The market value of The Walt Disney Company is now greater than that of the five largest banks in Europe. If one were impolite you might describe this as a triumph of creativity over destruction. However, the aim of this article to be constructive and recognize the role of Europe’s banks as the primary source of capital for business. That must be a good thing, right? Yes, but there can be too much of a good thing. Here’s a chart from the IMF which should challenge the thinking of all investors and business owners in Europe. It compares the role of US and European banks in funding corporates.
Wowzers! Banks in Europe provide about 80% of debt capital to businesses. Only 20% of funds are provided by investment markets. In the US the market structure is almost the exact opposite. The graphic above tells us that capital markets are far deeper, more diversified and more sophisticated in the US. It is very apparent, if we consider the US a market leader, that there are opportunities for alternative providers of capital to engage with European corporates. Of course, there are cultural challenges and banking traditions in Europe but the ugly truth is that corporates will have to look elsewhere as ultra-low interest rates (ZIRP) crush banking business models.
If one were to think further about the market data above it is also clear that European investors have favoured saving in bank deposits rather than investing. In a negative interest rate world that strategy looks a little challenged. It is quite possible decades of traditional saving behaviour will change and seek out new investment opportunities. Many investors will have seen “Dragons’ Den” TV programmes in recent years and wonder can they add a little extra risk/return to their portfolio. The good news is that equity crowdfunding platforms are growing rapidly in size and numbers across Europe to bank the start-up Disneys of the future. The dragons are hunting in size.
That’s not a fantasy. It’s a current banking reality on Planet ZIRP.
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