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How are European banks different from American ones?

How are European banks different from American ones?

created Forex Club17 March 2023

European Central Bank raised interest rates by 0,5 percentage points. percent to the level of 3,5 percent. At a press conference after the decision, Christine Lagarde referred to the problems of American banks. The situation of European banks is better than that of American banks, but the effects of a bank failure in Europe may be much more severe.

Lagarde's comment was a response to concerns about the state of the banking system spreading in Europe. They were caused by the weakness of American banks Silicon Valley, Signature and Silvergate. In the last week, the index Stoxx 600 Banks, which brings together European banks (and this is the sector with the highest capitalization on stock exchanges in Europe), fell by 12 percent, while the Polish WIG-Banki index - by almost 8 percent. This is a reflection of market nervousness and the fact that banks are the backbone of the European economic system.

How is the banking sector in Europe different from the US?

In such a situation, it is worth emphasizing that the banking system in Europe differs from the American one. This, in turn, makes a collapse of a large bank less likely (although its effects, should it occur, may be more severe for the economy). The required capital buffers for banks in Europe are higher and regulations are much more restrictive than in the US.

Only ten years have passed since the European debt crisis resulted in a new, region-wide regulatory architecture to hedge and combat the crisis in the industry. It was composed of the European Banking Authority (EBA) and a rescue fund - European Stability Mechanism (ESM). As such, European banks generally have higher capital and liquidity than their US counterparts. While in the US, those with capital above 250 billion are strictly regulated. dollars, in Europe the border is already 50 billion dollars. European banks are also more consolidated, and we have been able to observe the process of consolidation on the Polish market closely over the last 10 years.

On both sides of the Atlantic, the authorities have the tools to fight the existing risks (seen as specific, not systemic). Although, in the event of problems, the entire system and depositors will receive support, and not necessarily the holders of the bank's shares or bonds (the same as in the case of the collapse of Getin Bank in Poland).

In Europe, however, the consequences of the collapse of a large bank would be more severe. Most European companies prefer bank loans, while in the US they finance themselves more often on the bond market. This is why the ratio of bank loans to GDP in the European Union is 92%, while in the US it is only 51%. It is worth noting that in Poland this level is even lower and amounts to 42%, while in Germany it is 84%. And the higher the level, the more serious the effects of problems in the banking system on the economy.

About the author

Paweł Majtkowski - eToro analystPawel Majtkowski - analyst eToro on the Polish market, which shares its weekly commentary on the latest stock market information. Paweł is a recognized expert on financial markets with extensive experience as an analyst in financial institutions. He is also one of the most cited experts in the field of economy and financial markets in Poland. He graduated from law studies at the University of Warsaw. He is also the author of many publications in the field of investing, personal finance and economy.

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