Are European Banks Really Stronger Than Their U.S. Rivals?

European Banks

According to officials and analysts speaking at the Institute of International Finance conference in Brussels last week, European banks are looking stronger and more attractive than their U.S. counterparts on many metrics.

“European banks are safer, stronger, cheaper than U.S. ones,” said Davide Serra, CEO of Algebris Investments. “In a way, banks in the U.S. have been optimizing their deposit base more.”

Stressing the higher liquidity ratio of European banks, around 160%, versus 120% in the U.S., Serra also noted that regulation and collaboration are still needed to boost growth in the region.

The biggest bank in the U.S. is worth what the top nine or 10 European banks are due to weaker growth and less profitability since the 2008 financial crisis, according to Ana Botín, executive chair of Spain’s Santander Group.

Strengths in European Banks

There are several reasons why economists consider European banks stronger than their U.S. counterparts, including:

  • Higher Liquidity Ratio: European banks have a higher liquidity ratio of around 160%, compared to 120% in the U.S. This means that European banks have more cash and other liquid assets to meet their short-term obligations.
  • Lower Capital Requirements: Large European banks are subject to a Capital Requirement of only 8.6%, while large U.S. banks are required to maintain a minimum Tier 1 capital ratio of 10.5%.
  • Safer and Stronger: European banks are considered safer, stronger, and cheaper than U.S. banks due to factors such as higher liquidity ratios and lower capital requirements.
  • Regulation and Collaboration: The European Central Bank and the European Commission have done well in stabilizing the eurozone and making it profitable through strong regulation and collaboration within the bloc.

Implications of the Different Models

European and U.S. banks have some notable differences, including:

  • Investment Opportunities: There are opportunities for investors willing to wager that European banks are in better shape than U.S. peers. Deutsche Bank is undervalued, based on the same metrics, trading at 4.8 times this year’s earnings and at a 50% discount to peers.
  • International Competitiveness: Large U.S. banks are required to maintain a higher Tier 1 capital ratio than their European counterparts, which could affect their international competitiveness.

Challenges for Euro Banks

While European banks are in a strong position to weather further stress in their banking system, there is still potential for further instability in financial markets, arising from problems in the banking sector, as well as several other issues, including:

  • Lower Profitability: Due to structural factors, European banks have less profitability than their U.S. counterparts. Today’s return on equity (RoE) of the EU banking sector is 6.7% on average, compared to 11.9% for U.S. banks.
  • Regulatory and Supervisory Costs: European banks face higher regulatory and supervisory costs than their U.S. counterparts. A review of current capital requirements and supervisory processes could provide capacity for €4-4.5 trillion in additional bank lending for EU banks to support the financing of the green and digital transitions.
  • Mismanagement and Liquidity Issues: The recent volatility that led to the sale of Credit Suisse to UBS was not evidence of a systemic banking crisis, according to Botín; however, it was rather mismanagement and liquidity issues at specific banks.
  • Valuation: European banks are undervalued compared to their U.S. peers. The Stoxx Europe 600 Banks Index dropped just 14% in March, while the U.S. KBW Nasdaq Bank Index shed 25%.

EU Regulation Plays a Role

EU Bank

Several regulations have contributed to the power of European banks, including:

  • Banking Package 2021: The European Commission introduced new rules in 2021 to ensure that EU banks become more resilient to potential future economic shocks while contributing to Europe’s recovery.
  • EU Banking Regulatory Framework: Since the Global Financial Crisis (GFC), significant steps have been undertaken to strengthen the EU’s banking regulatory framework. The strength of the EU banking system has allowed banks to weather the cataclysmic impact of the COVID-19 crisis relatively undamaged. Banks helped backstop the economy, leveraging fiscal support measures of unprecedented scale and the accommodative monetary policy regime of the last decade.
  • Capital Requirements and Supervisory Processes: A review of current capital requirements and supervisory processes could provide capacity for €4-4.5 trillion in additional bank lending for EU banks to support the financing of the green and digital transitions. Policymakers should redouble their efforts to complete the banking and capital markets union to support the real economy.
  • Common Banking Supervision in the Eurozone: The European Corporate Governance Institute suggests that common banking supervision in the Eurozone has both strengths and weaknesses. Cooperation proved to be insufficient and was constrained by home- and host-country biases and regulatory forbearance during the recent crisis.

At a Glance: Other Key Differences

The U.S. banking system and the European banking system have some other differences in terms of structure and regulation, including

  • Universal Banking Model: European banks typically follow a universal banking model, which means that they offer a wide range of financial services, including commercial banking, investment banking, and asset management. In contrast, U.S. banks are more specialized, with separate institutions for commercial banking, investment banking, and asset management.
  • Stress Tests: The Federal Reserve conducts annual stress tests on U.S. banks to ensure that they have enough capital to withstand a severe economic downturn. European banks are also subject to stress tests, but the process is less centralized and more fragmented.

Despite several positive factors, there are still challenges facing European banks, and economists warn that policymakers should redouble their efforts to complete the banking and capital markets union to bolster the overall system and maintain strong competitiveness in the global market.


The views expressed in this article are not to be construed as personal advice. You should contact a qualified and ideally regulated adviser in order to obtain up to date personal advice with regard to your own personal circumstances. If you do not then you are acting under your own authority and deemed “execution only”. The author does not accept any liability for people acting without personalised advice, who base a decision on views expressed in this generic article. Where this article is dated then it is based on legislation as of the date. Legislation changes but articles are rarely updated, although sometimes a new article is written; so, please check for later articles or changes in legislation on official government websites, as this article should not be relied on in isolation.


Chris Lean

Chris is a Chartered Financial Planner who writes blogs and articles to simplify and explain some of the financial issues that affect UK expats. Subjects include; hot topics, regulation and the ever-changing world of finance.

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