by Tommy Reggiori Wilkes and Sinead Cruise

LONDON (Reuters) – The new era of financial deregulation expected by Wall Street with Donald Trump’s second term makes it a little more difficult for European banks to close their profit gap compared to their American rivals.

Since the 2008-2009 global financial crisis, lenders in the eurozone and Britain have been hobbled by low profitability and weakened economies while U.S. banks have risen in value, notably eating away at market share in investment bank to their European counterparts.

Some banks had started to regain lost ground this year, with European stocks performing better than American ones so far. Particularly as hopes had been growing that the United States would adopt some elements of Basel III regulations, which require American banks to hold more capital, helping to level the playing field.

Donald Trump’s victory in the presidential election this week changed the situation. Shares of JPMorgan, Goldman Sachs and Morgan Stanley have all soared, while the STOXX Europe 600 Banks Index is down more than 1% for the week.

“The situation is simple: deregulation and tax cuts in the United States contrast with strict supervision and low interest rates in Europe,” said David Materazzi, head of automated trading platform Galileo FX, based in Italy.

“If US banks receive the expected policy support, they could increase lending volumes and optimize capital in a way that European banks simply cannot match at present,” he added.

Since the start of 2010, shares of European banks have fallen 10%, while those of American banks have more than tripled.

The European Central Bank (ECB) estimated that the return on equity of eurozone banks fluctuated around 5%, compared to 10% in the United States. This is explained by higher fee income across the Atlantic and legacy non-performing loans with which European banks are still struggling.

A LEVER FOR LOBBYING?

There are already signs that European policymakers are preparing for a new paradigm: Swiss Finance Minister Karin Keller-Sutter said Thursday that she had discussed the prospects for U.S. banking regulation with her British counterpart, Rachel Reeves. .

“It was said in advance that a wave of deregulation was coming to the United States,” she told Reuters, adding that both sides agreed it was important to find a balance between competitiveness and stability.

A wave of deregulation should allow European banks to push for a relaxation of rules in Europe, a banking executive told Reuters.

Michael Ashley Schulman, chief investment officer at Running Point Capital Advisors, thinks Donald Trump could also roll back parts of the 2010 Dodd-Frank financial reform law that tightened regulation of banks to avoid another implosion of the type from that of 2008.

“In addition, an increase in expected corporate mergers and acquisitions with a less restrictive competition authority (Federal Trade Commission) should lead to an increase in investment banking fees,” he told Reuters.

“We can also expect an increase in regional bank mergers. With more restrictive authority, European banks will not have the same weapons.

(Reporting by Sinead Cruise and Tommy Reggiori Wilkes, with Elisa Martinuzzi in London and Jesus Aguado in Madrid, Bertrand De Meyer, edited by Kate Entringer)

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