Western Europe: Europe’s banks leave the emergency ward
The ECB’s inflation outlook in March gave hope that, after a year in intensive care, European banks are recovering. There is a sense that Basel risk-weighting rules pose less of an immediate danger, while peak regulation has passed. Is European banking cured or only in remission?
Illustration: Tom Hughes
The ECB’s March meeting did almost as much good for sentiment in European banks this year as the damage it did last year. Twelve months earlier, there was little sign of a wider regulatory let-up to muffle the cut in the ECB’s deposit rate to -0.4%, despite some attendant measures by governor Mario Draghi to try to ease the blow on banks.
A year ago, it sounded like a death knell for the industry, as investors worried that the biggest banks in two of the biggest European economies – clobbered by fines and bad debt – were close to missing subordinated-debt coupons.
Even after a six-month bank rally on both sides of the Atlantic, US banks remain ahead on price-to-earnings ratios (10 versus 11 times, according to Berenberg). European political leaders are not yet following Donald Trump’s call to roll back bank regulation. Rising rates in Europe will happen more slowly and from a lower base.
Nevertheless, European bankers have interpreted their representatives’ push-back against US calls for floors on internally modelled risk weights – culminating in the failure of the Basel Committee to reach a consensus in January – as an indication that Europe really has passed peak regulation.