After some two weeks of falling stocks, talk about a merger with Commerzbank, musings about bailouts, bashing of its investment banking arm and reassuring statements by all sort of politicians (and competitors!), Deutsche Bank yesterday made a somewhat impressive rebound at the stock markets. Preceding was a rumour, that it may face fines only worth €5.4b instead of the previously floated €14b.
The US Department of Justice (DoJ) has not (yet?) confirmed the new number. Interestingly, the fines are almost as much as Deutsche set aside for settling legal battles. The question is now, why did the new number appear right now and not earlier? Immediately after the original number made news, it became clear that the „riskiest bank of the world“ would be in trouble if the fines would be actually that large. This created stress for Deutsche’s stocks and for the banking sector as a whole, since a failure of Germany’s largest lender would affect other banks too. It is curious why this apparent error was not corrected on the spot. Even more fundamental, ony may ask what was the basis for the first estimation of €14b?
While it is in principle laudable that the US prosecute financial offenders, regardless of nationality, sometimes prudence and a view on the wider economic environment may be advisable, especially when a bank as big, connected and risky as Deutsche is in the centre of attention. One might wonder if the DoJ just tested the waters to see how markets would react in order to gauge the right balance between penalising Deutsche for its wrong-doing and keeping the banking market functioning.
Another, more malevolent idea is that the DoJ willingly exposed Deutsche’s weaknesses. It’s stocks currently trade roughly a quarter of its book value, making it a prime candidate for acquisition, maybe by an American competitor? Then the DoJ’s actions would need to be seen as industry politics and probably a retaliation for the EU Commission’s recent attacks on Apple’s tax payments in Ireland and the anti-trust investigations against Facebook and Google (and Microsoft some years ago) for abusing market power. The amount of the fine, which is curiously close to the „legal warchest“ of Deutsche may be an indicator for the latter theory. However, a contradicting fact is that in past the DoJ and the fined banks nearly always settled for way less than what was initially rumoured. Either way, Deutsche would be lucky to get off the hook so „cheaply“, but still its warchest is then empty and who knows what shenanigans are still to be uncovered.
Certainly, Deutsche Bank has more problems than just fines of whichever size, first of all an identity problem whether it wants to be a boring but stable lender or an international investment bank, something Deutsche has struggled to reconcile for decades. Add the general fragility of the banking sector brought about by low interest rates and the need to reinvent themselves as stable in a period of low growth and no profits and you have some formidable challenges on your plate.
There is not-so-subtle criticism that Deutsche should shed its investment banking arm instead of Postbank, a recently acquired retail bank, calling its desire to play with the big boys a „mistake“ and that the bank should return to its roots of being just a lender. Deutsche’s notorious investment banking arm has created a lot of trouble, so down-sizing and controlling it is prudent. But getting rid of the whole division would be a gross over-reaction. First of all, investment banking can be profitable (if done right, mind you!) and profits is something every bank, but especially Deutsche, currently has not that much of. Second, Germany needs one or two big investment banks to support e.g. IPOs of German firms. If Deutsche and Commerzbank are no longer willing or able to do the job, then foreign banks with less experience in Germany and knowledge of German business culture must fill the gap, or a new German investment bank with less experience and thus more risk will eventually pop up. I’d rather prefer the experienced pair of Deutsche and Commerzbank.