Deutsche Bank Becomes Government Headache as Economy Tanks
Deutsche Bank Turns Into Government Headache as Economy Tanks
(Bloomberg) --
Germany’s economic downturn is reigniting fears in Angela Merkel’s government about the future of its two largest lenders.
The push for Deutsche Bank AG and Commerzbank AG to hold merger talks created a massive backlash and eventually failed. Potential buyers are steering clear. Now, the administration is running out of options just when a looming recession fuels fears Germany’s banks might not be prepared to weather another crisis, according to two senior officials with direct knowledge of the government’s stance. The German Finance Ministry declined to comment.
“If the economy enters into a recession, the banks are the first to get hit,” says Danyal Bayaz, a Green party lawmaker on the lower house finance committee. The government can’t do much at this stage other than a fiscal stimulus program to mitigate recession risks, he added.
The plan to merge Commerzbank and Deutsche Bank has been put on ice but not completely discarded, one person said. The idea would likely be resuscitated if either lender were to face a real threat to its future, the person said.
Deutsche Bank, which once had ambitions to become a global player, recently announced a painful restructuring that aims to cut a fifth of its workforce and rip away a big chunk of its trading operations. Its renewed focus on German exporters comes just as the trade war between the U.S. and China heats up and President Donald Trump has German car makers in sight.
New banking troubles could have serious repercussions for domestic politics as well, with the governing parties at historic lows in the polls and under attack from populists and environmentalists. With Merkel’s coalition hanging by a thread, a handout to bankers would be a nightmare for the chancellor as she seeks to shore up her legacy.
Earlier this month, the government, which holds the largest stake in Commerzbank, sought outside advice about the strategy of the bank led by Chief Executive Officer Martin Zielke.
Limiting the government’s room to maneuver is the fact that Finance Minister Olaf Scholz spent much of his political capital backing a failed merger attempt between the two earlier this year.
A restructuring plan presented by Deutsche Bank -- and expected from Commerzbank this fall -- may reduce costs in the long run but would do little to shield the banks should there be a sudden slump in activity, one of the people said. In fact, restructuring, which foresees costly compensation payments, slows down the planned buildup of a capital base at a time when investors are becoming increasingly risk averse, the official added.
Germany’s financial stability committee, made up of representatives from the central bank, the finance ministry, and the bank regulator, has repeatedly warned that the risk of recession for the German banking system shouldn’t be underestimated.
Bad Time
The slowdown comes at a particularly bad time for Commerzbank and Deutsche Bank. Both have been struggling for years to achieve a meaningful level of profitability. In the case of Deutsche Bank, the restructuring coincides with moves to a potentially lower capital cushion as it shifts to a less risky business model. A strong rise in credit defaults could force them to ratchet up their loan loss provisions and further deplete their capital.
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For Scholz, who had been eager to create a national banking champion, the failed merger talks between Deutsche and Commerzbank, may have been particularly disappointing. In the end, it would have given the government a stake and say in Germany’s biggest lender and would have made it easier for it to intervene in the case of a crisis.
At the time, critics said the government was being too heavy-handed, that it wasn’t size but nimbleness that matter in banking.
Subsequent exploratory moves earlier this year for potential European mergers involving Deutsche Bank and UBS, as well as ING Groep NV, UniCredit SpA and Commerzbank didn’t prosper. Since then the appetite for M&A has subsided significantly, with banks shifting their medium term priorities amid the economic slowdown, another of the two officials said.
The fate of Germany’s major lenders mirrors a broader debate as to whether sufficient fixes have been made to the financial system since the 2008 crisis. The European Central Bank in March published research showing taxpayer money was now better protected than a decade ago but that despite “significant improvement” the “regulatory work is not yet complete.” The Basel-based Financial Stability Board commissioned its own probe, which is being led by Bundesbank Vice-President Claudia Buch. It’s expected to be published in late 2020.
To contact the reporters on this story: Birgit Jennen in Berlin at bjennen1@bloomberg.net;Steven Arons in Frankfurt at sarons@bloomberg.net;Nicholas Comfort in Frankfurt at ncomfort1@bloomberg.net
To contact the editors responsible for this story: Ben Sills at bsills@bloomberg.net, Raymond Colitt, Dale Crofts
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