‘Overbanking’ in Europe

Sabine Lautenschlaeger, one of the EU’s top banking supervisors
Sabine Lautenschlaeger, vice-chair of the ECB’s Single Supervisory Mechanism, believes regulators should strive to reshape business models in banking (source: dpa)

  • Financial regulators believe that Europe’s banking sector has become too large
  • However, their proposed remedy of consolidation may create financial monsters
  • The ECB’s ambition to reshape banks’ business models may exceed its proper role

Ten years ago, banks on both sides of the Atlantic were struggling to survive the worst financial crisis since World War II. Today, American banks seem to have recovered well, even entered the “golden age of banking,” if we are to believe JPMorgan Chase CEO Jamie Dimon. By contrast, the overall profitability of their European competitors remains significantly lower. Banks in the United States have reinvented themselves and can look to a bright future, including overseas, while many lenders in the European Union are still struggling to extricate themselves from a decade-long recession – triggered, after all, on the American side.

Various reasons can be evoked to explain this discrepancy. Crisis management is one. In Europe, the recapitalization of banks took years, whereas in the U.S., it occurred “in one big splurge,” as The Economist put it, notably with the support of the government’s Troubled Asset Relief Program (TARP). While many European banks kept dragging along their nonperforming loans, freshly “TARPed” American rivals could forget about theirs and get back to business as usual.

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