Europe needs swagger

Barclays chief says EU banking champion needed to compete with US

Martin Arnold
Adam Jeffery | CNBC

The chairman of Barclays has said European investment banks should consider merging to create a regional champion to compete with US rivals, highlighting the anxieties of senior bankers in Europe about their sector's future.

"If you did want to create an investment banking champion for Europe, you would have to combine the investment banking arms of the main players, but you would have to swallow really hard and you would need political support," John McFarlane told the Financial Times.

Underlining the concerns, Frédéric Oudéa, chief executive of France's Société Générale and president of the European Banking Federation, writes in Monday's FT that a handful of "robust" US universal banks "are gaining market share abroad while strengthening their positions at home".

European plans to introduce a financial transaction tax and structural reforms separating retail banks from investment banking activities would "limit the extent to which European banks can operate on the capital markets", he writes.

"This is unwise — and unfair, since US banks with large investment banking activities based in London would effectively be exempt from the rules," he added.

Time to bank on banks?

The comments by two of Europe's most senior bankers underline the growing angst in the industry about its performance and prospects. European banks are cutting thousands of jobs, selling billions of euros of assets and repairing balance sheets — while US rivals are expanding and growing stronger.

In his article Mr Oudéa writes that the top five US banks had increased their share of the global wholesale market from 48 to 59 per cent in the past five years, while the top five European banks had slipped from 35 to 31 per cent.

Big banks were held back from merging by the sliding scale of extra capital requirements for global systemically important banks, he writes. "I don't think that the answer is a big strategic reshuffle or merger because the bigger you are the more of a handicap you have in terms of capital requirements."

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Mr McFarlane, who joined Barclays as chairman in May and took full control after ousting its chief executive in July, said: "Americans do have the stronger positions than anyone else, and it is not quite game over but it is very severe.

"If the European politicians and banks are really serious, they can't just sit there and throw bricks — they have got to do something about it," he said. "It could even be Barclays, but we don't think there is any reality in it, which is why we are not pushing aggressively.

"If there was a decent play that was neutral or accretive for shareholders, we wouldn't be opposed to just joining two investment banks."

The newly appointed bosses of Deutsche Bank, Credit Suisse and Standard Chartered are preparing to cut thousands of jobs and retreat from several lines of business, following similar restructurings at Barclays, HSBC, Royal Bank of Scotland and UBS.

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Bill Michael, global head of banking and capital markets at KPMG, said European investment banks faced "a triple whammy".

"The deflationary environment in Europe means interest rates are going to be lower for longer and that is bad for the banks as people don't have to reprice their risks; the banks are just laden with non-performing loans and non-core assets that will take years to clean up; and the regulatory climate in Europe doesn't want investment banks," he said.

The Bank of England will on Thursday give more detail on how it intends to implement the law to ringfence the retail operations of British banks from other operations — making it harder for them to keep big investment banking arms.