Bank performance in Europe and the US: A divergence in market-to-book ratios

In the 2007-2017 period, the market-to-book ratios of European and US banks diverged markedly. We use panel regressions to investigate the determinants of M/B ratios for 112 European and US banks. We show that higher US valuations were driven by profitability and cost efficiency. The underperformance in Europe was associated with declines in the net interest margin and low policy rates, as well as with inadequate resolution of non-performing loans and an increasing share of deposits. Our results stress the importance of provisioning and NPL resolution in Europe. Moreover, low-for-long policy rates may be detrimental for bank franchise values.

Automated summary

During the period from 2007 to 2017, the market-to-book ratios of European and US banks diverged significantly, with higher valuations in the US driven by profitability and cost efficiency. The underperformance in Europe may be attributed to declines in net interest margin, low policy rates, inadequate resolution of non-performing loans, and an increasing share of deposits. This highlights the importance of provisioning and NPL resolution in Europe, and suggests that low policy rates for an extended period may have a negative impact on bank franchise values.