For once, U.S. banks are on the sidelines of the latest storm in the long, drawn-out bursting of the global credit bubble.
The implosion of interbank deposit markets in Europe and the slump in European sovereign debt has largely left U.S. banking unscathed. Yes, U.S. money market funds had large investments in short-maturity European bank dollar-denominated paper, but these are being repaid without problem (partly courtesy of central bank swap lines).
U.S. bank holdings of weak European sovereign debt or European mortgage backed paper are small in the total order of things (and in particular related to bank capital). That is in contrast to the situation for European banks where French and German exposure to now troubled debtors (weak sovereigns, Spanish mortgages, Eastern Europe) is in some cases a multiple of bank capital.
Beyond a sigh of relief that this time there is no big direct hit, will U.S. banks be able to seize new long-term business opportunity from the bubble-bursting now occurring in Europe?
The answer to this question is surprisingly positive, in particular for those U.S. institutions which have been successful in restoring and indeed deepening their own capital base during the past year. They are now in a good position to wrestle international business away from their lamed European competitors — especially as that laming probably has much further to go (restructuring of European sovereign debts, exits from Economic and Monetary Union by two or three countries, and delayed bursting of some residential real estate bubbles which are even today almost at full size — such as in Holland, France and the U.K.).
The opportunities are not likely to lie in mainstream commercial lending in Europe. As in the U.S., commercial banking is a declining industry which defied the laws of gravity over the past two decades by finding more and more illusory growth outlets in an ever bigger concentration on real estate lending. A big shakeout in the European commercial lending industry lies ahead, just as in the U.S. Rather the gains for U.S. financial firms at the expense of Europe are likely to lie in areas such as picking up distressed assets in European bank balance sheets (as banks there seek to raise their capital ratios) and taking away loan business in key emerging markets in Latin America and East Asia.
Outside commercial banking, private banking has been traditionally a high-profit business for European financial groups. Many of the European private wealth managers are now busy explaining to customers how so much has been lost in weak European sovereign debts. In principle some of these customers might now consider switching to U.S. private wealth managers. A main impediment here though is the particularly tough compliance rules, especially as regards taxation, under which the U.S. groups work. And the Swiss banks which have been especially important in private wealth management are in fact gaining from the EMU crisis.
Funds have been pouring into Swiss franc out of Germany, where confidence in the euro has collapsed as a consequence of the Bundesbank having lost control in the European Central Bank. This is now increasingly dominated by policymakers from France and indeed a leading German magazine has described a French plot to fool the Bundesbank. (Last month Bundesbank President Weber was outvoted when he sought to block the ECB buying weak sovereign bonds, and then the ECB bought masses of Greek bonds mainly from French banks.) The Swiss National Bank is widely assumed to be investing much of this year's pileup of its foreign exchange reserves (equivalent to around 40% of Swiss GDP) — amassed in the process of official intervention to slow the rise of the franc against the euro — in the German government bond market. This should give Bern a considerable degree of leverage when it comes to arguing with Berlin about the future of Swiss bank secrecy.
The big opportunity for U.S. banks lies elsewhere — in the regaining of hegemony of the U.S. dollar. The EMU crisis and the serious lack of trust now evident in euro-institutions (including crucially the ECB) mean that the flow of savings from other parts of the world, especially East Asia, will be into the U.S. rather than into the euro. U.S. financial institutions have a big advantage in marketing U.S. investments to global investors and opening U.S. capital markets to foreign borrowers. Moreover the waning of the euro as a serious competitor to the dollar and the disarray in French-German relations mean that Washington has unusual scope (in its strategic dialogue with Beijing) to gain important advantages for U.S. financial institutions in the Chinese universe.
Almost certainly the next few years will see major steps by Beijing toward making its currency (the yuan) fully convertible — meaning the dismantling of restrictions on the inflow and outflow of funds. A year back it looked as if Europe would have got a good chunk of that new business with Beijing keen to avoid becoming overdependent on the U.S. finance sector and impressed by European financial might. The People's Bank of China had put an estimated 25-30% of its foreign exchange reserves into the euro (and from there into European government bonds to a considerable extent). Now Beijing is in a state of disillusion about the euro.
International investors seeking to gain a new foothold in Chinese financial markets as these open up will look to U.S. rather than European financial institutions.