■ December 13, 2018, 12:01 AM EST
On the Eve of Brexit, U.S. Banks Are Set to Conquer Europe
● Exit Britain. Enter Wall Street.
By Edward Robinson, Lananh Nguyen and Yalman Onaran
With Donald Trump rattling the international order Washington built after World War II, engagement is out and isolationism is in. Yet Wall Street, an expression of American influence every bit as defining as Hollywood or Silicon Valley, apparently didn’t get the memo.
European finance—whipsawed by debt crises and political upheaval since the financial crash of 2008 and now on the verge of the Brexit trauma—is seeing just how internationalist American banks are. U.S. financial powerhouses such as JPMorgan Chase & Co. and Goldman Sachs Group Inc. have been running up the score on their European rivals, dominating investment banking overseas as never before.
The U.K.’s separation from the European Union will cleave Europe’s financial industry in half. London’s diminished role as the financial gateway to the Continent may prevent Europe from matching the U.S. with its own deep, seamless flow of capital. Brian Moynihan, the chairman and chief executive officer of Bank of America Corp., calls this effect “disaggregating liquidity.”
“That’s not going to be good for the economy,” Moynihan said at an industry conference in Boston in November. “It puts them back about 10 to 15 years in the possible development of capital markets, which is critical to a country’s success. At the end of the day, what makes the U.S. powerful is our capital markets and all the capital we can bring to the situation. That just allows us to develop wealth faster for people, and companies can access the capital a lot faster.”
The result: Wall Street’s deepening penetration into the EU. Bank of America is turning a post office in the center of Paris into a trading floor for hundreds. Goldman Sachs, Morgan Stanley, and JPMorgan are shifting capital and staff to Frankfurt, Paris, and possibly other locales. JPMorgan Chase Chairman Jamie Dimon and his peers are increasingly signing up clients for work at the expense of homegrown rivals such as Deutsche Bank AG and BNP Paribas SA. In January, for instance, JPMorgan, Morgan Stanley, and Lazard advised Belgian drugmaker Ablynx and Paris-based Sanofi on a $4 billion takeover that featured no involvement by a European investment bank. This year, five of the six top institutions handling European transactions worth $500 million to $6 billion were American, according to data compiled by Bloomberg.
It’s possible the contest between U.S. and European investment banking will shift again. In the precrisis decade, European institutions were making inroads into the new world. UBS Group AG built an airplane hangar-size trading floor in Stamford, Conn., and Barclays, Deutsche Bank, and Credit Suisse elbowed into the upper ranks for securities underwriting and mergers advice in the U.S. In 2010, top European banks raked in 51 percent of global revenue from trading equities, compared with 44 percent for American lenders.
The UBS trading floor is no more, and Deutsche Bank is the latest European bank retreating from the U.S. In equities trading this year, Wall Street commands 60 percent of global revenue, compared with Europe’s 34 percent, according to data compiled by Bloomberg. The top five U.S. investment banks earned $75 billion in the first nine months of 2018, a quarter more than the same period last year. In contrast, Deutsche Bank, which has been hobbled by CEO turnover and a round of money laundering cases, saw its shares fall to record lows in December. BNP Paribas, France’s No. 1 bank, jolted investors in the third quarter when it reported a 15 percent drop in revenue in fixed income, long considered one of its strongest businesses.
Even before Brexit, Europe struggled to overcome obstacles that would make its lenders more competitive. Brussels’ bid to unify its member states’ banking industries, for example, has foundered. “The fact that European politicians failed to produce banking union is a travesty,” says Barrington Pitt Miller, a portfolio manager with Janus Henderson Group Plc, which holds big stakes in European lenders. “If you’re a U.S. capital markets bank, you are looking at a free runway to step in and take market share.”
As if that weren’t enough, Dimon and Moynihan and their fellow Americans are riding a tailwind courtesy of the U.S. Federal Reserve—a surge in lending revenue. Over the last eight quarters, the Fed has lifted its benchmark interest rate to a range from 2 percent to 2.25 percent, which means banks can charge more for loans. The European Central Bank, nursing a fragile regional economy, has stood fast with a subzero rate. “There’s strong lending growth coming from companies in the U.S.,” says Jan Schildbach, head of research on banking, financial markets, and regulation at Deutsche Bank. “In Europe there’s only modest lending volume growth after years of contraction.”
Wall Street is doing well in Asia, too. U.S. banks take the five top spots in Asian equities underwriting, according to Bloomberg data. In the global business of trading securities, only one Asian lender, Japan’s Nomura Bank Holdings Inc., makes the top 16, with just a 1.7 percent share. In mergers and acquisitions, Asian institutions tend to show up in deals on their own turf. The Bank of China Ltd., for example, leads yuan bond underwriting.
It’s tempting for European banks to conflate the financial industry with the other sources of U.S. economic influence. The dollar continues to be the world’s reserve currency, and the U.S. Department of the Treasury has stepped up its role as a global financial cop—whether on trade with pariah states, policing money laundering, or enforcing tax laws. Foreign bankers and lawmakers bristle at what they call the “weaponization” of the dollar—how its dominance makes it harder for other countries to borrow and trade—and fear that Washington is indirectly giving Wall Street a boost by fining overseas banks billions of dollars.
The EU is starting to push back. Brussels was dismayed by the Trump administration’s withdrawal from the 2015 international agreement to curb Iran’s nuclear program and pursuit of penalties for companies that have renewed doing business with the oil-rich country. So Brussels is trying to cook up a way to get around the dollar-denominated economy to preserve commercial links with Iran.
Indeed, Trump’s willingness to undo long-standing accords on trade, security, and climate change has emboldened rival powers to challenge Washington’s reach. On Dec. 5 the EU unveiled an initiative to strengthen the euro as an alternative to the dollar by calling for companies in the financial and energy industries to denominate more trading contracts in the single currency. China is in its fifth year of rolling out its Belt and Road Initiative, a program worth hundreds of billions of dollars designed to project Beijing’s influence through myriad infrastructure and commercial ventures in dozens of nations in Africa, Asia, and Europe. Russian President Vladimir Putin, for his part, has called on nations to use their own currencies for international trade to blunt U.S. economic power.
Yet when it comes to Wall Street, the great game of geopolitics may ultimately amount to little more than noise. The industry, of course, has only one lodestar: money. And if a tectonic shift such as Brexit creates new opportunities, you can bet America’s big banks will grab a bigger share of business. Still, some fret about what will happen when the cycle turns. “The banks are never going to be terribly good at identifying what would cause them to fail,” says Paul Tucker, chairman of the Systemic Risk Council and former deputy governor of the Bank of England. “There will be a recession at some point, and people will lose money. The economy relies on these banks, and so they need to be able to withstand a lot of stress.”
Theoretical fears of some future downturn aren’t likely to put off Wall Street from making money today. And in the pursuit of profit, America’s global financial profile will grow only more prominent. “That old adage that the business of America is business is still true,” says Curtis Chin, the former U.S. ambassador to the Asian Development Bank and now an Asian Fellow at the Milken Institute. “Soft power comes in many forms.” —With Chitra Somayaji
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BOTTOM LINE – American banks are establishing global hegemony as European institutions retrench even before London loses its place as the world’s financial capital.