Germany Needs a Plan B After Deutsche Bank Deal Collapses

(Bloomberg) -- The collapse of merger talks between Deutsche Bank AG and Commerzbank AG is a crushing defeat for German Finance Minister Olaf Scholz.

While Chancellor Angela Merkel steered clear of the proposed deal, Scholz’s fingerprints were all over it. A potential Social Democratic challenger to lead the next government, Scholz was the biggest advocate for a merger despite the threat of thousands of job losses, and now needs a new plan to fix Germany’s troubled financial sector.

Scholz and his deputy Joerg Kukies, a former Goldman Sachs banker, had been the key political agitators behind the merger plan, arguing that Germany’s lenders are undersized and ill-equipped to support the country’s exporters. He publicly called for an “industrial policy” for banking -- code for state intervention -- and his aides held frequent discussions behind closed doors with Deutsche Bank officials including Chief Executive Officer Christian Sewing and Chairman Paul Achleitner.

“Besides Scholz and Kukies, nobody wanted this merger,” said Olav Gutting, a lawmaker for Merkel’s CDU party who sits on the finance committee of the lower house of parliament. “The time and energy that’s been frittered away because of the finance ministry’s pressure could have been better spent on restructuring the two.”

Scholz’s grand plans were dealt a major setback after Deutsche Bank and Commerzbank walked away from creating a German banking giant after six weeks of exploratory talks. He accepted the defeat, but reaffirmed his stance that Germany needs stronger banks.

“Germany’s globally active industry needs competitive credit institutions that can accompany it around the world,” Scholz said in an emailed statement. “Deutsche Bank and Commerzbank have discussed closer forms of cooperation. Such cooperation only makes sense if it adds up in economic terms and aims toward a robust business model.”

Troubles Ahead

A statement from Merkel’s chancellery was more muted, saying that the talks were ruptured on the basis of a “business decision made by individual companies” and that the government would make “no further comment.”.

Discussions of the risks in Germany’s financial industry have intensified since Scholz was appointed last year. The Financial Stability Committee -- a group of regulators and finance ministry officials -- warned the government in December that the country’s banks could face troubles ahead if a deepening economic downturn hits their balance sheets and triggers a capital squeeze, according to people familiar with the discussions.

Deutsche Bank is a particular concern in political circles, said the people, asking not to be identified discussing internal deliberations. The country’s largest lender is considered systemically relevant by regulators and has continued to struggle after a series of missteps during the financial crisis a decade ago.

Political Opposition

The finance ministry will now need a Plan B after Scholz exposed the shortcomings of Germany’s banking landscape with his controversial campaign to create a national banking champion. Amid fears of job cuts and financial risk from combining two struggling lenders, the plan faced widespread political opposition, including from allies in his own Social Democratic Party.

The fallout could hamper Scholz’s ambitions to potentially run for chancellor and hamper the party ahead of elections for the European parliament and the city state of Bremen in late May. But it could have been tougher for the SPD -- which has fallen below the Greens in recent polls -- if a deal went ahead.

“A merger decision would have caused bigger problems for us as we would have to deal politically with the consequences,” said Ingrid Arndt-Brauer, a SPD lawmaker on the Bundestag’s finance committee. “But with the end of the merger talks, the problems in the banking sector haven’t been solved. They continue to exist and need to be addressed.”

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