Restoring the competitiveness of European banks and asset managers can’t be achieved by tweaking regulations
3 min
After a decade and a half of seeing the U.S. economy pull ahead thanks to its outsize technology sector, European politicians are desperate to fight back in emerging industries such as green energy. One challenge they face is that America also keeps pulling ahead in the business of financing the investments required.
On Thursday, Luxembourg for Finance—a public-private partnership that seeks to promote the financial industry in the low-tax city state—published a report detailing the different ways in which European banks and asset managers might regain an edge relative to U.S. and Asian peers.
This is part of an effort by officials across the European Union to give firms a break. “Old economy” industries such as car manufacturing face rising competition from China and higher energy costs since Russia invaded Ukraine. The U.S. Inflation Reduction Act also has drawn investment across the Atlantic. Last year, the European Commission tasked former Italian prime ministers Mario Draghi and Enrico Letta with drafting a report on European competitiveness.
Luxembourg for Finance Chief Executive Nicolas Mackel echoes a common refrain: “Europe can take the lead in financial services when we eliminate fragmentation.” His report points out that the return on equity of European banks has bounced back in recent years. But it also showcases the gulf that has opened up relative to U.S. financial firms.
European lenders’ return on equity is now around 8%, compared with 12% across the Atlantic and 10% in Asia, in part as a result of stricter regulations following the 2008 banking crisis. Most European banks trade below book value on the stock market, having returned a negative 14% to investors since the April 2009 trough. Large American banks trade above book value and have gained 113%.
In services particularly exposed to international competition, American banks dominate in Europe too: In 2023, they took the top five positions for mergers and acquisitions deals, Dealogic data shows, with France’s BNP Paribas coming in sixth, and the top six spots for issuing equity.
And this isn’t just about banks. In 2007, top European and U.S. asset managers roughly split the global market between them. By 2022, European fund managers had just 22% of total assets under supervision, with only France’s Amundi playing in the big leagues. This reflects their failure to jump on the train of low-fee passive investment as effectively as U.S. giants such as Vanguard and BlackRock. Ironically, the latter’s dominance in exchange-traded funds resulted from its acquisition of iShares from Britain’s Barclays in 2009.
European officials are taking some useful steps. They admitted in 2022 that a directive aimed at harmonising securities markets, known as Mifid 2, has done more harm than good, and have agreed to amend it. New EU-wide savings products give pensioners greater choice, and might help address the lack of sophistication that characterises European individual investors relative to Americans used to managing 401(k)s. Stringent constraints on what asset managers can offer are being relaxed, and the rules governing sustainable finance—where Europe has an edge—are being clarified.
Meanwhile, the fallout from last year’s Silicon Valley Bank debacle will bring U.S. regulation closer to Europe’s.
Such rule changes might narrow the gap, as investors have recognised: The stock-market discount at which European lenders trade compared with American ones has shrunk over the past three years. But it is hard to see the tables fundamentally turning. In the digital era, economies of scale are even more powerful. The European Union comprises many countries with different languages, whose firms and investors have local financial relationships and strong home biases. The obstacles to eliminating fragmentation are huge.
If Europe can’t compete with America’s private financial muscle, it is doubly problematic that its efforts to mobilise industrial investment through the public sector have been meek compared with the U.S. Inflation Reduction Act. Promoting more sustainability-minded funds isn’t an adequate fix.
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Investors are bracing for a bumpier fall stock market due to shifting odds of a Federal Reserve interest-rate increase and other macro challenges.
3 min
The stock market had a decent summer. Investors are bracing for a bumpier fall.
In the past couple of months, equity investors cheered soaring profits at big companies, shrugged off jitters in the bond market and nudged megacap tech shares back near records.
Now, as the post-Labor Day stretch begins, a number of new challenges lie ahead: ever-shifting odds of an interest-rate increase from the Federal Reserve. Sky-high expectations after a stunning earnings season. The persistent threat of higher consumer prices as fighting in the Middle East drags on.
“You’re moving from this earnings-driven market to this macro-driven market with the Fed, inflation and interest rates in focus,” said Keith Lerner, chief investment adviser for Truist Advisory Services. “It tends to be a choppier period.”
Historically, every major U.S. stock index experiences its worst average return in September. The Dow Jones Industrial Average has slid an average 1.1% in the ninth month of the year, in data that dates back to the 19th century. The S&P 500 has seen the same average decline—and for every September dating back to 1928, the benchmark ends the month lower more than half of the time.
Analysts caution against reading too much into those seasonal patterns. But in recent weeks, new reasons for investor caution have emerged. One of the largest: the looming threat of an interest-rate increase from the Fed, which announces its next policy decision on Sept. 16.
Chairman Kevin Warsh’s decision to ditch forward guidance and take more of his cues from markets has muddied the waters for investors when it comes to monetary policy. That has left traders scouring Fed governor speeches and economic-data reports for clues on the central bank’s next move.
“There’s going to be a lot of eyes on those numbers,” said John Luke Tyner, head of fixed income and portfolio manager at Aptus Capital Advisors.
The past couple of weeks offered just one example of how frequently those expectations can change. After Warsh struck a hawkish tone during remarks on Aug. 28, the odds of a hike at the Fed’s next meeting jumped from 35% before the speech to 58%, according to CME FedWatch data.
On Thursday, Fed governor Christopher Waller made a case for leaving rates where they are. Interest-rate futures showed coin-flip odds between a hike and a hold. Then Friday’s robust jobs report amped up rate-hike bets once more, back to a roughly 60% chance of higher rates after the meeting.
“Rates have really been driving the car for equities the last few weeks,” said Ross Mayfield, an investment strategist at Baird.
That uncertainty comes as an unruly bond market could put pressure on stocks. Treasury yields have marched higher for much of the summer, driven by concerns about rising oil prices, growing U.S. budget deficits and a deluge of tech-company bonds now competing for investors’ cash. Last week, the rout went global, pushing yields to multiyear highs in Japan, Germany and the U.K.
Higher bond yields can drag on stock prices and lift borrowing costs for companies and consumers across the economy.
Rising prices remain the top concern for bond traders, and continued fighting between the U.S. and Iran has done little to ease those worries. The national average price of diesel climbed to a record of $5.850 on Friday, according to AAA. That is up from $3.712 a year ago.
Investors will get more insight on the path of prices this week, with the much-awaited consumer-price index report due Friday and a reading on producer prices Thursday.
With another blockbuster earnings season in the books, some analysts have also warned that any boost from the third-quarter reports due in the coming months could be minimal. Back-to-back quarters of standout profits have raised expectations and made it especially difficult to impress traders. Custom-chip company Broadcom, for example, said Wednesday that it more than tripled its earnings and nearly doubled its revenue. Shares slipped 2.7% the next session.
Many analysts note there are plenty of reasons not to panic. The economy is in impressive shape, thanks to a healthy labor market and the rippling effects of the artificial-intelligence investment boom. Profits are booming at America’s biggest companies. The Cboe Volatility Index has dropped to its lowest levels of 2026. Credit spreads are tight, a sign bond investors aren’t concerned about economic conditions that could hurt companies.
But the mood has shifted from the euphoria that felt tangible when the Nasdaq was notching back-to-back records early this summer. The question, Mayfield said, is whether the fundamentals that have bolstered the bull market so far can stretch the rally into 2027.
“There are more anxieties or uncertainties about the backdrop,” he said. “It does feel like a transitional moment.”
