European banks have been shrinking since the financial crisis, dwindling both in terms of their market value, number of branches and staff. Their fortunes have suffered and profits fallen as a result of stricter regulations, general economic weakness and low interest rates.
It’s unlikely that they will ever be the same again. All the more so as the decline in Europe’s over-reliance on banks could present new opportunities for the region to develop much-needed alternative financing channels.
Financial companies lost one trillion euros in market value
Since August 2007 the 471 financial companies that form Datastream’s financials equities sector lost over one trillion euros in market value. That’s the equivalent of Spain’s yearly GDP wiped out.
No other EU sector suffered a comparable loss, not even Oil & Gas contending with low oil prices.
Back in 2007, financial service companies were by far the largest EU Datastream sector by market value, roughly 64 per cent larger than the consumer goods sector. Now they are about the same and the latter was even briefly bigger in the aftermath of Britain’s EU’s referendum.
The worst performing sector in the EU since 2007? Banks
Datastream’s EU financials index has halved since its pre-crisis peak. By comparison, healthcare and consumer goods stocks indices are 70 per cent higher.
This is truly a pan-European story. Bank stocks are traded at less than 40 per cent of their August 2007 prices across all major European countries. German and Italian banks are traded at about 15 per cent their 2007 levels, while the Portuguese banks index is at an incredibly low 2 per cent of its pre-crisis price.
Back in 2007, there were 15 banks among the largest companies by market value of the European Stoxx 600. Today they are down to five.
Thousands of job cuts and axed branches
In 2015 there were more than 27,000 fewer bank branches in the Eurozone than in 2007, a drop of 13 per cent. There were 212,000 fewer people employed in banking, a 10 per cent drop since before the crisis according to the ECB.
The downsizing was particularly dramatic in France – where the number of banks halved to 360 – and Spain where it was exacerbated by a poor recovery in overall employment.
The largely fragmented German banking sector was not left unscathed. In July this year it counted 1,745 credit institutions, 14 per cent less than in the same month in 2007.
The European banking sector needed to downsize
Up until the 1990s the EU banking sector was comparable in size to other advanced countries. But soon after it “became extraordinarily large” and now “Europe is home to the world’s largest banking system” according to Sam Langfield and Marco Pagano, authors of ‘Is Europe overbanked?’.
Behind this disproportionate growth were government policies:
“Eurozone banks (..) benefited from a greater reduction in funding costs owing to government support than US banks” they write.
This meant that alternative forms of funding were hard to come by and to this day they are notoriously weak. The EU’s equity market is about half the size of that of the US, its securitisation market is less than a quarter – this is despite their economy being roughly the same size.
Time for change
According to Langfield and Pagano, the downsizing of the banks has created a slack which “security markets have partly taken up”.
It’s about time. Mario Draghi, president of the ECB, has said that “it’s better to have a plurality of channels financing the real economy than to rely on just one”. And indeed, the point of a Capital Market Union is to “diversify and amplify sources of finance”.
But there is change in the horizon. Langfield and Parano believe the shift from the old bank-based model to market-based finance “is likely to prove structural”.
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