How can we tell if an economic sector is healthy? Opinions may vary, but long-term stock market performance is often a good indicator. European banks have performed respectably since the 2008 crisis, with an annualised return of 5%, but US banks have done much better, averaging 11%.
A more favourable macroeconomic environment (no fiscal austerity, no negative interest rates) and pragmatic regulation (competitiveness has always been a key consideration for regulators) have made the US banking sector the big winner of the last 15 years: it is more concentrated, more efficient and dominates many market segments, particularly investment banking.
But Europe now seems to be back in the race. Interest rates have returned to positive territory, the excess capital accumulated over the past 10 years is being redistributed to shareholders or set aside for future consolidation operations, ROE has been higher on average than that of US banks for several quarters, and our policies have put competitiveness back at the heart of legislative and regulatory reforms.
But beware, our old demons are never far.
Macroeconomic contexts: US banks’ resilience vs. European banks’ stagnation
In 2025, the macro gap is still widening, but Europe is showing signs of recovery.
In the United States, GDP is growing by 1.8%, driven by robust consumption and investment in AI, despite a slowdown (+2.8% in 2024).
Core inflation is falling towards 2%, allowing the Fed to anticipate rate cuts to 3.75% at the end of the year, which remains within a comfortable range for banks' net interest margins (NIM).
In the eurozone, the picture remains mixed: GDP at 1.0-1.2%, impacted by residual austerity and energy shocks, but boosted by two promising fiscal stimulus packages.
Germany, under the leadership of Chancellor Merz, has approved an ambitious 2025 budget (spending 2.4% of GDP on defence and infrastructure), marking a shift towards more daring fiscal policy.
At the same time, the European Commission's programmes for the green transition – via the Green Deal and LIFE project calls (more than €80 billion allocated in 2025 for energy, circularity and climate adaptation)– are injecting industrial dynamism, targeting 15% of the global clean tech market.
Core inflation at 2.1% justifies a pause in ECB rates at 2% (until at least 2027) without the American punch, but with a growing safety net.
As a result, US banks are riding an expansive credit cycle, while European banks have been enjoying a cycle of positive rates for several quarters and hope that these favourable winds will not weaken in the face of fears of European sovereign debt fragmentation.
Europe is still paying for its past fiscal excesses and remains hampered by the budgetary fragmentation of the European Union, while America is reaping the rewards of its chronic audacity. The lesson: growth comes from fiscal pragmatism – and Europe seems to have finally understood this.
Profitability: Europe banks are catching up, but for how long?
ROE for European banks soared to 12.3% in Q2 2025 (EBA), thanks to NIMs boosted by good control of deposit costs and a steepening of the yield curve in the eurozone, as well as sharply rising fees (+9%). Share buybacks (€15 billion in Q3) boosted returns.
In the US, the 13 banks in the BANKX index maintained an average ROE of 11%, but regional banks struggled under CRE provisions (+20% YoY).
In terms of valuations, European banks have enjoyed a spectacular stock market run in recent quarters but remain undervalued at 9.2x 2026 earnings, compared with 12.2x for US banks.
Europe is finally redistributing its capital buffer (CET1 15% vs. 13% in the US), freeing up €50 billion for M&A. But beware: this outperformance is cyclical. Without reforms, a return to low interest rates would erode these gains, as in 2010-2020 when the EU stagnated at 5% ROE.
Reforms and regulatory issues: American banks’ pragmatism vs. European banks’ rigidity
This is where America excels.
The US ‘Basel Endgame’, which was supposed to tighten weighted average risk requirements, is currently being simplified. Michelle Bowman, Vice-Chair of the Fed in charge of supervision, has postponed the phase-in of Basel IV.
She is also proposing relief for small banks (<$250 billion in assets). Post-Dodd-Frank, the US has eased the rules for banks with less than $100 billion in assets, encouraging consolidation.
According to estimates, the ‘Basel Endgame’ could free up between $100 billion and $150 billion in capital.
In Europe, pragmatism is finally emerging, but belatedly. The suspension of the FRTB (Fundamental Review of the Trading Book) until 2027, announced by the Commission in June 2025, avoids further competitive shock with the US.
Securitisation reform would give European banks a more effective balance sheet management tool than they currently have. Other reforms have recently been proposed.
France is leading the charge on global systemic banks with a proposal to merge MREL/TLAC for G-SIBs, creating a single requirement based on weighted average risks and eliminating duplication in capital requirements.
Germany is targeting smaller banks with a simplified regime for banks with assets of less than €10 billion (Bundesbank, September 2025), limiting reporting in order to reduce costs for 1,500 small entities.
These initiatives, inspired by the US model, aim to counter the ‘over-regulation’ that has undermined the sector's competitiveness since 2010. But progress on these projects is slow, and Europe risks losing its recent lead in profitability.
Risks: European and American banks face shared threats, which are more acute across the Atlantic
European banks are less risky. This is the trade-off for strict regulation in Europe and the prudence of the regulator. In the US, exposures to CRE (Commercial Real Estate) are high and underperforming.
The few European banks that are exposed to this sector have recorded defaults in recent quarters (Deutsche Bank in particular).
Also in the US, American banks' exposure to non-depository financial institutions (NDFIs), estimated at around $300 billion (Moody's), has been a cause for concern for several quarters due to a number of bankruptcies and fraud cases (Zions $60 million losses, Q3).
In Europe, the ESRB has alerted banks to their exposure to NDFIs, but this exposure is more limited, as is CRE exposure, which represents around 10% of loans (vs. 30% in the US).
Finally, European banks still have precautionary provisions built up during COVID, whereas US banks have reversed them. Europe, which is more cautious, will be more resilient in the event of a credit shock.
In short, the European banking sector is flirting with excellence: higher ROE, excess capital, less risky profiles. Recent reform plans are very encouraging for the future. But despite these positive aspects, Europe remains fragmented and therefore uncompetitive compared to US banks, where consolidation has been largely completed over the past decade.
Europe must accelerate its own banking unification in order to improve its competitiveness against US and Asian giants. But if we want to close the gap, we must kill our old protectionist demons. Consider a subtle but recurring brake on this European consolidation: constraints on the loan-to-deposit ratio, often imposed by governments to force domestic financing of the real economy.
The recent example of UniCredit's failed takeover bid for Banco BPM, torpedoed in 2025 by Rome via its ‘golden power’ (requiring a high loan-to-deposit ratio on the pretext of preserving local financing), perfectly illustrates this trap.
Rather than these protectionist barriers, which hinder cross-border synergies and perpetuate fragmentation, Europe would benefit from accelerating reforms that enable banks to better manage their risks while continuing to finance the economy. The reform of securitisation, a tool that has been widely used in the US for a long time, is crucial in this regard.