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

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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. 98
Some have attempted to explain the generally superior profitability of the US banking market in terms of the high level of consolidation that has occurred there driving the sector to higher levels of efficiency. This is however not borne out by our numbers, which suggest that the pace of consolidation in the US has not been significantly greater than in the EU (the number of credit institutions fell by 44% between 1985 and 2003 in the US, while the number of credit institutions in the EU fell by 41% for that same period). Nor is there conclusive evidence that banking consolidation in the US has driven profitability 255 . In addition, empirical evidence suggests that banking M&As do not significantly improve cost and profit efficiency and, on average, do not create significant shareholder value 256 . 5.4 Section Conclusion 1. Both the EU and the US experienced large falls in the number of credit institutions in the last two decades. Looking at the level of EU Member States however reveals that the decline was most strongly experienced among the larger Member States of the EU, while a number of small EU countries actually experienced an increase in the number of credit institutions over the period studied. 2. In terms of actual size of banking sectors, the EU 15’s banking sector is more than twice as large as the US banking sector in terms of assets (€22,098 compared to €8,139 billion). In terms of numbers of credit institutions the US has considerably more credit institutions (18,533) than the EU 15 (7,444) (even excluding credit unions, the US has 9,164 credit institutions) in spite of the former having significantly less inhabitants than the latter (384 million inhabitants in the US, 291 million in the EU15). This means that the US has many more credit institutions relative to its population than the EU (64 per 1 million inhabitants in the US compared to 19 credit institutions per 1 million inhabitants in the EU). 3. In terms of the number of branches, in spite of significant decreases in the number of institutions, both the EU and the US have experienced an increase in the number of branches in the last two decades. The increase in the US has however been more significant than that experienced in the EU for the same period. 4. In spite of the EU having a great deal less credit institutions than the US, it has twice the number of branches (186,009 in the EU compared to 99,807 in the US for the year 2003), and thus a significantly larger number of branches relative to population. 5. The number of branches of credit institutions has therefore increased in both the US and the EU in spite of the large decline in the number of credit institutions in both markets. The resulting increase in the number of branches per credit institution is a sign that in the age of globalisation, local market representation and proximity to customers is deemed essential by both American and European banks. 6. In general terms, it can be said that the banking industries in both the EU and the US are dominated by small to medium-sized institutions but that the majority of the industry’s assets are concentrated among a few large institutions. Though the average US credit institution – even excluding credit unions – is considerably smaller than the average EU credit institution. 7. Differences in official bank size categorisation in the US and the EU illustrate well the margin of difference between average bank sizes in each economic area: under US definitions, the average (FDIC insured) US credit institution is medium-sized, while the average EU credit institution under US definitions is a large bank. Under EU definitions, however, the average US bank would be considered a small bank, while the average EU bank would be considered a (small) medium-sized bank. 8. This is quite revealing, for it highlights that if we were to regard the size of average institutions as a partial indicator of the concentration of a banking market we would conclude that the US banking market is in fact more ‘fragmented’. This is reinforced if we take note of the fact that the US has many more credit institutions (whether or not one includes credit unions) than the EU. All this suggests in fact that banking in the US is rather a small scale, local affair, and that although the US is known for producing many of the world’s ‘mega-banks’, this model of banking is in fact not at all representative of the majority of the industry. 255 See the conclusions of Walter N. (ed), “US vs EU banking market: the more integrated, the more profitable”, November 2003, Deutsche Bank Research. 256 “Banking Consolidation in the EU: Overviews and Prospects”, May 2004, R. Ayadi and G. Pujals, CEPS Research Report in Finance and Banking, No 34. 99
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September 2006 RESEARCH A COMPARATI
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IE UK FR BE NL LU DK DE SE CZ AT SL
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The following WSBI/ESBG committees
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4 Regulation and supervision compar
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6.5 Issues of competition in retail
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To finish, if we had to pick from a
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In the US, credit institutions have
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Following the same logic, the EU co
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In that context, it is tempting to
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3. INSTITUTIONAL COMPARISON 3.1 Sec
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The market share of the US banking
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FDIC-insured commercial banks are i
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The subsidiary stock institution is
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Regulatory reform over the past thi
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State credit unions were first exem
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There has however been much effort
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3.2.2.2.2.2 Ownership and corporate
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Hermann Schulze-Delitzsch and Fried
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In contrast, building societies in
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The commitment of savings banks is
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4. REGULATION AND SUPERVISION COMPA
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In addition, for regulations define
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MoU Memorandum of Understanding OTC
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Annex 2: Statistical appendix Table
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Table F: Share of US banking indust
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Table L: Structure of the liabiliti
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Table R: Number of ATMS in the EU a
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F - Federal Deposit Insurance Corpo
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