Abstract
In the 2007–2017 period, the market-to-book ratios of European and US banks diverged markedly. We use panel regressions to investigate the determinants of M/B ratios for 112 European and US banks. We show that higher US valuations were driven by profitability and cost efficiency. The underperformance in Europe was associated with declines in the net interest margin and low policy rates, as well as with inadequate resolution of non-performing loans and an increasing share of deposits. Our results stress the importance of provisioning and NPL resolution in Europe. Moreover, low-for-long policy rates may be detrimental for bank franchise values.
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