by Ugo Marani
From 2000 to 2007 European banks’ overseas assets almost quadrupled, making them the most globalized in the world, while from 2007 to 2015 they shrank by 45%. The repercussions of the 2008 crisis can be guessed: Dutch, French and German banks, for example, were waist deep in the Spanish real estate bubble, while Austrian banks had expanded too far into Eastern Europe and Central Asia and Italian banks were mired in Turkey. European experience, however, does not imply that the age of cross-border banking is waning. In fact, foreign investment as a percentage of GDP has been roughly the same since 2007. What is changing is the instruments and the players, against one consistent backdrop: the dominance of the major American investment banks in a world where, with Barclays, Credit Suisse, Deutsche Bank and UBS all grown smaller, the narrow circle of bulge-bracket banks (i.e. banks listed at the top of the “tombstone”) is restricted to the big five of Goldman Sachs, Morgan Stanley, JP Morgan, Citigroup and Bank of America Merrill Lynch.
In the decade from 2005 to 2015, the market share of European banks decreased by more than eight points, while their US counterparts gained virtually the same amount. American. banks increased their share of the European market thanks in part to the hub-and-spoke model, whereby London continues to function as a hub and the spokes extend toward Frankfurt, Dublin and other major financial centres. The watershed moment for international banking was the emergence of banks from Canada, Russia and China, which blatantly fattened their portfolios of foreign assets. The new troupe of players coincided with a change in the kinds of assets acquired abroad: debt securities and outright loans were gradually replaced by equities and direct investments so as to pursue investments that were perhaps less volatile but certainly less dependent on the default risk of the business and/or the company “bought out.”
Ten years on from 2008 it is difficult, and maybe premature, to judge to what extent the big international banks have changed their architecture and how the lesson has affected their behaviour. Radical change overlaps with no change at all, and a more thorough reckoning will likely take time. A few aspects seem unarguable, however, and downright paradoxical. First, the large investment banks that had such a hand in the 2008 collapse are the very ones still at the core of international banking; indeed, unmistakably, their international capital flows are mightier than ever. Next, the US, where the crisis had its core and whose Troubled Asset Relief Program (TARP) was the largest buyout of toxic securities on record, is back to billing itself as the worldwide capital of private placement, M&A, and FDI. Conversely, in the international hierarchy, the role of European banks has been undermined by new countries with China in the lead. Through a consolidation process that has narrowed the strategic horizon to their own continent, these banks appear less able to follow the model of risk and internationalization which, with apparent mastery, they had learned from their American counterparts. European banks still have a significant presence in the transcontinental markets; some countries, like France with its ever-dynamic BNP Paribas, Crédit Agricole Group and Société Générale, have strategies and ambitions that go beyond national borders while fragile institutions like Deutsche Bank insist, thanks to Germany’s role in the Eurozone, on maintaining a risky asset mix.
However, lest the hierarchy were ever in doubt, all trends suggest that the large continental banks still play an ancillary role. Financial globalization is alive and well, evolving and adapting—in a dialectical relationship with insipid governance rules—to the limits imposed by financial stability. And anyone who might think “systemic risk” is at least partially in the rearview mirror would be seriously underestimating the danger: change doesn’t happen overnight, especially in rereading the assessments of major investment bank CEOs. For example: derivatives are no faint memory in big banks’ asset management portfolios: as of 2015, they made up 18.6% of assets at JPMorgan Chase, 21.1% at Citigroup, 59.1% at Deutsche Bank, 39.1% at Barclays and 47.7% at BNP Paribas. By no stretch of the imagination have big banks in the US and elsewhere become “safer” in the wake of the crisis; in fact, a bit of in-depth analysis suggests they are riskier than ever.
Since the 2008 meltdown, then, the international banking system has shown a resilience that seemed impossible a decade ago. This ability to respond to such a traumatic event should probably be traced to the direct and indirect government aid that the financial industry enjoyed during the following seven years. But whether this was more transparent as in the US or hypocritically self-righteous as in the Europe of fiscal austerity, resilience is its own motivation; financial governance has not changed a single rule of the game. It’s true that European banks have become more parochial, more biased towards business on the Continent; that China’s unique financial system is vying for their place; and that the large American banks are shifting their international portfolios. Nothing, however, suggests that big banks are developing a calling for longer-term profits, less speculative behavior and fewer excesses in the derivatives market.
Paradoxically, the uncertainty felt by the markets in the wake of the crisis may be regarded as another source of speculation. Perhaps the regulator, when arranging for the bailout, should have considered the fact that the more uncertain the future, the greater the impetus to wager not on the most beautiful woman, but on the woman the market will find to be most beautiful tomorrow. Keynes’ Beauty Contest always rules. But the truth (or rather, the paradox) is that our regulators are well aware of the long-established relationships between uncertainty, expectations and speculation. We might well conclude that in their preference function, a known evil is preferable to an unknown good. – Social Europe
by Ugo Marani