The globe observes Europe embracing global trends.
In the United States, the ongoing vaccination campaign and a recovering labour market are signs of an economy on the rise. According to recent reports, the U.S. economy is experiencing a potential new boom, and this growth is set to benefit U.S. banks more than their European counterparts.
The U.S. Federal Reserve's decision to consider a return to monetary normality has played a significant role in this trend. As of mid-2025, U.S. interest rates remain above 4%, reflecting a relatively restrictive monetary policy by the Fed aimed at controlling inflation. This environment typically allows U.S. banks to earn higher net interest margins because they can charge more on loans relative to what they pay on deposits.
In contrast, the European Central Bank (ECB) has aggressively cut rates more recently, with Eurozone rates being about half of U.S. levels (around 1.5% deposit rates expected by end-2025). The ECB has moved towards a more expansionary policy stance due to weaker economic conditions and stable but moderate inflation. Lower interest rates imply that European banks face a more compressed interest margin environment.
The divergence between the two regions' interest rate policies is not the only factor at play. In the Eurozone, lower interest rates have stimulated loan demand, particularly for households and businesses. However, the impact of falling rates on banks' earnings is less pronounced given the overall lower benchmark rates, limiting profitability growth for banks in the region.
Moreover, while the U.S. Fed signals a relatively stable or slowly declining rate environment following sizeable rate hikes, the ECB is expected to continue cutting rates towards a neutral or even expansionary level. This divergence means U.S. banks still benefit from elevated rates, while European banks face pressure on margins from a looser policy environment.
The financial hub of Germany is reportedly "underbanked" in terms of the capital strength of its financial institutions, and investment banking is not a strong suit for many small credit institutions shaped by the three-pillar banking system. As a result, U.S. banks are expected to benefit more from a rising interest rate environment compared to European and German banks.
This trend is reflected in the global financial sector rankings. Europe lags behind in the ranking of the world's largest investment banks, with U.S. banks such as J.P. Morgan, Goldman Sachs, Bank of America, and Morgan Stanley dominating. The Deutsche Bank ranks 19th internationally by balance sheet size, and no other German institution appears high in the list.
It is important to note that this analysis is for informational purposes only and should not be considered as a buy or sell recommendation. Any investment decision should be based on the customer information document, published prospectus, latest annual report, and half-year report.
The rising interest rate environment is favourable for the global financial sector, and the first interest rate hikes for 2023 are being considered by the U.S. Federal Reserve. The prices of financial assets in other regions, including the U.S., are also being driven up by this trend.
However, it is crucial for investors to conduct their own research and consult with financial advisors before making any investment decisions. FIL Investment Services GmbH only publishes product-related information and does not provide investment advice.
Sources: [1] Statista [2] banksdaily.com [3] FIL Investment Services GmbH Marketing Communication (no specific document mentioned) [4] Various economic reports and news outlets (no specific sources mentioned)
Economic and social policy, such as the projected rise in U.S. interest rates, can significantly impact investing in the business sector, including personal-finance, as higher interest rates often translate to higher net interest margins for U.S. banks, making them potentially more attractive for investments compared to their European counterparts. In contrast, lower interest rates in Europe, coupled with a more expansionary monetary policy by the European Central Bank (ECB), may put pressure on the interest margin environment for European banks, potentially limiting profitability growth for banks in the region.
