Which Banks Are More Risky, The Largest EU or U.S. Banks?

The largest of the European Union (EU) banks fell more than their US peers in the recent credit crisis, since their leverage ratio and the exposure to market risk was higher. Many European bank stocks such as ING Bank (ING), Royal Bank of Scotland (RBS), Societe Generale (SCGLY.PK), Commerzbank (CRZBY.PK) and Lloyds Bank (LYG) fell sharply last year and through March of this year. For many investors, this was a big shock since they assumed that European banks were not involved heavily in the sub-prime mess.

If banks have high leverage ratios, then their capacity to absorb losses becomes less. The leverage ratio for the financial sector in the Euro area increased to about 70% of the GDP between 1999 and 2007. But in the U.S. this ratio grew to only 40% during the same period.

The chart below shows the leverage and exposure to market risk of the largest EU and US banks between 1998-2008:

click to enlarge

Leverage: total liabilities/net tangible equity. Exposure to market risk: total securities/net tangible equity. Data on 2008 are estimates. Source: R&S - Mediobanca 2009

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The large EU banks had an average leverage ratio higher than US banks (top section of chart). The average ratio for EU banks was about 35 but it reached as high as 70 or even 80 for some German, British and Swiss banks.

Compared to the US, Europe has tougher regulations for the banking sector. Despite this, European banks not only over-leveraged but also exposed themselves to some of the riskiest assets out there, similar to the large banks in the US. This situation occurred because of the lax oversight by the regulators in European countries. Besides, European banks also wanted to boost their profits to high levels even if meant taking huge and unnecessary risks.

Comments

[David in En...:]

So some of the Europeans in a 'tougher' regulatory environment took on more risk than US banks.
Regulations failed so we should have more regulations.
That may make sense to some people but not to me.

Aug 15 01:47 PM

[Fliujniligui:]

NBG and Deutsche Bank seem to be among biggest bargains, fat growth plays and required little or no government help.

Aug 15 09:41 PM

[Erick Tippett:]

Mr. Hunkar,

This is all quite well stated by you concerning the leverage ratio
and exposure to risk levels of this country compared to europe.
This should be no surprise to anyone with some knowledge of
the history of europe and this country though they probably
would not have attained in the educational system here, such
as it is.

E. Tippett
Chicago, Illinois

Aug 16 12:36 AM

[AuGod!:]

The "too big to fail" banks on either side of the Atlantic are NOT out of the woods yet. In terms of risk exposure, if you turned them all upside down, they would all look like sisters. The best of the best big banks are only as strong as the weakest link on their balance sheets just like the rest of us. As for off-balance sheet items, well, who really knows?

Aug 16 12:21 PM