A Tale of Two Banking Systems: The Performance of U.S. and European Banks in the 21st Century

Abstract

I compare the financial performance, growth, asset mix, risk, operational efficiency, profitability and capital holdings of the 20 largest commercial banks in the U.S. and Europe from 2001-2013. U.S. banks earned significantly larger stock returns than their European counterparts in the post-crisis years, accompanied by higher rates of revenue and loan growth, lower risk, and superior profitability and loan quality. European banks, on the other hand, remain trapped in a downward spiral of negative revenue and loan growth, decreasing profitability, increasing impaired and nonperforming loans, and are sporting market value to debt ratios that suggest imminent insolvency. U.S. banks display their own post-crisis irregularities financially and operationally, however, including unusually low loan loss allowances relative to their impaired loans, paying smaller dividends to investors and lower interest to depositors compared with Eurozone banks, and a full 5% decline in their average effective tax rate compared with the pre-crisis period. U.S. banks appear to be just as well-capitalized and hold lower levels of investment and trading assets than European banks, but regulatory loopholes that allow U.S. banks to account for trillions of dollars of risky derivatives positions off-balance sheet render these comparisons less than fully meaningful. Despite unprecedented central bank intervention, the stock returns of both U.S. and European banks have remained significantly related to market and bank-level fundamentals in the years since the financial crisis. Modeling bank returns as a function of their profitability, growth and solvency explains 44% to 60% of the variation in U.S. and European bank stock prices, respectively.

Keywords: Commercial Banking, Bank Capital, Regulation, Risk, Stock Returns, Profits

JEL Classification: G18, G21