European banks are facing an increasingly challenging landscape as they prepare for intensified competition from their U.S. counterparts following the re-election of Donald Trump as president. The prospect of a second Trump term raises expectations of a new era of financial deregulation, which could give U.S. banks an even greater advantage in global markets, further widening the profitability gap between American and European lenders.
Since the global financial crisis of 2008-09, European banks have struggled with low profitability, sluggish economic growth, and a raft of stringent regulations. Meanwhile, U.S. banks, buoyed by deregulation and a more favorable economic environment, have thrived, particularly in the highly lucrative field of investment banking. As a result, U.S. financial institutions have gained market share, while European rivals have retreated, leaving them with a substantial gap to close.
In recent months, there had been some optimism for European banks, with shares outperforming their U.S. counterparts and hopes growing that the U.S. might adopt certain elements of the Basel III regulations. These regulations, which require banks to hold more capital, were seen as a potential leveling mechanism for the playing field. However, Trump’s re-election victory has turned the tables. On the heels of his win, shares of major U.S. banks like JPMorgan, Goldman Sachs, and Morgan Stanley surged, while the STOXX Europe 600 Banks index fell by over 1% for the week.
“The expectation is simple: deregulation and tax cuts in the U.S. contrast with Europe’s strict oversight and low-interest-rate grind,” said David Materazzi, CEO of Galileo FX, an automated trading platform based in Italy. “If U.S. banks receive the expected policy support, they could ramp up loan volumes and optimize capital in ways that European banks just can’t match right now.”
The numbers reflect this disparity. Since the early 2010s, European banking shares have fallen by 10%, while U.S. lenders have more than tripled. The European Central Bank (ECB) has estimated that the return on equity for euro zone banks hovers around 5%, significantly lower than the 10% seen in the U.S. This gap is largely due to higher fee income in the U.S. and the lingering problem of non-performing loans in Europe that banks continue to grapple with.
Amid this imbalance, European policymakers are already bracing for the new landscape under Trump. Swiss Finance Minister Karin Keller-Sutter recently acknowledged that a wave of deregulation was expected in the U.S., and she and her British counterpart Rachel Reeves discussed the implications for U.S. banking regulation. While both agreed on the importance of maintaining a balance between competitiveness and stability, the focus on deregulation in the U.S. is seen as an additional challenge for European banks, which already operate under a more restrictive regulatory framework.
Some experts believe that the deregulation wave in the U.S. could give European banks more leverage to push for a loosening of the rules in Europe. One banking executive pointed out that this would allow European institutions to lobby for regulatory reforms that would make it easier for them to compete with their U.S. rivals. However, the pace of any changes in the U.S. regulatory landscape remains uncertain, as Trump has yet to appoint key new regulators and policymakers.
Michael Ashley Schulman, chief investment officer at Running Point Capital Advisors, speculated that Trump could roll back parts of the Dodd-Frank financial reform law, which was introduced after the 2008 financial crisis to tighten regulations on U.S. banks. This would further reduce restrictions on U.S. banks, leading to increased corporate mergers and acquisitions (M&A), which would likely boost investment banking fees.
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“An uptick in corporate M&A and a less restrictive Federal Trade Commission (FTC) could increase investment banking fees,” Schulman said. “We can also expect an uptick in regional bank mergers. Comparatively, European banks with their more restrictive regulatory oversight will be competing with one hand tied behind their backs.”
While some M&A activity has returned to the European banking sector in recent months, with deals such as UniCredit’s potential takeover of Commerzbank and BBVA’s bid for Sabadell, these deals are not guaranteed and face political opposition. For European banks, which face a more complex regulatory environment, competing on the same level as their U.S. counterparts will be an uphill battle.
Filippo Maria Alloatti, Head of Financials Credit at Federated Hermes, emphasized that U.S. banks would be the primary beneficiaries of a second Trump term. However, international banks with significant U.S. operations, such as Barclays, Deutsche Bank, and UBS, could also see positive impacts from the anticipated changes.
As the second Trump presidency unfolds, European banks will need to adapt to an increasingly competitive and deregulated environment. The future of global banking could see an even greater divide between the U.S. and Europe, with American institutions continuing to dominate, leaving European lenders to navigate a tough path ahead.
