Universal Banking

Deutsche Bank's Big Gamble

Old, Vintage, Photo, Grunge
Times gone by?
  • Why it matters

    Why it matters

    Deutsche Bank is clinging to a model of business – the universal bank that is all things to all clients — which has been abandoned by many of its peers. The gamble could pay off or worsen the bank’s current financial crisis.

  • Facts


    • Deutsche Bank’s top managers will have to work hard to sell their modest reorganization to shareholders at their annual meeting on Thursday.
    • The new strategy includes spinning off part of its retail network – Postbank – and closing some branches.
    • Bank managers rejected a more radical approach involving splitting the bank in two – a commercial and investment banking entity.
  • Audio


  • Pdf


Anshu Jain of Deutsche Bank sounds almost like a blast from the past when he sings the praises of the “universal” bank — a financial smorgasbord of an institution offering all products and services to all people and businesses around the globe.

A few years ago, Mr. Jain, the co-chief executive of Germany’s largest bank, used to be in good company. But in the aftermath of the global financial crisis, his colleagues in Britain, France, the United States and elsewhere have deserted him, forsaking their universal aspirations to the austerities of a more sober financial landscape.

Mr. Jain last month said Frankfurt-based Deutsche Bank “may be the only one” that still believes in the idea that a bank can be big and global – and, most importantly, consistently profitable too.

As it weathers the headwinds of a skeptical financial community, Deutsche Bank is pressing on against the grain – to the disappointment of some investors. In what is being billed as a major restructuring, the bank is clinging to its universal model, but will make significant, although not wholesale, cuts to its retail business.

In doing so,  the German benchmark for finance rejected a more radical plan to split the massive bank into two – an investment bank and a commercial bank – the very model chosen by many of the bank’s better-performing peers around the world.

The tension will be palpable when Mr. Jain and his co-chief executive, Jürgen Fitschen, face their shareholders at the bank’s annual meeting on Thursday in Frankfurt.

There is talk of a shareholder revolt and even some calls for the two co-CEOs, who have been in charge of the bank’s management since 2012, to resign.

All this will be foremost in the minds of the bank’s non-executive supervisory board, which plans to meet tomorrow, before the shareholders’ meeting.

In the wake of the 2008 global financial crisis, governments in the United States and Britain have cracked down on “too-big-to-fail” banks – in the hopes of sparing taxpayers from again having to stave off a global financial collapse.

“There is more fondness for Deutsche Bank in Germany. Because of that populism, the political climate is more favorable than in the U.K.”

Mark Taylor, Dean of Warwick Business School

That’s been a paradigm shift for an industry raised to believe bigger was better.

Europe led the way in the post-war financial era, as banks such as HSBC, Barclays and Deutsche grew into global institutions. Their success in part prodded the United States in the 1990s to lift restrictions that had prevented U.S. banks from combining commercial and investment activities, in effect removing limits on growth.

In Germany, universal banks were associated with the country’s post-war recovery, the so-called “Wirtschaftswunder” or economic miracle that saw Germany grow into Europe’s largest economy. Smaller and medium-sized exporters, the backbone of the German economy, relied on German banks to finance their expansions.

The symbiotic relationship between the country’s Mittelstand firms and its banks became the foundation of German growth. Even today, in the aftermath of the global meltdown, many German companies still demand large, one-stop-shop banks.

“The German universal banking model always stood by their side,” said Jan Peter Krahnen, a professor of finance at Frankfurt’s Goethe University, referring to the point of view of the Mittelstand. “It continues to be emphasized from the side of industry how important it is to have a globally-operating universal bank based in their home country.”

The demands of the country’s mid-sized companies – which provide 9 in 10 jobs and generate the majority of German GDP – have apparently influenced Deutsche Bank’s decision to retain its universal architecture. As the bank’s top managers were considering alternatives for its restructuring, Mr. Jain and Mr. Fitschen said they ran their options by key German federal politicians in Berlin.

Handelsblatt reported that the federal government, which doesn’t have a financial stake in Deutsche Bank but wields influence indirectly over the financial institution, wasn’t fond of the nuclear option of splitting the bank into two parts. This indirect political support for preserving the bank – and as many jobs as possible – probably also played a role in Deutsche’s decision to retain its universal banking profile.

“There is more fondness for Deutsche Bank in Germany,” Mark Taylor, a professor of finance and dean of the University of Warwick’s Business School, told Handelsblatt Global Edition. “Because of that populism, the political climate is more favorable than in the U.K.”

But outside Germany, the mood has been radically different in banking circles since the 2008 financial crisis. Regulators who once praised bank “diversification” now view the “interconnectedness” of universal banks as posing an unacceptable risk.


Rise of the Specialists-02


Market forces are also paramount – being a universal bank has become increasingly unprofitable and unaffordable for many of the world’s largest financial firms, and based on Deutsche Bank’s uneven recent earnings history, perhaps for Germany’s largest bank as well.

