A Butterfly Flaps Its Wings In Europe

The Opportunities for Community Banks Arising From the European Debt Crisis


Most of the commentary on the financial crisis in Europe has focused on the acute challenges policymakers must address today, an approach that makes sense given the consequences for the global economy if those issues are not addressed adequately.  Less attention has been focused on the opportunity the crisis has created for our own community banks.

The combination of the financial crisis that struck our own country three years ago and the fallout from the European debt crisis may be creating an opportunity for community and regional banks to retake market share lost over the past 20 years.  During that period, community and regional banks lost significant market share in almost every loan class, with the glaring exception of real estate lending.  The resulting real estate dependent business model has now been called into question by both investors and regulators, and it is hard to see growth opportunities or even long-term survival for community banks that do not adapt to the new environment, in which balance sheets saturated with real estate loans are regarded with growing skepticism.

In a silver lining to the European debt crisis, the retreat by many of the world’s largest banks is providing new lending opportunities for those community banks that have steadily grown their capital and liquidity over the past few years, and are contemplating new ways of generating prudent loan growth.

Until recently, European banks have provided credit to American borrowers across a wide range of sectors, including small and medium business enterprises.  Historically, these markets were fertile ground for community banks, but in recent years those banks have seen themselves become less relevant in many of those sectors.  While the ultimate outcome of the European situation is unclear, we can be confident that European banks are going to continue to be severely constrained, with substantially less capital reaching our own lending markets.     

To give some context for the magnitude of this withdrawal, the European Banking Authority last year announced that European banks must reach a 9 percent Tier 1 capital ratio by June 2012. In aggregate, European banks would have to raise over 100 billion euros of new capital to reach this target with their existing balance sheets.  Rather than raise this much equity, however, many European banks have indicated that they intend to reduce their balance sheets to meet the capital target.   Estimates suggest that balance sheet reductions could exceed 1 trillion euros. While we do not yet know how much of that reduction will take place in the U.S., some European banks are already pulling back from our market.

There is no reason for this void to be filled exclusively by the country’s largest banks.  Many, if not most, of these U.S.-based assets and loans are appropriate for banks both large and small.  The challenge for community banks in accessing these loans is two-fold: a question of access and a question of understanding the credits.  As these banks engage in markets they may have exited years ago, they need to ensure that they understand the loans they put on their books, and remember lessons learned from the recent real estate crisis.  In some cases, the move back to traditional commercial (non-real estate) lending may require investing in the education of loan underwriters and credit officers who find their skills outside of real estate lending may have become rusty. 

In order to have access to the best credits surfacing because of this disruption, and to defray the associated sourcing, underwriting and servicing costs, we believe that community banks that choose to work together will be best positioned to compete with their larger brethren.   They will be able to fill lending gaps left by the European banks and take advantage of the tail winds finally blowing in their direction.