Wall Street’s profit boom has Europe ripping up its banking rulebook
U.S. investment banks have toasted a record quarter, as their European rivals continue to lag — but now a major pivot towards deregulation across the Atlantic could provide a much-needed shot in the arm for the continent’s beleaguered banks.
At stake is whether Europe can build banks with the scale and firepower to compete with U.S. giants that have spent more than a decade taking market share in trading, investment banking and capital markets. A major EU deregulation push could lower capital burdens, free up balance sheets and clear the way for more cross-border mergers — potentially reshaping a banking sector long seen as too fragmented to challenge Wall Street.
The European Commission will outline its proposals in a report on banking competitiveness, due Friday, setting out legislative changes for the sector for 2027.
It is reportedly preparing to ditch parts of its “Pillar 2” capital requirements rules on leverage ratios as part of a sweeping regulatory overhaul aimed at boosting banks’ competitiveness. These rules allow national supervisors to impose additional discretionary add-ons on top of the EU’s basic 3% leverage ratio rule.
Stoxx 600 Banks Index.
A draft version also includes measures to cut the amount of extra capital buffers that Europe’s banks must meet, a reduction in reporting requirements for lenders, and more details on a common European Deposit and Insurance Scheme, which could help unlock cross-border banking consolidation in the region, according to an FT report.
European regulators playing catch up
Taken together, the measures would be a seismic shift in the way European banks are regulated. They follow similar plans by U.S. and U.K. regulators to relax certain banking rules, including U.S. proposals to cut capital requirements for the largest banks by nearly 5%.
“European authorities are mindful of the regulatory developments in the U.K. and the U.S. and simply do not want to put the banking sector at a disadvantage,” said Jakub Lichwa, a member of the multi-sector bond portfolio management team at TwentyFour Asset Management.
Lichwa said a lower amount of capital held by banks would make it easier to deliver a higher return on equity, making shares of European banks more attractive to investors. “In and of itself, lower capital requirements do not necessarily lead to operational improvements of the sector, but at a margin could facilitate better competition with global peers,” he told CNBC via email.
U.S. investment banks are enjoying a stellar second-quarter earnings season, with JPMorgan Chase, Bank of America, Citigroup, Wells Fargo and Goldman Sachs all beating expectations with bumper trading revenues and a rebound in dealmaking.
Now, as European bank earnings come into focus — with Santander, UniCredit, UBS and Deutsche Bank all set to report later this month — a change in policy from the EU will be key in prompting more action and confidence in European bank boardrooms, said…
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