Is the European banking model broken?

…a far higher proportion of U.S. loan books are funded by deposits. The U.S. market has a loan to deposit ratio of 78% compared to more than 110% in Europe. European banks have a total funding gap of $1.3 trillion ($1.72 trillion) which they need to finance in wholesale markets, estimates Simon Samuels, a banking analyst at Barclays Capital.

The article is interesting, and depressing, throughout.  Here is the FT on related issues:

Describing it as a “Ponzi scheme”, Marc Chandler, currency strategist at Brown Brothers Harriman in New York, says simply: “Weak banks are buying weak sovereigns.”


Shouldn't it be deposit to loan ratio? Otherwise the statement seems backward.

I don't know about the big EU banks, but 78% loans to deposits sounds about right for the big 4 US banks (they are almost entirely funded by deposits and have cash, securities, and trading assets in addition to loans).

No. An increase in loans holding the deposits constant will increase the percentage and thereby increase the leverage.

What do you find depressing? The US system or the European system or both?

When looking at liquidity risk in bank balance sheets it makes more sense to look at the mismatch between long term assets and long term liabilities. I.e. a ratio like Loan+securities) / (Equity + LT capital market funding + Deposits) is slightly more interesting than the simple loan-to-deposit ratio. Of course loan-to-deposit ratios are lower when mortgages are called securities instead of loans.

On a sidenote: comparisons of (especially leverage of) US vs Europe are always impacted by the fact that US GAAP and IFRS have very different rules for netting. US GAAP allows much more netting. This means that reported (non-risk weighted) leverage of banks reporting under US GAAP (i.e. US banks) is much lower than reported leverage under IFRS (i.e. European banks). Making conclusive statements is generally extremely hard because data is very, very inconsistent.

Better still to measure flows of the sources and uses of cash. Static balance sheet approaches don't figure in the strategic plan, market risk, and other shocks to liquidity.

Borrowing capacity might be an extreme impairment to liquidity.

The point about securitization may be apt. However, the accounting link below shows that under GAAP and IFRS, loans and deposits (excluding repos) are accounted for similarly.

European vs US accounting.

Isn't that at least partially driven by European corporates' preference for bank finance over capital markets?

There has been an ongoing push by FASB to align with IFRS so these GAAP vs. IFRS comparisons are increasingly out of date.

I think the GAAP vs IFRS differences are more pronounced for industrials than for financials. The Basel accords align financial institution accounting a bit more.

If you have a different understanding, please tell me. I haven't focused on firm financial statements in a long time and I only know accounting basics.

The whole idea is that it is in many multinationals' interest to have transparent balance sheets to international investors, hence the push for GAAP to align with IFRS.

just click the above link on IFRS vs GAAP for netting of derivatives. The same book is 2x large under IFRS because of GAAP netting rules.

To quote Arnold: Have a Nice Day


Seriously... modern banking has always been a way for the state to create artificial demand for its debt. Under the gold standard, it eventually leveled off and was more or less sustainable, but without some reality check, its just Ponzis all the way down.

The Loans/Deposit ratio is pretty meaningless in and of itself. In Australia the banks have a L/D ratio of about 120% and there are few who would say it is a less sound banking system than either the US or the EU. (January 2012 figures:

I don't know if it's any less sound than the US or the EU but I do think the near uniformity of the big 4's funding structures is not healthy.

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