There once was a time when Deutsche Bank’s central purpose was to expand its investment banking operations to compete with its American counterparts. On Sunday (7 July), its CEO declared those “days of spectacular ambition” over, announcing a major restructuring in a last attempt to save the bank from collapse.
In a decade of decline for the once-great European investment banks, Deutsche has fared particularly badly. In the aftermath of the financial crash, it refused a German government bailout. Regulators have since discovered it was only able to do so by fiddling its books, earning it a large fine from the US Securities and Exchange Commission.
The bank has remained fragile. The IMF called it the “most important net contributor to systemic risks in the global banking system”. If Deutsche falls, it could pull many other European banks down with it. It has also been breaking rules in pursuit of a return to profitability. It earned big post-crisis fines for its role in the Libor rigging scandal, for laundering Russian money, and for violating US sanctions against a string of countries. The bank’s share price has fallen to below €7, from a pre-crisis peak of €112.
The scale of its restructuring has shocked many analysts. Having already squeezed shareholders for huge amounts of capital, Deutsche aims to pay for it by cutting costs. Eighteen thousand jobs will be lost worldwide and the bank will shift away from expensive investment banking and return to its “traditional strengths” in corporate banking.
The bank’s riskiest assets will be moved into a “bad bank” called the “capital-release unit”, which will hold around $83bn of risk-weighted assets. This move should insulate it from losses on these assets, which represent about 21 per cent of its balance sheet, and allow it to operate with a lower capital requirement.
In other words, Deutsche Bank is following in the footsteps of the other big European banks by making banking boring again.
Investment banks enjoyed an unprecedented boom before the crisis, largely driven by a rise in securitisation centred in the US but also prevalent in Europe. Securitisation allowed retail banks to sell mortgages to investment banks, giving them access to the cash they needed to make more loans. The investment banks would then package these mortgages up into financial securities and sell them on to investors.
But the market in so-called structured finance collapsed after the crisis. The total global fees made by investment banks fell by 40 per cent between 2007 and 2009 and profits have halved. Global cross-border capital flows have fallen 60 per cent since 2008, driven by a collapse in international lending. There has also been a shift from equities to bonds, with corporations and governments issuing (and buying) more than in the past. This has been difficult for investment banks to manage, given that loose monetary policy has pushed down yields on safer bonds.
Regulators have tried to address the regulatory issues that caused the financial crisis, demanding that banks hold more, and higher-quality, capital relative to their assets – which means lower profits.
As a result of these trends, says the Bank for International Settlements, banks in the global North have “moved away from trading and more complex activities towards less capital-intensive activities, including commercial banking”.
As investment banks decline, two parallel institutional shifts are apparent. First, states are playing an increasingly important role in financial markets – whether through bailouts, quantitative easing or public investment banking. Second, major corporations, which have amassed huge cash piles since the financial crisis, are also playing an increasingly important role in these markets.
One can imagine huge, unaccountable technology corporations coming to dominate the international financial system – by developing their own payment systems, or by buying up the bonds of other corporations.
Alternatively, we may see the growth of public investment and retail banking, alongside the emergence of new, democratic models of public ownership.
Which option wins out – corporate monopoly finance or democratic public finance – will depend upon politics.
This article appears in the 10 Jul 2019 issue of the New Statesman, The state we’re in