For the banking industry, 2013 was a year of transition. For the first time since 2006, there were no existential crises threatening the U.S. or European banking systems, as the European debt crisis had slowed down in late 2012. Still, 2013 was a year of substantial operating challenges, with banks almost everywhere suffering from a lack of growth, the low interest rate environment, elevated litigation expenses, tougher regulations and, particularly in Europe, continuing pressure from supervisors and investors to strengthen, de-leverage and de-risk balance sheets.
Commercial banking in Europe witnessed a significant decline in credit volumes, particularly with firms, whereas lending to households stayed virtually flat. Banks were still tightening credit standards but much less compared to 2011 and 2012. The main obstacle to loan growth may instead have been a lack of demand for credit, which fell further, even though the pace of the decline slowed over the course of the year. Loan losses probably decreased somewhat. On the funding side, private sector deposit growth remained solid throughout the year, for both corporate and retail clients. Banks’ bond issuance shrank once more, to reach the lowest level in more than a decade. However, this may have been driven mainly by a lack of funding needs rather than a lack of access to debt capital markets. Indeed, EU banks’ total assets dropped by more than 4 % year-over-year.
In the U.S., retail lending surprisingly turned negative again in 2013, driven by a lower volume of residential mortgages, despite an ongoing recovery in the housing market. Loans to corporations, on the other hand, continued to expand healthily, with all major lending categories returning to growth for the first time since 2007. Loan losses sank still further to the lowest figures on record, to levels not even seen at the peak of the credit boom. Deposit growth stayed robust, suffering neither from the low level of interest rates nor from the expiry of Federal Deposit Insurance Corporation (FDIC) coverage for certain large corporate deposits. With deposit growth outpacing loan growth, the deposit funding of banks’ balance sheets climbed to its highest level in two decades.
Investment banking performance was heterogeneous in 2013. Bond issuance fell moderately from a very strong prior-year level, with high-yield activity reaching a new record high. Equity issuance was also solid, while the M&A business based on deal values had its best year since 2008, although revenues decreased. Equity trading volumes in 2013 were even weaker than in the year before, whereas fixed-income trading remained broadly flat compared to the 2012 result. Total investment banking revenues declined to the lowest level since 2008 due to reduced activity in more profitable business segments and tighter regulation, e.g. relating to derivative transactions. Revenues from issuance underwriting and advisory combined were up compared with the previous year and were in fact the strongest since 2007, but revenues from trading and other activities were down substantially, partly due to further margin compression.
Asset management businesses benefited from a particularly benign year for the capital markets: Market liquidity remained high, demand for high-risk assets increased further (notwithstanding some capital outflows from emerging market countries into developed markets), interest rates stayed very low (despite some uptick following announcements by the U.S. Federal Reserve it would taper its exceptionally loose monetary policy), and several major stock markets reached new record levels.
Overall, European banks profitability in 2013 improved from the miserable levels of 2011 and 2012, when the EU banking industry recorded aggregate net losses in the wake of the European debt crisis and the associated recession. However, returns in 2013 were still meager and far below sustainable levels, i.e. banks’ cost of capital. In the U.S., bank profitability probably reached a new record high in absolute terms, despite setbacks in the second half of the year due to sizeable litigation expenses (which also continued to drag on bank earnings in Europe).
Regarding regulatory developments, 2013 saw further progress on a number of important projects to build a new architecture for a safer, more stable banking system. EU policymakers agreed on crucial components of a future European Banking Union by deciding to transfer supervision of the euro area’s largest banks to the ECB as well as, in principle, designing mechanisms to resolve failing banks without requiring taxpayer support. Implementation of Basel 3 commenced both in Europe and the USA. Furthermore, discussions intensified on the international introduction of a binding leverage ratio, with U.S. authorities pressing ahead with considerably increased requirements for large domestic credit institutions. Derivative markets reform took final shape in the EU through the European Market Infrastructure Regulation (EMIR), while implementation of new derivatives rules under the Dodd-Frank Act has already started in the USA.