After the 2008 financial crisis, the European sovereign debt crisis and the covid-19 pandemic, Europe’s financial services “ecosystem” has lost its competitive edge when compared to North America and Asia, says the introduction to a , published on 11 January 2024 by Luxembourg for Finance and the Official Monetary and Financial Institutions Forum (OMFIF).

Key reasons for this decline in competitiveness include fragmentation in Europe’s financial services industry, the lack of a working capital markets or banking union, stricter regulations, low interest rates and an overall lack of risk culture.

But many European banks have returned to pre-2008 levels of profitability, and Europe leads the way in sectors like green finance and the digitalisation of financial services, marking a “potential shift” in the EU’s financial services sector, noted a press release marking the report’s publication. “We must ensure that the cycle linking financial services and the real economy remains virtuous, and that we are competitive enough on the global stage to finance the economy and boost growth in the region,” said , CEO of Luxembourg for Finance, in the communiqué.

“There are encouraging signs of recovery in EU financial services after a lost decade, and a huge opportunity to build and benefit from sustainable and technological transformations,” added Clive Horwood, managing editor and deputy CEO at OMFIF. “But regulations must be viewed through the lens of what impact they have on the ability of banks and asset managers to compete globally and provide the finance that the European economy needs.”

The report aims to compare the competitiveness of the European financial services industry against the US and Asia by analysing factors like scale, diversification, profitability, pricing power and valuation. Here are a few findings from the study.

Share of AUM drops from 47% to 22%

Amongst the world’s 100 largest asset managers, the share of funds from Europe has dropped from 47.1% in 2007 to 21.9% in 2022, found the report.

Europe has only four of the top 20 asset managers worldwide--Amundi (France), Legal and General Investment Management (UK), Natixis Investment Managers (France) and UBS Asset Management (Switzerland).

$385bn market cap for Europe’s four largest banks

Four of the largest 20 banks by market capitalisation are in Europe--HSBC Holdings (UK), UBS (Switzerland), BNP Paribas (France), Banco Santander (Spain)--with the rest mostly in North America or Asia. The market capitalisation of these four banks together comes to $385bn, which is below that of the largest bank--JP Morgan ($451.2bn).

Comparing the largest banks in the European Union’s four largest economies--France, Spain, Italy and Germany--to JP Morgan’s market capitalisation at the end of October 2023, they fall “way short,” said the report.

“The higher profitability and relative optimism in North America’s banking sector are reflected in higher market valuations there,” stated the report. As of 30 November 2023, the value of the European banks in the sample was $811bn versus $1,577bn for banks in North America and $1,334bn for those in the Asia Pacific region.

Chinese banks, moreover, have been on the rise. The share of tier 1 capital in China has increased from 16% in 2007 to 49% in 2022.

That being said, the profitability of European banks is a bit of a brighter spot, noted the report. JP Morgan’s net profits stood at $37.6bn in 2022; BNP Paribas, Santander, Intesa SanPaolo and Deutsche Bank together made a combined profit of $32.7bn.

“Over the past two years, the outlook for European banks has substantially improved. They have refined their business models, built their capital bases and seen net interest margins return them to better levels of profitability,” stated the report. “Now, they need to put their profits to work (rather than just return them to shareholders), build their lending books, increase the velocity of their capital and benefit from better capital markets.”

US leads, Europe fragmented

Several of the industry experts interviewed for the report cited “fragmentation in capital markets” as an obstacle to cross-border investments, which could be addressed by a capital markets union in Europe. But cultural and national boundaries often cause “home bias” amongst investors, meaning they prioritise domestic investments and domestic asset management firms. The US, on the other hand, has a more unified, harmonised domestic capital market that allows capital to move more freely.

Compared to the US, the smaller and less sophisticated retail investor base in Europe “has also contributed to the relatively stunted trajectory of the European asset management industry,” found the report. In 2022, only 13% of US household financial assets were in currency and deposits, compared to an average of 38% for EU households, said the report. The figure for Luxembourg is even higher--45.5%.

This is partly due to cultural factors, with investors in the US having a more “entrepreneurial and risk-seeking culture” than those in Europe.

Advantage for Europe in sustainable finance

Despite structural, institutional and cultural factors hindering the growth of the asset management industry since the 2008 financial crisis, European funds have a “comparative advantage” in sustainable finance, said the report. This is thanks to frameworks and standards developed by the European Union (such as the Sustainable Finance Disclosure Regulation, or SFDR), which give the European asset management industry “an edge” when it comes to innovating and building scale. Regulation, which could be seen as “overly burdensome” in Europe, is generally seen as a “net positive,” according to industry experts interviewed as part of the LFF-OMFIF report, while the EU taxonomy can help tackle greenwashing concerns.

Establishing a capital markets union would also help boost the asset management sector, noted the report. More capital will be needed in the near future to help finance the green and digital transitions.

Mobilising European savings and broadening Europe’s retail investor base will be key, the report added. This can be done through financial literacy campaigns and financial education, diversifying pension schemes (such as through defined contribution pension systems or the pan-European personal pension product) and better targeted products for retail investors (like the European long-term investment fund or government bond issuances).

Finally, Europe also has opportunities to grow in the fields of central bank digital currencies, distributed ledger technology and artificial intelligence, argued the report. It’s setting the pace in terms of data privacy standards, but lags behind Asia in areas like payments. However, EU policies like the Payments Services Directive 2 (PSD2), the Financial Data Access framework (Fida) or the Markets in Crypto-Assets regulation (Mica) help provide regulatory clarity, which can in turn boost innovation and investor confidence.

Find the full report .