Mon. Dec 6th, 2021


Under the emphasis of the achievements that Joe Biden picked up during his whistle-stopping tour of Europe last week, the detente in trade relations between the EU and the US, symbolized by the end of a penalty tariff regime on Boeing and Airbus, was one of the most striking.

But there is still a lot of tension – most evident in the EU’s war against the Big Tech giants of Silicon Valley, which recently asked US officials to complain about Brussels “Protectionist measures”. Less obvious, but no less symbolic of constant friction, is how – and who – the EU chooses to conduct its bond auctions.

While Brussels has tightened its debt issuance – with the launch of its € 800 million record fund restored last week – the list of syndicated banks over the deal was telling. In a unprecedented maneuver, the European Commission chose to exclude ten institutions on the grounds that they had historically violated antitrust rules.

It is difficult to blame the moral argument here: many banks have been convicted over the past few years of collusion in various markets, which has led to fines of billions of dollars. It is a logical consequence to withhold them from the ongoing cases until, as the Commission has stated, they have shown ‘corrective measures’ to ‘be fit to be an opponent of the EU’. But it also seems arbitrary – the EU has done business with blacklisted banks in the past – and is cynical about synchronizing with its flagship recovery fund program.

British and American bankers seized on the decision as an example of an attitude aimed at punishing the US, amid continuing geopolitical tensions, and the UK after Brexit. Five of the ten banks excluded were British or American, and all had European platforms in the City of London.

Instead, mainly continental European investment banks of the second tier were selected for the program, although the EU said on Friday that eight of the excluded ten would be allowed to work on future transactions, after promising to show ‘integrity’.

If it were protectionism, it could be very self-defeating for European banks – and not just through the potentially higher price that can be paid by smaller, less well-connected institutions. The more internal EU financial markets become, the more likely it is to decline further.

The already large gap between American and European banks has widened over the past decade or so. The relative market capitalizations of JPMorgan and Deutsche Bank illustrate the point. According to Macrotrends, a data provider, Deutsche was worth it $ 79 billion at its peak in 2007, compared to $ 179 billion for JPMorgan. Today, the difference rose to $ 29 billion from $ 470 billion.

Until relatively recently, the world’s investment banks were unfavorable compared to retail banks: the post-financial crisis crisis hit investment banks and their more complex business models were not fashionable.

But as new research by JPMorgan banking analysts has pointed out, there are several reasons to reverse the view. Technological challengers are much more focused on retail banks than wholesale institutions. Regulation has built a wall around the positions of investment banking services, making it much harder for beginners to challenge them. And the market business of investment banks has risen amid more volatile conditions. In addition, there is particular pressure on retail banking as ultra-low interest rates reduce the spreads between deposits and lending.

These are collectively powerful tonics for the major US banks, most of which have large units for investment banking services and most invest in the technological advances that will help accelerate their better performance.

Even a sharp correction in the markets and the world economy should not be disastrous, given the isolation provided by the regulations after 2008 by investment banks’ business models, and a shrinking dependence on asset ownership on the balance sheet.

According to the JPMorgan analysis, Barclays is a weak spotlight among European banks. Its investment bank is JP’s third favorite after Goldman Sachs and Morgan Stanley. The boom in Barclays’ investment banking franchise in recent months has been so marked that it has asked former activist shareholder Edward Bramson to give up on its mission to have the unit demolished.

If small politics Brussels has indeed announced the liberation of most banks outside the EU from the Brussels bond syndication, the alleged prospects for US banks (plus Barclays) are a sting in the tail reminiscent of the Boeing Airbus tariff war at its bitterest.

patrick.jenkins@ft.com



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