Germany Eyes European Banking Champion in Fix for Deutsche Woes

(Bloomberg) -- With Deutsche Bank AG and Commerzbank AG struggling, a chorus of German power players is suddenly stepping up calls for national champions big enough and strong enough to support the country’s export-driven economy.

In the span of a few days, leading politicians, banking regulators and even Deutsche Bank’s chief executive officer have uniformly highlighted Europe’s, and especially Germany’s, fragmented financial landscape. Between the lines, the message is: mergers are needed, and European cross-border deals would be an interesting option.

Finance Minister Olaf Scholz on Thursday bemoaned that the financial crisis caused German banks to fall behind global rivals, creating risks for the continent’s largest economy. He suggested a European solution, rather than a national one.

“The question of how to achieve the scale and size to compete globally is something that must be discussed,” he said at a banking conference in Frankfurt, when asked whether mergers might be necessary. “When it’s about reshaping the European banking industry as a whole, of course we need a situation that makes headquarters in Germany or Frankfurt clearly possible.”

Germany Eyes European Banking Champion in Fix for Deutsche Woes

A decade after the financial crisis, record-low interest rates, strategic missteps and regulatory demands have caused a remarkable decline in Germany’s two leading banks. Commerzbank is poised to drop out of the benchmark Dax index, and Wirecard AG -- the online payment provider due to replace it -- is worth more than Deutsche Bank.

Amid tough market conditions and tighter regulations, “the pressure to consolidate will rise significantly,” Deutsche Bank CEO Christian Sewing said Wednesday in Frankfurt. “There are 5,500 financial institutions in the euro area. But how many of them can really manage risks in a world economy where’s it’s increasingly hard to get an overview?”

While there has long been speculation that Germany’s two biggest banks could ultimately seek a tie-up, the latest comments suggest European combinations are gaining favor in Chancellor Angela Merkel’s government, even if it’s just rhetoric for now.

The country’s exporters “need two strong big German banks,” Volker Kauder, the head of Merkel’s bloc in parliament, said in an Aug. 28 interview with Handelsblatt newspaper. “Otherwise, our banking market becomes too fragmented. We need to think about how we can get big powerful banks in Germany again.”

Read More on Europe’s Banking Woes:
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  • Deutsche Bank chair explores Commerzbank deal
  • Four charts on why a German bank merger makes sense
  • Why big European bank deals still face hurdles
  • Davos elite see rationale for merging European lenders

While the government can’t engineer a deal on its own, it’s more than just an interested observer, owning 15 percent of Commerzbank. The spate of comments suggests growing concern that action is needed before another downturn hits. The fear is that Deutsche Bank’s lost influence could hamper global giants like Volkswagen AG, Siemens AG and Bayer AG as well as Germany’s Mittelstand, the small and mid-size companies that make up the backbone of the economy.

The new tone may also be the result of personnel changes. Wolfgang Schaeuble, the former finance minister, was much more critical of banks, and his successor now has a deputy, Joerg Kukies, who used to work for Goldman Sachs. Meanwhile, Deutsche Bank’s Sewing is the first non-investment banker to lead the lender since the financial crisis.

Consolidation Complexities

To be sure, there’s work to be done before a deal can be implemented. Deutsche Bank hired a unit of Cerberus Capital Management -- an investor in both German lenders -- to help meet profit targets. There are also ongoing discussions in the European Union on better integrating financial systems, which could influence a potential deal.

Such hurdles need to be cleared before major European banking consolidation can move ahead, Felix Hufeld, president of German banking regulator BaFin, said Thursday in an interview with Bloomberg TV’s Tom Keene and Nejra Cehic.

“You are talking about major institutions to create what is commonly called national or European champions,” Hufeld said. “I am sure it will happen, but currently we shouldn’t underestimate the complexities of cross-border consolidation, which are massive. And I think post crisis there is still quite a bit of homework to be done.”

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