I am catching up on older stories and having spent time yesterday in the Americas, realised it was time to return to Europe on the other side of the pond. One of the most notable results of the reactions of banks and their regulators to the financial crisis of 2008 was the focus on building capital. In general the US banks were forced to quickly increase their capital levels, even if it meant pain for their shareholders. As a result the large European banks continue to have lower levels of equity to assets than then large US banks. This comparison can be seen clearly in the research of the GABV (page 12). In fact the level of equity to assets for the large European banks at the end of 2018 was just over half of the level of the US banks.
With this comparison in mind, a recent declaration by the European Banking Authority should be taken with a very large grain of salt. As noted in the Financial Times, the EBA is “hopeful” that there is enough capital to survive the COVID-19 driven economic downturn. I would be very cautious on that conclusion but we should all be “hopeful” that the EBA has it right. More importantly I believe that this situation shows that deferring the pain of building strong levels of capital is not a good idea. As with any treatment for an illness, taking immediate needed action although painful is likely to lead to better results.
