Abstract
The author compares the performance, growth, asset mix, risk, operational efficiency, profitability and capital holdings of the 20 largest banks in Japan, the U.S. and Europe from 2003-2015. Total revenue for each set of banks has declined by a full 20% since 2011. European banks are in a multiyear downward spiral, evidenced by dramatic declines in market capitalization, the book value of loans and total assets, and the level of deposits. Japanese bank performance is stagnant compared to Europe and the U.S. Both Japanese and European banks are particularly challenged by persistently lower net interest margins compared to U.S. banks.The percentage of impaired, restructured or nonperforming loans soared for U.S. and European banks post-crisis, but barely rose in Japan. All banks hold more Tier 1 capital than required by the Basel III accord, which has led to profound declines in their net profit margins and return on equity. Modeling the conditional volatility of U.S., Japanese and European banks provides evidence consistent with the idea that U.S. banks continue to exhibit a more robust post-crisis recovery, while Japanese and European banks continue to experience crisis-level conditions. Any evidence that Japanese and European banks have recovered from the financial crisis is fragile at best. Keywords: commercial banking, bank capital, regulation, risk, stock returns, profits. JEL Classification: G18, G21
Highlights
Japanese bank performance is stagnant compared to Europe and the U.S Both Japanese and European banks are challenged by persistently lower net interest margins compared to U.S banks
Any evidence that Japanese and European banks have recovered from the financial crisis is fragile at best
These authors conclude that the U.S is fundamentally different from Europe due to factors such as: an aggressive central bank with a much broader mandate than the European Central Bank (ECB); the U.S Dollar is the global currency standard vs. the Euro; world financial markets doubt the solvency of some European governments compared with the U.S government; the U.S has a more flexible labor market; and the U.S economy is less dependent on weaker trading partners
Summary
The academic literature conclusively determines that larger banks enjoy a competitive advantage, which explains why the banks featured in this study are often viewed as industry bellwethers. Filbeck et al (2011) find that size plays a significant role in a bank’s ability to outperform the S&P 500, during an economic contraction. Filson and Olfati (2014) investigate banks that merge with or acquire other banks, as permitted under the Financial Services Modernization Act of 1999. The long-awaited economic convergence has not materialized, and as the spreads have widened further, European banks have increased their holdings of these risky positions (Acharya and Steffan, 2014) This massive carry trade exposure has most likely led to an increase in systemic risk, as it is essentially a network of overleveraged nations holding each other’s bonds backed by nothing more than verbal assurance that they will not default. Schildback et al conclude that the lack of profitability of Eurozone banks is unsustainable, and that these banks are not yet close to earning their cost of capital These factors have had a profoundly negative impact on the European economy because the role of banks in providing credit to the private and public sectors is more important in Europe, as the shadow banking system in the U.S has provided an alternative source of credit vs the traditional banking sector since the 1990s. These authors conclude that the U.S is fundamentally different from Europe due to factors such as: an aggressive central bank with a much broader mandate than the ECB; the U.S Dollar is the global currency standard vs. the Euro; world financial markets doubt the solvency of some European governments compared with the U.S government; the U.S has a more flexible labor market; and the U.S economy is less dependent on weaker trading partners
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