Europe’s bank myths get busted

Marc Sidwell
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WITH so much regulatory interest in the reform of the banking sector, whether by those seeking to encourage new entrants, boost lending to favoured business sectors or increase capital buffers in the name of greater safety, you would hope that everyone was starting with an accurate picture of the industry.

And yet, despite so much riding on a clear picture of banking’s current condition, there are still plenty of myths around. A fascinating note from Redburn Partners does its best to dispel a few of them, by comparing the European and American banking sectors.

Redburn takes aim at two pieces of conventional wisdom on Europe’s banks – that they are oversized compared to their home economies and that they have still not done enough to deleverage.

When you run the numbers, these received ideas start to look shaky. Excluding derivatives and interbank assets, consolidated European bank assets are equivalent to 1.6x the continent’s GDP, just above the US (1.2x) and in line with Japan.

And Europe wins in terms of deleveraging. Europe’s banks have actually cut leverage by a quarter since 2007 by one measure.

According to Redburn’s comparable numbers, Europe’s bank leverage ratio fell from 17.8x in 2009 (when it was indeed well above America’s 13.3x) to 11.9x by the end of 2012, when US banks were at 12.8x. Wholesale funding in Europe has come down by 15 per cent over the last three years as well, although Redburn still sees Europe’s lack of diversification as a key difference from the US. Recovery from the crisis remains a work in progress but we can’t finish the job properly without acknowledging how far we’ve come.