What came with interstate banking in the US was expansion and consolidation within the industry. That kind of cross-border expansion and consolidation is not taking place in Europe
Various European bank chief executives offer their read. One is an optimist: “The US is just three years ahead of us in the interest-rate cycle. Give us a normalized rate curve in Europe and everything will look better.”
Another is more defeatist: “People always talk about the dominance of US banks. Don’t ask me where is Europe’s JPMorgan? Where is Europe’s Google, or Facebook, or Amazon? There isn’t one. US banks have only succeeded because US companies have.”
“The biggest change in my career came in 1986 with interstate banking,” he says. “Prior to that, you could only bank a given city or state. Credit cards could be offered nationwide, but banking was local. We were in Rhode Island and couldn’t open a branch in Massachusetts, which is about as far away from here,” he points over his shoulder in his office high above Bryant Park in Manhattan, “as La Guardia airport.
“The coming of nationwide banking took the US banking industry away from rolling recessions that might start in California and then progress through Texas and the northeast, impacting banks that were heavily exposed to a few industries in one geography.”
Search for scale
The opportunity to achieve diversification unleashed a search for scale that saw thousands of US banks, including many of the largest, swallowed up in waves of mergers and acquisitions that transformed the industry in the 1980s and 1990s. That was led by NationsBank, which lives on today as Bank of America. It contains within in it seven of the eight largest banks that operated in New England when Moynihan began his career in banking.
“European banks lack the opportunity to operate at a scale that unified capital markets and economies would permit,” says Moynihan. “It is similar to what US banks faced prior to the adoption of interstate banking. Of course, what that came with in the US was expansion and consolidation within the industry. That kind of cross-border expansion and consolidation is not taking place in Europe.
“At the same time, the US has the advantages of scale that come from expansive, liquid capital markets that are built upon a single sovereign debt market of US treasuries. Europe has German bunds or French OATs or Italian BTPs.”
Globally, the banking industry remains fractured.
“We have maybe 14% to 16% share of US consumer banking, but that’s not very much globally,” he says. “The biggest concentration is probably in investment banking and capital markets, where we have a high single-digit percentage share of the market globally.”
The scale of its domestic consumer and middle-market banking operations allows Bank of America to house big markets businesses comfortably, says Moynihan.
“Having a big markets trading business attached to a large, stable company with low-cost funding and deep client relationships is safer for the markets and for society. By operating the way we do, there is diminished volatility.”
Although in any given year the sources of revenue and profit may vary, the outcome has become predictable.
“The range in our annual sales and trading revenue is narrow: it varies from $12.9 billion to $13.6 billion,” says Moynihan. “The result is stable, stemming from us not doing principal trading. What would be very difficult would be to try and build a standalone sales and trading operation at scale to compete. That just doesn’t make sense and would be volatile and less stable.”
If there is a long-term risk for the big US banks it may be that the contentment of having such a big and strong home market stops them looking beyond their borders.
Moynihan may not worry too much about the Europeans, but he has his eye on another group that could become powerful competitors in the years ahead.
“Policymakers face interesting questions when it comes to China and banks. Collectively, they are similar in assets and revenues to the US banks, with lower expenses. They operate globally, including in the US. Will policymakers in the US permit them to grow through acquisition in the United States?” he asks.
“I think of the tower we built in Buenos Aires to house the Bank of Boston operations in Argentina. Today, it houses an ICBC branch; they eventually acquired all those operations.”