(News Bulletin 247) – Since the bankruptcy of Lehman Brothers fifteen years ago, the banks of the monetary union have hardly returned to the prices that existed before this flagship event, unlike their American counterparts. Blame it on monetary policy and negative rates.

The bankruptcy of Lehman Brothers, 15 years ago to the day, was an incredible shock wave for the market. And the major international banks logically saw their stock prices collapse during this crisis which, although it came to light on September 15, 2008, was in reality showing warning signs as early as 2007.

Since then, banking regulation has been significantly strengthened, notably with the development of Basel III prudential rules, concluded in 2010 and finalized in 2017. Institutions are better capitalized, with better risk management and their financial results are proving to be solid. For example, BNP Paribas posted record profits in 2022.

A measure, obviously imperfect but nevertheless interesting, allows us to realize this: the evolution of the pan-European Euro Stoxx Banks index, compiled by the company Qontigo, and which brings together the major banks in the euro zone.

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Have American banks recovered?

Currently this index is around 109 points compared to 486 at its peak in 2007, then 257 points on September 15, 2008 and 94.5 in March 2009.

Since 2010-2011 (a period which certainly coincides with the sovereign debt crisis in the euro zone), this index has rarely exceeded 150 points and never 200.

In comparison, in the United States, the Dow Jones US Bank index, which currently brings together 39 banks, is performing much better. In 2007 its pre-Lehman Brothers peak was around 570-580 points before falling to 290 points in September 2008 then to just over 100 points at the start of 2009, according to investing.com.

But this index then recovered well, exceeding 400 points in 2017 before reaching a high of more than 600 points in 2021. Currently, it stands at 421 points.

Negative rates as poison

“If you had invested in the American banking sector in March 2009, post-Lehman Brothers crash, today you would have had more than 13% annual return on your investment compared to a little more than 6% if you had invested in the sector European banking sector”, underlines David Benamou, investment director at Axiom Alternative Investments.

How can we explain such a disparity? “The difference in stock market performance between European banks and American banks since the Lehman Brothers crash mainly comes from differences in monetary policy. The fed funds of the American Federal Reserve (Fed) have never gone into negative territory unlike the deposit rate of the European Central Bank which remained negative for 8 years!”, explains the specialist.

“But we must not forget that a bank earns money in two ways: either via loans, or by placing the deposits it collects with central banks. With negative deposit rates (which do not have not passed on to individuals), European banks have seen a whole part of their turnover disappear”, he continues.

Improving prospects

We can think that the regulation, deemed stricter in Europe, could cause a stock market discount between euro zone banks and American establishments. Not really, actually.

“Large American and European banks have similar regulatory constraints, slightly more important for Europe, in particular on the management of interest rate risk. The difference is mainly at the level of regional banks, with much greater regulation in Europe than ‘in the United States”, argues David Benamou.

Currently, banks in the euro zone are once again benefiting from positive rates but this is not necessarily reflected in their prices.

“With the rise in key rates from the European Central Bank, the situation is normalizing but the market is still struggling to integrate it. On average, the shares of European banks trade around 6 times the expected profits over twelve months , compared to more than 8 times for large American banks and regional American banks”, observes David Benamou.

“But their prospects are improving, the quality of their credit portfolio is good, the ROE (return on equity) is expected on average around 11% and analysts are raising their profit forecasts,” notes the expert.