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Why the mooted Deutsche-Commerzbank merger is such a terrible idea
IF YOU'RE looking for one of the worst ideas in contemporary banking, look no further than Germany.
The mooted merger between Deutsche Bank AG and Commerzbank AG would make a mockery of any notion that EU governments are serious about ending the "too big to fail" problem. It would also turn back the clock on a guiding principle of European regulation over the past decade: The promotion of a "banking union", where risks are shared widely across the continent on the basis of jointly decided rules.
Berlin clearly has a problem when it comes to Deutsche, its most iconic lender. The bank has come under the scrutiny of regulators across the world because of its large portfolio of illiquid assets, as well as its implication in a string of money-laundering scandals and its dubious and relatively weak capital position. A succession of chief executives has failed to shrink costs sufficiently and revamp revenues. The share price has plummeted, leaving German politicians scrambling for a fix.
One proposed solution is to tie up Deutsche with Commerzbank, a rival lender that has already benefited from a cash injection from the state. The imagined benefits include: Cutting costs by reducing overlaps; hiding Deutsche Bank's shaky balance sheet in a bigger entity; and creating a "national champion", which can support German companies across the world. A merger might also spare the German government the embarrassment of having to consider an injection of public money. This would cause a domestic political backlash, and accusations of hypocrisy from abroad. It was Berlin, after all, that asked for stricter European rules on bank bailouts.
It's not as if any of those supposed advantages of a merger stand up to scrutiny. The two banks specialise in different areas (Deutsche in investment banking, Commerzbank in trade financing), weakening the case for finding efficiency gains and savings.
Meanwhile, combining the two banks would create an entity with more than US$2 trillion in assets, mostly concentrated in a single country rather than spread across national borders. Finally, any politician who thinks there's a need for a national champion should look no further than Deutsche Bank itself, and see how well that went.
Would European supervisors even be able to supervise such a behemoth? Perhaps. But it's far less certain that they'd be able to close it down in an orderly manner, if that was ever needed. The Single Resolution Board, the European agency in charge of winding down failing banks, is currently working with lenders on drafting plans so that such an event could be managed over a single weekend. Deutsche Bank is already the name that pops up every time someone questions the resolution board's ability to cope with a complex bank that might get into trouble. Adding Commerzbank would merely make this worse.
A domestic combination would confirm once more that Europe's banking union is still very much unfinished. The eurozone has a single supervisory mechanism and a single rulebook, but this has failed to spur any significant cross-border merger since the creation of the banking union - as was once hoped for.
Of course, supervisors shouldn't be in the business of deciding which bank should marry which. But more cross-border deals would spread the pain of banking losses, weakening the "doom loop" between a sovereign state and its financial system that brought Ireland, Spain and Cyprus to their knees.
This strange persistence of national banking has several causes. Governments have failed to unify other crucial areas of banking, including deposit insurance and bankruptcy laws, which remain national. The ECB hasn't always been consistent enough in its demands on capital buffers, making banks more cautious about getting together. And this is before you get into the inherent difficulties of executing any cross-border merger, spanning from language to culture.
The danger is that we're entering a phase where governments are no longer interested in a truly European banking system, and prefer to retrench to their domestic comfort zones. In Italy, the ruling populists have mounted an unprecedented challenge to the spirit of the single European rulebook, demanding the right to use state money more easily on banking losses. Now Germany, which had been a strong backer of the new regime, is toying with its own national solution.
Perhaps banking can't be immune from the new sovereign-first zeitgeist. But it's certainly not what Europe had in mind at the start of the decade. BLOOMBERG