A comparative analysis of the US and EU retail banking markets - Wsbi

Finally, looking at cost-income ratios for credit
institutions in the US and the EU (graph 15), we can
see that in both markets these were comparable and
followed a downward trend until 2001, when the US
industry cost/ income ratio came down significantly
while the opposite happened in the EU.
A number of EU countries such as Denmark, Spain,
Ireland, Luxembourg, Portugal and the United
Kingdom have achieved ratios lower than both the
EU and US average for most of the years under
comparison. Luxembourg has achieved by far the
lowest cost to income ratio consistently throughout
the period.
Graph 15: Comparison of the cost to income
ratio in the EU and the US, 1994-2003
70.0%
67.5%
65.0%
62.5%
60.0%
57.5%
55.0%
52.5%
50.0%
1994
1995
1996
■ EU Average
■ US Average
1997
1998
1999
2000
2001
2002
Source: ESBG calculations based on data from OECD for the EU
and FDIC & NCUA for the US.
2003
A number of possible explanations exist which could
explain the divergence in performance between US
and EU credit institutions, as measured by the above
indicators.
No unique explanation exists concerning the important
difference between US and EU banks as regards
interest margins. One possible way to explain the
difference refers to a possible lower level of
competition in the intermediation business in the US
as compared to the EU. Reference is also made to
the composition of the portfolios of assets of US and
EU banks, with US banks having a stronger focus on
assets which bring higher yields. In this context, the
interest margins of US banks can have been favoured
by the dynamism of the US consumer credit market,
as compared to the European one.
The fact that banking institutions in the US are
generally highly capitalised could also explain part
of the difference observed with regard to interest
margin between the US and in the EU. Indeed, the
interest rate margin of a bank is influenced by the
proportion of own funds held by the bank, given
that the remuneration of own funds is not included
in the calculation of the interest rate margins.
With regard specifically to the fall in net interest
margins experienced in the EU, part of the decline
has been due to the convergence of interest rates
towards the common levels for European Monetary
Union, followed by the adoption of a single interest
rate for the eurozone. The creation of a monetary
union has also increased the level of competition
among financial institutions in the eurozone, which
has in turn put pressure on banks’ interest margins.
Bank margins in both the US and the EU have
also likely been affected by low inflation and the
consequent fall in nominal interest rates, especially in
the years 2001 – 2003. Very low interest rates are in
general more difficult to pass on to customers on their
deposits, with a resulting pressure on bank margins.
As mentioned above, a possible reason for the
decline in bank margins has been the reported
increase in competition from new entrants. In actual
facts, increasing competition in the EU banking
markets could explain why both margins and ROEs
have been falling, possibly reflecting downward
pressure on profits. But, as we explain in the product
and distribution chapter of this study, competition to
banks from non-banks has been more significant in
the US than the EU, especially due to the growing
commoditisation of the US mortgage and consumer
lending markets. Yet the ROEs of credit institutions
there are not only larger than that for most EU
Member States, they have been growing in the last
few years while ROEs in the EU have been falling.
Perhaps, higher ROEs in the US could be the result of
generally higher risk taking by banking institutions
(with the result of higher pay-offs) there than the EU.
The discrepancy could also be explained in terms of
factors external to the banking sector, such as for
instance flexible labour market laws and the more
favourable economic climate enjoyed by credit
institutions present in the US, who benefited from an
average annual growth in US real GDP between
1993 and 2003 of 3.3% compared to 2.1% for the
Eurozone for the same period 254 .
254 The Economist statistics.
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