Collateral Damage

No Bailout for Deutsche Bank, Please

Dunkle Wolken über der Deutschen Bank
Dark clouds gather over Deutsche Bank headquarters in Frankfurt. Photo: DPA
  • Why it matters

    Why it matters

    Deutsche Bank is so entwined in the global financial markets that its deep troubles could trigger the next major monetary crisis.

  • Facts

    Facts

    • Shares of Germany’s largest bank fell to an historic low on Monday after a report that Chancellor Angela Merkel had ruled out government aid for the struggling institution. Both sides denied the report.
    • The Frankfurt-based bank has been hobbled by legal costs and penalties from cases that stretch back more than a decade.
    • John Cryan, who was put in command of Deutsche Bank last year, wants to settle key legal cases and restructure the bank with job cuts and branch closures worldwide.
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    Audio

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At the height of the financial crisis, Josef Ackermann rose above his rivals. At the time, he was chief executive of Germany’s most powerful financial institution. He stated for the record in 2008 that he would be ashamed if Deutsche Bank were forced to accept help from the government.

Eight years on, it’s clear these words are a flagrant example of the hubris that contributed decisively to Deutsche Bank’s deep fall.

The bank, though still an icon of German industry, is in bad shape. So much so that there is now open discussion about whether the government should lend a helping hand to the once self-confident financial powerhouse in Frankfurt.

Germany’s major banks are in a deplorable state, and renewed intervention by the government would change nothing. The political collateral damage, both domestically and on a European level, would be gigantic.

The short answer to this question is no, or only if it becomes absolutely necessary.

Such a necessity has long since ceased to be inconceivable, however. While most of the dramatic action revolving around Deutsche Bank is still taking place on the stock market, the bank’s credibility with customers will soon be undermined if the brutal plunge in stock prices isn’t checked.

If it came to that, then for better or worse, the state would have to step in with an emergency rescue. The bank is so entwined in the global financial system that it could then become the catalyst of the next major financial crisis.

But would an intervention by Berlin quickly defuse this explosive situation? The fans of this solution like to point to the example in the United States when, at the height of the financial crisis, Washington more or less forced the banks to take government money and ultimately profited from it. The U.S. banks came out of the crisis healthier than their European competition, and the government in Washington even earned money through its involvement.

It’s not clear that such an intervention would work as well in Germany, though. As strapped for cash as Deutsche Bank is today, it has actually had no problem getting its hands on fresh capital for some time. Since 2008, the bank has been able to collect over €21 billion ($23.5 billion) from its shareholders. The problem is all that money has been eaten up by the exorbitant penalties the bank has shelled out to work through its nearly endless list of scandals. The sins of the past would have wiped out the government’s capital just like that of the shareholders, and the bank’s financial straits would probably have been just as great today if Mr. Ackermann had let the state intervene.

Aside from that, it has now been eight years since the collapse of Lehman Brothers. If the German government were to recapitalize Deutsche Bank with billions in taxpayers’ money, it would be the admission of failure in its attempts to secure global financial system since then.

The European Union’s new settlement rules require that shareholders and creditors be held liable in an emergency before governments are allowed to take action. German Finance Minister Wolfgang Schäuble insisted on compliance with this regulation when it came to bailing out the hard-hit Italian bank Monte dei Paschi di Siena, the oldest surviving bank in the world. If Europe’s most important economic power were to now disregard these guidelines, referring to exceptional circumstances that weren’t a real emergency, it would discredit eight years of hard reform work.

Furthermore, an intervention by the state wouldn’t free Deutsche Bank from having to develop a new strategy and a sustainable business model. One way or another, the bank must shrink down to a healthy size.

This can be seen in the example of Commerzbank: During the financial crisis, the federal government took an €18-billion stake in the bank and still has a 15 percent share. Despite this stake, the second-largest private German bank still isn’t on sound footing. The new chief executive, Martin Zielke, has had to prescribe radical restructuring that will likely cost 9,000 jobs.

Germany’s major banks are in a deplorable state, and renewed intervention by the government would change nothing. And the political collateral damage, both domestically and on a European level, would be gigantic. Chancellor Angela Merkel knows full well what a fiasco she would face if she propped up the unpopular Deutsche Bank in the election year of 2017, of all times.

There is no convincing argument for the state to rescue Deutsche Bank. Except one that no one wants to think about: the acute danger of a new financial crisis.

 

To contact the author: maisch@handelsblatt.com    

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