THE EVOLVING US REGULATORY PLAYING FIELD - WHAT DOES IT MEAN FOR EUROPEAN BANKS?

There continues to be considerable focus on the nature of potential changes that the new US Administration will bring-on for US banking including a review of the Dodd Frank Act. Many believe the administration is convinced that this regulation is stifling economic growth in the US, whereas others argue this isn't the case. Some are saying Dodd Frank should be reformed regardless, given its scale and complexity (see http://www.marketwatch.com/story/an-inconvenient-truth-gets-in-the-way-of-trumps-claim-that-companies-cant-get-loans-2017-02-14). For sure, the lending volumes numbers I have seen at the St Louis Fed's website suggest lending to the C&I sector appears healthy. However, a side story is developing which considers the impact of any such change in US bank regulations upon European bank rivals. In earlier posts, I have chronicled the lead of US banks (versus Europeans) in re-structuring their business plans, building up new capital levels and taking losses in a timely and disciplined fashion (see my piece entitled AMERICAN FIRMS WIDEN LEAD OVER EUROPEAN RIVALS, March 23rd 2016 for example). 

Now with that lead largely substantiated, US banks may gain again relative to European rivals by a curtailment or refocusing of regulations. Bloomberg published a story that indicates that European banks may find themselves once again disadvantaged as a result of any refinement in bank regulations.  Their piece entitled Trump's Rule-Slashing is Bad News for European Banks (Bloomberg, February 6th 2017) argues that European banks have been forced to retrench already in equity and debt capital markets activities and that any relaxation of US rules would further increase the existing business model gap that already has developed.

To be sure (and as a generalisation), European banks have approached the post crisis environment at a different pace and with somewhat different regulation and uneven accounting principles versus their American rivals. Regulation is not applied in a uniform basis upon global banks, as UK banks grapple with ring-fencing unlike other jurisdictions as just one example (see Morrison & White's (2009) paper entitled International Playing Fields in Bank Regulation). European banks are capital hungry these days. However, in a world with mobile investment capital flows, US banks will continue to offer investors an appealing investment thesis as US tax rates may drop and regulation is under review.