Major changes are afoot at Deutsche Bank, which weathered the 2008 economic storm but has been slow since then to adapt to changes in global financial markets.
FRANKFURT — Deutsche Bank has taken a series of radical restructuring measures that have everything to do with events from seven years ago, when the collapse of New York-based bank Lehman Brothers ignited the global financial crisis.
Deutsche Bank survived the crisis more or less intact. But the relative success it enjoyed under CEO Josef Ackermann between 2002 and 2012 may have blinded the German bank to the ways financial markets changed after the 2008 crash. This seems to be the only plausible explanation for problems that have beset the Frankfurt bank since then.
Current co-CEOs Anshu Jain and Juergen Fitschen are now having to play catch up, to adopt lessons that should have been learned years ago. As such, they decided to sell the Postbank subsidiary and minimize the remainder of the banking institute. The absolutely atrocious stock price leaves them with no other choice.
Two things changed because of the financial crisis. Pestered by an angry populace, politicians and financial regulators made it clear that they were serious about controlling the banking sector's movements. They signaled an unwillingness to spend billions in taxpayer revenue to save the world's financial system a second time around.
For that reason, banks are now required to hold more in equity funds to secure their businesses. This is costing the banks a substantial amount of their profits. Furthermore, the new equity fund laws have been justifiably constructed in such a way that larger, international banking institutions are required to have larger equity funds than smaller banks.
Minimizing can therefore be beneficial. Which is why Deutsche Bank is not only selling its Postbank subsidiary but is also reducing the scope of its investment banking. This will ensure security, but it also means job losses.
No more tolerance
The attitude of the financial regulators has also changed, especially in countries with longstanding capital market traditions, such as the United States and Britain. These countries operate zero-tolerance policies when it comes to violation of laws and executive orders and tend to impose serious punishments.
For a long time bankers appeared not to take these regulatory bodies seriously, which helps to illustrate how significant Deutsche Bank's cultural reform really is. Adhering to the old financial culture resulted in a fine of 2.3 billion euros for manipulating interest rates during the London Libor scandal. The bank seems finally to be learning its lesson.
In Frankfurt, Deutsche Bank should also give high priority to the difficulties it's facing with the U.S. financial controller. The Federal Reserve has been negotiating with Deutsche Bank’s North American subsidiary because it finds its financial reports "of low quality and not reliable." Deutsche Bank even failed the second stress test due to a deficiency in reporting techniques. All of these problems could lead to an explosive mixture that might backfire on an institution that wants to remain at the international forefront of investment banking.
The second factor that has changed since the financial crisis are interest rates. The Federal Reserve and European Central Bank are flooding the markets with cheap money to stabilize the economy and prevent deflation. Those who want to save their money barely receive any interest and are sometimes even forced to pay.
With that in mind, Deutsche Bank apparently didn't see a future for its Postbank, whose main clientele are small-time savers and borrowers. So the Postbank subsidiary will be phased out after only seven years of being part of Deutsche Bank. Without this subsidiary, Deutsche Bank hopes it can adhere to the equity requirements regulators have imposed.
After its restructuring phase, Deutsche Bank will look exactly as it did before the financial crisis, only smaller, relatively speaking. It will be an investment bank that will also have a retail banking department for high-end clients. It's betting on its ability to outperform the competition in certain areas. The success of this strategy will depend on whether the financial culture change in investment banking that Jain and Fitschen talk so much about is truly happening.
Meanwhile, the German banking sector as a whole still has some major issues to resolve. There may be a healthy number of Volksbanken and Sparkassen on a local level, but the larger banks still face difficulties. Because of the post-crash bailout, Commerzbank, for example, is still partially state-owned. The regional banks may be in even deeper trouble. And with the employees of the only German bank of international standing fighting among themselves, there's really nowhere else to turn.