Introduction to corporate and investment banking

In addition to size, the business model of banks is another penalizing aspect of the European banking system. The most revealing statistic in this regard can be found in the breakdown of funding for American and European institutions. In the US, 70% of funding for companies consists of securities, while in Europe the same percentage is covered by bank loans. This substantial difference makes European companies less capitalized and less competitive from the market’s perspective. Moreover, from a lender’s standpoint, this means that European banks appear to be very dependent on the lending business and as such exposed to the (mostly external) volatility of interest rates. Vice versa, the dependence of US banks on the securities market protects them from reliance on interest margins. However, the business model question does not imply that a radical transformation of European banks is either obligatory or even desirable. Instead, there needs to be a shared (European!) commitment among banks to progressively transition toward a complete range of investment banking activities. This should be endorsed, once again, on the political, supervisory and regulatory fronts, while engaging shareholders as well. All this is not only for the good of the profit and loss accounts of banks, but more importantly for the sake of financial growth - and real growth - of businesses.