Shifting Trends Favor European Banks vs. US Banks for the First Time in Years

For the first time since before the global financial crisis, European banks appear to be in a stronger position than US banks. Moody’s Ratings recently downgraded several regional US banks, citing funding cost pressures, capital weakness and a deteriorating outlook for credit quality, including commercial real estate (CRE). We have long shared the same concerns about smaller US banks, and in our view, the downgrade adds to the contrast between US banks and their overseas counterparts. From the shifting regulatory landscape to liquidity, we see several key differences that contribute to our more favorable outlook for European banks relative to US banks.

The regulatory landscape

The US takes a substantially different approach to regulation compared to most global banking systems, particularly when it comes to smaller banks. The table below highlights a few key differences in the regulatory landscape for US and European banks.

contrasting landscape


We believe capitalization favors European banks, particularly among smaller banks. US and European systemically important banks (GSIBs) have similar capital ratios (the percentage of a bank's capital to its risk-weighted assets) due to similar regulatory frameworks. For smaller domestic-only banks, capital ratios are significantly lower in the US than elsewhere around the globe.

differing patterns

Unrealized losses on securities eroding economic capital is a major concern for some US banks because they built up deposits during the pandemic and invested much of them in securities that have since fallen in value. The risk of unrealized losses is less material outside the US. European banks saw a similar increase in deposits, but many chose to increase cash positions instead of investing in securities. The difference in regulatory treatment of unrealized losses by small banks strongly favors European banks in our opinion, though the US has proposed new regulations following a number of bank failures.