American Finance Has Left Europe In the Dust. The Tables Aren’t Turning.
Restoring the competitiveness of European banks and asset managers can’t be achieved by tweaking regulations
3 min
After a decade and a half of seeing the U.S. economy pull ahead thanks to its outsize technology sector, European politicians are desperate to fight back in emerging industries such as green energy. One challenge they face is that America also keeps pulling ahead in the business of financing the investments required.
On Thursday, Luxembourg for Finance—a public-private partnership that seeks to promote the financial industry in the low-tax city state—published a report detailing the different ways in which European banks and asset managers might regain an edge relative to U.S. and Asian peers.
This is part of an effort by officials across the European Union to give firms a break. “Old economy” industries such as car manufacturing face rising competition from China and higher energy costs since Russia invaded Ukraine. The U.S. Inflation Reduction Act also has drawn investment across the Atlantic. Last year, the European Commission tasked former Italian prime ministers Mario Draghi and Enrico Letta with drafting a report on European competitiveness.
Luxembourg for Finance Chief Executive Nicolas Mackel echoes a common refrain: “Europe can take the lead in financial services when we eliminate fragmentation.” His report points out that the return on equity of European banks has bounced back in recent years. But it also showcases the gulf that has opened up relative to U.S. financial firms.
European lenders’ return on equity is now around 8%, compared with 12% across the Atlantic and 10% in Asia, in part as a result of stricter regulations following the 2008 banking crisis. Most European banks trade below book value on the stock market, having returned a negative 14% to investors since the April 2009 trough. Large American banks trade above book value and have gained 113%.
In services particularly exposed to international competition, American banks dominate in Europe too: In 2023, they took the top five positions for mergers and acquisitions deals, Dealogic data shows, with France’s BNP Paribas coming in sixth, and the top six spots for issuing equity.
And this isn’t just about banks. In 2007, top European and U.S. asset managers roughly split the global market between them. By 2022, European fund managers had just 22% of total assets under supervision, with only France’s Amundi playing in the big leagues. This reflects their failure to jump on the train of low-fee passive investment as effectively as U.S. giants such as Vanguard and BlackRock. Ironically, the latter’s dominance in exchange-traded funds resulted from its acquisition of iShares from Britain’s Barclays in 2009.
European officials are taking some useful steps. They admitted in 2022 that a directive aimed at harmonising securities markets, known as Mifid 2, has done more harm than good, and have agreed to amend it. New EU-wide savings products give pensioners greater choice, and might help address the lack of sophistication that characterises European individual investors relative to Americans used to managing 401(k)s. Stringent constraints on what asset managers can offer are being relaxed, and the rules governing sustainable finance—where Europe has an edge—are being clarified.
Meanwhile, the fallout from last year’s Silicon Valley Bank debacle will bring U.S. regulation closer to Europe’s.
Such rule changes might narrow the gap, as investors have recognised: The stock-market discount at which European lenders trade compared with American ones has shrunk over the past three years. But it is hard to see the tables fundamentally turning. In the digital era, economies of scale are even more powerful. The European Union comprises many countries with different languages, whose firms and investors have local financial relationships and strong home biases. The obstacles to eliminating fragmentation are huge.
If Europe can’t compete with America’s private financial muscle, it is doubly problematic that its efforts to mobilize industrial investment through the public sector have been meek compared with the U.S. Inflation Reduction Act. Promoting more sustainability-minded funds isn’t an adequate fix.
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And many investors are responding by pivoting toward yield, prioritising cash flow over capital growth in a way that property strategists say misses the point entirely.
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Nouh, who works with high-net-worth families and investors on long-term acquisition strategy, argues that capital growth remains the primary driver of genuine wealth creation and that the post-budget environment has made quality assets more important, not less.
The numbers make his case plainly. An additional $500 per week in rental income is welcome. A prestige asset appreciating by $1 million over a market cycle is transformative.
These are not equivalent outcomes, and portfolios built around yield at the expense of location and land value tend to generate income while wealth stands largely still.
The more nuanced shift Nouh is seeing among sophisticated investors is a move toward assets where both outcomes can be engineered simultaneously – established homes on substantial land in quality locations, where the existing dwelling can be repositioned, rental returns improved, and the underlying land value compounds independent of what sits on it.
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