Deutsche Bank: still skating on thin ice
DOUBTS about the financial health of Deutsche Bank have not yet gone away. Despite reporting an unexpected profit of $278 million dollars in the third quarter, uncertainty looms over Europe’s largest bank. Speculation about its financial health was first triggered last June when the International Monetary Fund (IMF) published its annual assessment on the stability of the financial system. The IMF concluded that Deutsche, of all global systemically important banks, posed the largest risk for the global financial system[FA1] . This prompted John Cryan, Deutsche’s CEO, to assure the financial markets that doubts about his bank’s financial health were unwarranted. But is that so?
Deutsche is currently involved in more than 7500 legal disputes. Claimants include the US Department of Justice (DoJ), which has filed a claim against Deutsche of $14 billion dollars. And Blackrock, the world’s largest investment company, is suing Deutsche over anti-trust violations together with other institutional investors. Deutsche is now selling assets to generate cash that may be needed to meet the legal liabilities that might arise from these claims. The staggering number and the size of some of these claims suggest that they did not arise from poor business judgement alone.
The origins of today’s problems can be traced back to 1994. That year, Deutsche’s management decided to diversify and embark on the ambitious mission of becoming a global investment bank. This did not only shift the focus of business towards high-risk investment practices, it also affected the business culture. Under the successive leadership of Hilmar Kopper, Rolf Breuer and Josef Ackermann, Deutsche expanded its balance sheet with high-risk assets, but apparently without properly assessing the attendant business and legal risks. And whereas other investment banks such as Goldman Sachs, JP Morgan and UBS downsized their exposure to high-risk financial assets after the financial crisis of 2008, Deutsche expanded its activities in this sector in order to boost profits.
This has now created a systemic risk because other banks have used Deutsche to hedge themselves against default of high-risk assets. The IMF assessment suggests that, as a result, many European and American banks could suffer substantial losses if Deutsche were to collapse.
Furthermore, Deutsche is grappling with low profitability. Low interest rates have dented its profit margins from traditional deposit-loan intermediation, while fierce competition in its home market — Germany — leaves little room to compensate for this. Though other banks are experiencing similar problems, Deutsche seems to be particularly affected due to its high operating costs. To tackle these difficulties, John Cryan has announced a five-year restructuring programme, cutting 9500 jobs, downsizing its presence in the US and recalling bonuses awarded to some of its (former) top brass. But unlike high costs and claim-prone business practices, which can be got rid of in a relatively short spell, the history of questionable business dealings for which Deutsche is now being sued, cannot be erased so quickly. So unfortunately, it will be skating on thin ice for quite a while.