Do you agree that US banks have progressed in the European market?
Globally, for the first time since 2009, the US banks have consolidated themselves as the top five banks in terms of Global Investment Banking revenues in 2015. Prior to 2015, there was always one European bank in the Global top five. This is partly due to better market conditions in the US in 2015 than in Europe.
Similarly, four out of the top five banks in terms of European Investment Banking revenues are US banks and there is only one European Bank which is currently restructuring itself.
HSBC is one of the few banks that have globally improved its relative market position since 2009. The bank benefits from its credit rating, long-term relationships based on solid foundations and from having two “home-market” hubs, in London and Hong Kong, which provides HSBC with additional local expertise, crucial to be profitable in the new environment.
Do you think that the regulation, as implemented today, provides a level playing field for both sides of the Atlantic?
It is very difficult to create a level playing field for banks under different market types. The US is capital markets driven while the European market is more bank financing driven, which means that the US banks do far less on balance sheet lending to corporates than their European peers.
The quick intervention by the US Government and implementation of new post crisis regulation in the US provided early visibility and assisted the banks to reposition themselves quickly. These regulations include Dodd-Frank and Comprehensive Capital Analysis and Review (CCAR) which assesses capital adequacy to absorb losses through stressed economic conditions. In contrast, the on-going regulatory measures in EU with additional rules such as ring-fencing and challenges within the eurozone make planning for banks more challenging.
From a capital perspective, leverage constraints create an uneven playing field. The threshold (minimum leverage ratio) is higher under US regulation but the leverage is calculated differently on both sides of the Atlantic, with a different treatment for off-balance sheet items. As a result, US bank off-balance sheet activities are typically larger than European peers as securitization is more developed in the US than Europe. EU regulators are still trying to boost the Asset Backed Securities market in Europe.
Last and not least, the accounting rules are different. While Europe adheres to IFRS (International Financial Reporting Standards) the US have their US GAAP (General Accounting Principles).
These differences in treatment should mean that regulators should focus more on outcomes than comparisons of particular ratios but this is not an easy task.
Do you think that the European market is more open to foreign banks such as US banks than the US market to European banks?
US regulators have taken a number of steps to protect their economy from the previous excesses that led up to the global financial crisis. Therefore, they have high requirements for the banks that operate on in the US and those operations need to be increasingly ring-fenced from the rest of any financial group, operating through an intermediate holding company (IHC) and with increased scrutiny over risk management and operational controls.
The European Union has not forced local ring-fencing onto US banks operating in Europe and US banks which have established a presence in Europe are free to operate across the Single Market from a single balance sheet. Constraints may be slower to emerge given the need for multiple market participants to agree.