“It does seem like there are very few arguments for supporting the continuation of universal banks,” Mr. Taylor said.

Most banks that tried to be both investment and commercial bank have been less profitable than more focused peers, Mr. Tayler said. Regulators, he added, should offer large banks incentives to reduce their operations in an orderly fashion.

U.S. and British regulators have been more aggressive at cracking down on “too-big-to-fail” institutions, saddling firms with new, tougher reserve requirements and forcing many to ring-fence riskier investment operations from traditional retail operations. The European Union is mulling a similar law.

Some global banks are already groaning under what they say are the onerous costs of that new regulation.

Barclays’ chief executive, Antony Jenkins, declared the universal banking model to be “dead” and has dramatically scaled back the U.K. bank’s operations, selling off its asset-management arm and retail branches in continental Europe.

Other one-time supporters such as Sandy Weill, the founder of Citigroup and a former advocate of universal banking, have started to argue that a more focused approach may be better after all. Citigroup sold off its Japanese consumer unit last year and faces pressure to exit retail banking altogether.

Other banks in Europe which have scaled back their ambitions in the post-crisis era include Switzerland’s UBS, which is positioning itself more as an asset manager.

The remaining universal banking holdouts are facing pressure to change, too.

Some analysts have called for the break-up of JP Morgan and Bank of America/Merrill Lynch. A report by Goldman Sachs, one of their competitors, found that JP Morgan could raise its value by 25 percent if it broke into two or four parts.

“Virtually all of the big banks in the United States have broken up,” said Richard Bove, a bank analyst at Rafferty Capital Markets in New York, who is one of the few remaining advocates for maintaining larger banks.

Mr. Bove argues government pressure and regulation has driven most lending activity into the “shadow banking” sector – a network of private capital market investors and lenders that don’t face the same tough regulations as banks.

Most global banks are facing pressure to specialize.

Goldman Sachs has paved the way as a globally-successful investment bank. Spain’s Santander, which avoided a bailout even as other Spanish banks were rescued by the E.U. during the crisis, has grown to become the largest retail bank in Europe.

The Spanish bank has no significant investment banking operations.

“The idea of ‘economic perspective’ has become much more important than in the past,” said Rüdiger Filbry, who heads banking research in Germany for Boston Consulting Group. “It is now about reaching critical mass in a particular business sector.”

On Thursday at Deutsche Bank’s annual shareholders’ meeting, Mr. Jain will work to convince shareholders why he thinks Deutsche Bank is the universal banking exception that still proves the rule.

Some investors are willing to give the bank the benefit of the doubt – for now.

“Holding onto the fundamental idea of a universal bank is not necessarily futile. But it has to be explained, especially the economic advantages. It is no longer a no-brainer,” said Mr. Krahnen of Goethe University.

That Deutsche Bank could become “the last man standing” as a universal bank could be beneficial, Mr. Krahnen said, “but what we need are reasons wherein this exceptionalism lies.”

Supporters of the universal approach argue that the German economy, as one of the world’s major exporters, is more suited to one-size-fits-all banks.

Its export-heavy industries and family-owned businesses have long relied on such firms to help export goods abroad.

118 Deutsche Bank-WTB 2014

Germany’s family-owned firms have traditionally relied on big banks to represent their interests abroad. Many smaller, family-owned firms, would be unlikely to obtain financing on the capital markets.

Commerzbank, Germany’s No. 2 bank and itself once a universal bank, was forced to drastically scale back its investment banking operations after being bailed out and partly nationalized following the 2008 financial crisis.

The downsizing of Commerzbank’s ambitions and scope is an opening for Deutsche Bank.

“We have a shrinking universal banking landscape in Germany,” said Martin Hellmich, a professor of financial risk at the Frankfurt School of Finance and Management.

Mr. Hellmich said Deutsche Bank could benefit by picking up business loans, investment banking and trading customers that other formerly global banks are now abandoning in the face of higher regulatory hurdles.

“The investment banking could indeed be the more profitable business,” Mr. Hellmich said. In essence, Deutsche Bank is playing a waiting game, he added.

Mr. Bove of Rafferty Capital also noted that Deutsche Bank has done a better job than nearly all foreign banks in establishing a beachhead in the United States, focusing on investment banking in New York. This is not a position to be given up lightly.

Banking on regulators forcing other Deutsche Bank rivals out of the trading business first is “a bet that could be won,” Mr. Hellmich said.

Or it’s a bet that could be lost, and in grand fashion.

Regulators in Europe may still force Deutsche Bank to split its investment banking and commercial banking businesses into two distinct operations that are linked by little more than the corporate brand name.

If that happens, the disadvantages of being universal may outweigh the benefits.


Christopher Cermak is an editor covering finance for Handelsblatt Global Edition in Berlin. To contact the author: cermak@handelsblatt.com

We hope you enjoyed this article

Make sure to sign up for our free newsletters too!