Rigorous capital standards have helped U.S. banks nearly recover from the financial crisis as many of their European counterparts continue to flail, according to a new study from the Boston Consulting Group.
North American banks are on track to post a so-called economic profit for the first time since 2007, according to the study, which weighed income against operating and refinancing costs as well as loan-loss provisions and capital charges.
Their economic bottom line was -7 basis points in 2011 and -2 basis points in 2012. The study predicts North American banks' score this year will cross into positive territory but did not provide a precise estimate.
In the U.S., regulators rigorous and pessimistic assessment of capital adequacy in the aftermath of the financial crisis ultimately proved to be a major boon to the industrys stateside recovery, according to Boston Consultings Duncan Martin, who coauthored the study.
Banks were forced to raise capital and that broadly restored market confidence, Martin said in an interview.
By contrast, European banks in 2012 posted their worst year since the financial meltdown. Economic profit dropped to -43 basis points, down from -27 in 2011.
The outlook was even more dismal for Southern European banks. Greece, Italy, Spain and Portugal recorded an economic profit of -132 basis points last year, compared with -55 in 2011. Loan-loss provisions were the major source of Southern European banks struggles, according to the study.
The economic environment and regulatory headwinds have combined to create a two-speed world where there is increasingly separation between the United States and Europe, Martin said.
The diverse nature of the European Union makes it harder to impose uniform regulations, Martin said. If you have 17 different national governments, all of whom have varying degrees of vested interest in the banking system, its hard to get common action, Martin said.
As U.S. banks grapple with tighter regulatory standards, Martin says they have good cause to be optimistic. Broadly, theres opportunity, he said. Dont be drowned by the thought of regulationits incredibly complicated but its not beyond the wits of man.
Improving risk management efficiency can help banks navigate a complex regulatory environment, he said. Banks should think through the ways in which different projects interact rather than running 15 regulatory projects in parallel.
Yet banks would be mistaken to assume that stronger balance sheets mean the industry is back to business as usual, with precrisis [return on equity] and growth rates, Martin said.
The Boston Consulting study, Breaching the Next Banking Barrier, is based on economic profit data from 318 retail, commercial and investment banks that represent 90% of global banking assets.