Portfolio: European and U.S. Banking Systems

5 MINS READJul 7, 2011 | 13:54 GMT
Vice President of Analysis Peter Zeihan examines the differing roles of European and U.S. banking systems and the geopolitical dynamics that produced them.

Editor’s Note: Transcripts are generated using speech-recognition technology. Therefore, STRATFOR cannot guarantee their complete accuracy.

Rivers are the foundation of any financial system. The ability to move goods from areas of high supply to high demand and making profit on the difference is all what economic activity and trade is about, but you have to have a bank. You have to have somebody to manage the money and ease the process, and each river system is going to have one major banking center. Take a look at a map of Europe and you'll notice that there's one major banking sector in each of the rivers: the Seine has Paris, the Thames has London, the Vistula has Krakow and so on. Now in Europe, economic life and national identity go hand-in-hand, because each of these river systems is home to a different nationality. As such, political leaders particularly in Europe see banks not just as another economic institution or pillar of the economy, but as a core piece of the state support and nation-building process. And it's expected that banks will take national interests and state needs into account when making decisions. Hardwired into the system is state-to-state competition, nation-to-nation competition, and the banks are no exception. So what capital those rivers generate, funneled through the banks, is expected to play a role in whatever it is the state feels it needs to do, whether that's to generate full employment, advance in nuclear technology, build a world-class infrastructure or so on. It's believed that the money that's in the bank should stay home and serve national purposes. It shouldn't go out, and outside money shouldn't come in. This is one of the reasons why European leaders are often quoted as saying foreign money in the form of stock markets and hedge funds are locusts or vultures. On average, over two-thirds of the capital that is used by private enterprise to fund their activities is raised in the form of bank loans, with stock markets and bond markets making up the balance. In this, as in so many other things, the United States is an outlier. The United States doesn't have a navigable river — it has a navigable river network. The greater Mississippi basin has more miles of connected waterways than all the European rivers combined. The U.S. also has the advantage of the Intracoastal Waterway, a series of barrier islands the parallel the Gulf and East coasts, which links the entire East Coast and the entire Midwest into the same maritime network. Now this has a number of implications for how the United States functions. Because everyone is part of the same financial zone, you didn't have the development of different nationalities. The United States doesn't have the Spanish and the Dutch and the Romanians; it just has the Americans. And because of the sheer size of the territory in question — we're talking about Eastern half of the continent — you don't have just one financial center. You have Chicago, you have New York, you have St. Louis, you have Norfolk and a number of other cities. There isn't just one American city that everything is based around like you have with Paris or London. Between the disconnected nature of the financial sector and the fact that there's just capital everywhere because the network is so big, Americans don't have the same proprietary view of their banking sector that the European nationalities do. Consequently, American banks only make up about one-third of funding, with the rest being stocks and bonds, as opposed to the two-thirds of Europe. Americans also see the financial sector as just another branch of the American economy, neither more important or less, or better or worse than any other subsector, which brings us to the bailouts that are going on in Europe right now. When the Americans have an economic sector that fails, it's typically allowed to go down. But if there is a bailout, it's the government that does the bailout using taxpayer money. There's no leaning upon the banks to rescue another sector. But look at what's going on Europe right now: all the various European governments have been leaning upon their banks to provide funding not even for a bailout in their own countries, but for a bailout of the Greek government. Already there have been public announcements in excess of €20 billion ($28.6 billion) of funds that have been raised from the various European banks. The use of the banks in this way to achieve national goals, as opposed to private, profit-driven goals, has a big impact on the health of European banks. The credit rating agency Moody's estimates that the bond market treats American banks as if they're actually two ranks below where they are in the official ranking system, largely an aftereffect of the sub-prime mortgage crisis of a couple years ago. In Europe, Moody's estimates that the gap is five.

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