Bad banking news for Angela Merkel

Deutsche fall from grace will not help Italian banks

Financier, manager, architect, counsellor, Deutsche Bank has escorted the icons of German history – Bismarck and the Bundesbank, the Hohenzollerns, Hitler and Helmut Kohl – along every stretch of a winding journey. Its fall from grace as a result of overleverage, misapplied ambition and others’ desire to cut it down to size has brought Germany’s premier bank to one of the lowest points since its establishment in 1870.

Deutsche’s share price has gyrated in recent days as investors digest the impact of a fragile capital base and a heavy impending fine from the US justice department over mortgage securities mis-selling.

The affair, posing a possible dilemma for Chancellor Angela Merkel if the government is forced to consider some form of formally outlawed state aid, has strong implications for pan-European policies on banking and economics. Italian officials hope Deutsche’s ills will deflect attention from their own problem banks. However, the Rome government knows that the bank’s difficulties will not make capital-strengthening easier for Italy’s own troubled institutions.

Stymied by widespread perception of built-in arrogance, Deutsche has never been able to progress with the cross-border European banking consolidation widely foreseen to stem from monetary union in 1999. A senior French banker once told me that a Franco-German banking merger would never succeed because German bankers were physically bigger than Frenchmen and would want to run the joint enterprise.

I have spoken over the years to all but one of Deutsche’s 12 chief executives since the second world war – slightly more than half of all the 21 leaders who have run the bank since it started 146 years ago.

A bank regarded as over-powerful has always – below the surface – harboured a sense of vulnerability. Hermann Josef Abs, an adviser to the pre-Bundesbank Reichsbank, and after the war a legendary Deutsche chief executive who collected 24 supervisory board posts throughout German industry, had his wings clipped by a special German law to limit his influence. In old age, he used to complain about the collapse of Germans’ work ethic and their propensity to go on holiday.

Helmut Schmidt, West Germany’s leader during the 1980s and one of many German chancellors with a strong relationship with Deutsche Bank, had it uppermost in his mind when he warned of the consequences of reunification in 1990. Europe had to forge a single currency to prevent a rampant D-Mark giving German banks and insurance companies ‘a market-dominating position well beyond our borders, producing irritation and envy among others – and with malign political consequences for us [Germans].’

Symbolising the bank’s quest to fix its identity as both a German and an international bank, three of the last four chief executives have been non-German. They will probably get much of the blame for what’s gone wrong. None of the threesome – larger-than-life Swiss Josef Ackermann, and two Britons, India-born investment banker Anshu Jain and sharp-witted, lugubrious John Cryan, the present incumbent – could repair the bank’s endemic psychological crisis.

Deutsche has not made a successful escape from the straitjacket of its small share of domestic retail and corporate banking, a result of the regionally entrenched positions of Germany’s co-operative and public sector savings banks. Investment banking, assembled in London and New York from the 1990s onwards, has turned from being a major source of profit into a regulatory and financial nightmare. The establishment of the euro, by ending the previous near-monopoly of German banks harnessing the strength of the D-Mark, has removed a prop for capital market activities. Low and now negative interest rates have compounded the damage to profitability.

A vaunted tie-up with the No.2 institution Dresdner Bank (since merged, under the then No.3, Commerzbank) was scuppered in 2000 when Deutsche Bank’s own investment bankers in London put a stop to the deal.

An ultimate merger with the new Commerzbank (itself far from healthy and implementing major job cuts) might soon be mooted – but state aid might still be required to stabilise the resulting bank and cushion further personnel reduction. Whatever happens, Deutsche Bank’s trials spell bad news for Merkel on the threshold of an arduous election year.

David Marsh is Managing Director of OMFIF.

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