Europe Bankers Should Fear a President Trump

(Bloomberg Gadfly) -- This U.S. election matters to bankers and traders across Europe, and not just because of market volatility or political instability. Like Brexit, it could mean European finance losing yet more business to New York.

Despite mixed messages from both candidates on whether life should be made harder or easier for the banking industry, there's an increasingly common view that a Donald Trump win would be "good" for Wall Street -- even if it shocks the financial markets at first. The billionaire has said repeatedly he would roll back the post-crisis banking rule book of Dodd-Frank if elected. He has pledged to cut red tape "massively." Sure, Trump will promise the moon if it wins votes, but the stock market seems to take the view that a Trump win would be good for banks, as my colleague Oliver Renick points out.

Let's take Trump at his word and assume that life as a U.S. bank would be easier under his regime (even if it gets worse for Latinos, Muslims and liberals.) That wouldn't really be a good thing for European banks' global market share. America's bankers have already adapted better to the post-crisis world and recently took all top five spots on investment bank rankings, as calculated by Coalition. According to McKinsey, their return on equity of about 10 percent is double that of European rivals, which are still struggling to turn a profit under the continent's new rules and capital curbs. If regulatory barriers are lowered in the U.S. even as they rise in Europe, it's likely that the earnings gap will widen too.

Throw Brexit into the mix and you can see why New York might suddenly become a more convincing threat to Europe's financial hub, the City of London, than any pipe dream conjured in Paris, Frankfurt or Dublin (or even Vienna). While Europe will be squabbling over how to carve up the $570 billion-a-day euro derivatives clearing industry post-Brexit, effectively stifling London through force, the U.S. will be going in the opposite direction if it tears up the 848 pages of Dodd-Frank -- which include tougher regulation of derivatives. Surely bank boards in Europe would be planning a tour of office space in Manhattan, rather than Mannheim, as a result.

Sure, there's always a chance this would be too risky to pull off, even for a President Trump. Dodd-Frank is part of a global, not just national, drive for reform. Europe's policymakers probably wouldn't sit by and allow such a huge regulatory arbitrage to open up, without some adjustments of their own.

And, despite the apparent benefits, Wall Street bankers themselves won't be cheering the prospect of "re-regulation," whether under Trump or Clinton. Years of investment in compliance, both human and technological, couldn't be easily undone. There's a real risk that reopening the debate on financial stability would lead to other grand plans such as breaking up big banks. Both the Republican and Democrat platforms call for reintroducing a version of Glass-Steagall, the Depression-era law that kept consumer and investment banking separate. It would be incredibly hard to pull that off. But blowing up Dodd-Frank would put such proposals back on the table.

Still, for now, investors and economists interpret a Trump victory as positive for U.S. financials. "Trump would be better for banks [than Clinton] but... not necessarily for the broader economy," according to Indosuez Wealth Management's chief economist. There are myriad reasons why Trump is deeply troubling for Europe, and regulatory arbitrage wouldn't be uppermost. Nevertheless, it's another potential blow to the Old Continent's already beleaguered bankers.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story: Lionel Laurent in London at llaurent2@bloomberg.net.

To contact the editor responsible for this story: James Boxell at jboxell@bloomberg.net.