How is the European banking system different from the US? IESE Banking Meeting 2023

The banking crisis that started with the failure of SV Bank and led to the acquisition of First Republic by JPMorgan Chase gives us a setting to examine some important differences.

In my session at IESE’s Banking Meeting, I presented some clips of the conversation with Jamie Dimon on May 1st, 2023:

– The Banks that failed or were “at risk” had very concentrated deposits, and a large fraction of them were uninsured. Deposits in the US move with less friction – than in Europe. In addition, we need to take into account the competition from other savings products, very prominent in the US such as money markets – for example, 340B USD flowed into MM funds just in March.

Business models that are too specialized in one industry – i.e. startups in Silicon Valley can be very fragile from a deposits perspective. Too much volatility.

An increase in interest rates has a two-phase effect. The initial phase is positive since it increases the margins on variable-rate products while deposits remain cheap. But you need sticky deposits! – which are more so in European banks. The second phase may be negative on three fronts: credit quality of families and corporates may deteriorate; funding in the market (via AT1) is more expensive; and there might be unrealized losses on large HTC portfolios.

Regulation in US and Europe for mid-sized banks is different. There are two elements that are in contrast: liquidity requirements LCR and the explicit examination of interest rate impact on the banking book: the famous IRRBB in Europe.

Open Banking is market driven in the US while it is regulated in Europe. With high-interest rates, competing for deposits from non-banks is attractive: Apple will pay 4.15% for savings but can get 5.15% in a MM Fund. So an increase in interest rates opens opportunities to make money collecting deposits. The Open Banking sphere may allow for new viable models in Europe, it might change competition on the deposits side. Payment players such as Adyen, Stripe, and Paypal might be the ones to enter first.