Could Deutsche Bank be too big to fail? The bank’s stock hit a record low as UBS downgraded it to sell.
Deutsche Bank is the biggest bank in Germany, followed by Commerzbank, the bank that Deutsche just tried and failed to buy. Commerzbank opened merger and acquisition talks this week with others banks. Both banks are at best only marginally profitable which is becoming normal in Germany’s banking sector.
Source: Google Finance
Some of the problems include high labor costs, negative interest rates and very tough capital rules. Even though Europe’s biggest economy has seen eight consecutive years of growth, its two largest banks appear very sick. The collapse of the merger has senior executives at Deutsche Bank working to identify a “Plan B” for turning around the large bank.
Deutsche Bank, as part of their restructuring, announced they would cut their US equity business including prime brokerage and equity derivatives. The bank’s US business employs 9,275 people. This was part of what Chief Executive Officer Christian Sewing called “tough cutbacks” during Deutsche’s recent annual investors meeting.
The investment bank had only managed a 1% return on equity last year vs 16% at JPMorgan Chase’s investment bank.
Adviser Dr. Lars Feld, a top executive and one of the German Council of Economic Experts, fears a European financial crisis might be forming based on the need to improve both Italian and German banks.
European regulators have said they fear Deutsche Bank could fail a U.S. stress test. Even if it passes, there could be severe limitations placed on how the big bank operates.
The company is also facing issues with the Europe Central Bank. Deutsche does not have any capital or liquidity shortfalls, but the ECB has raised many “areas of concern.” These included high expenses, several scandals, the high cost of funding and the future of the large investment bank. The CEO is under pressure to shrink the very large lender until it becomes manageable again.