Such frenetic activity seems unsustainable. Indeed, says Stuart Graham of Autonomous, a research firm, debt issuance appears to have slowed in July. So the fate of banks will primarily be decided by the extent to which they are prepared for loan losses. Lenders on either side of the Atlantic have taken different approaches to the matter, with European banks booking smaller provisions, as a share of total loans. American banks have generally been more cautious in the past, only for European rivals to play catch-up (see chart). So who is right this time?
There is reason to think America’s banks may suffer more. Unemployment there has surged; Coface, a credit insurer, expects bankruptcies over the next year or so to rise by more than in Europe. A larger portion of American bank lending, including consumer and high-yield credit, is riskier and unsecured. European banks prefer to lend against collateral, for example through mortgages. That implies fewer and slower defaults, as well as higher recovery rates, when the cycle turns.
But the economic outlook is not the full explanation. America’s accounting rules require its lenders to make provisions against losses they expect on all loans over their lifetime. European rivals are required to account for lifetime losses only on loans that are closest to default (for performing assets they need to care only about the next 12 months). That makes them mechanically more myopic. In March the European Central Bank (ECB) encouraged more optimism by telling them to “avoid excessively pro-cyclical assumptions” when making provisions—in other words, to ensure that lending does not seize up in bad times.
Cultural differences compound prudential ones. American businesses, fans of transparency, tend to shoulder more pain upfront. European ones prefer to wait and see. Disclosure is not helped by the fact that fewer banks are listed. Only half of the 84 euro-zone lenders deemed “significant” by the ECB are publicly traded, says Nicolas Véron of Bruegel, a think-tank. By contrast, all America’s big banks are listed.