Features

Deutsche-Commerzbank merger will be a disaster

The Deutsche-Commerzbank tie-up makes no sense and may spark another financial crisis.

938_MW_P16_City-View

Christian Sewing: he'll need<br />all the help he can get

The Deutsche-Commerzbank tie-up makes no sense and may spark another financial crisis.

The days when Deutsche Bank was the powerhouse of European finance are behind it. Almost two decades ago, drawing on the might of German industry, it was aiming to build the most lucrative investment-banking operation in the world, a strategy that culminated in the $10bn takeover of Wall Street's Bankers Trust in 1999. But it never had the savvy of a Goldman Sachs or the muscle of a JP Morgan Chase, or the global presence of an HSBC. Instead, it stumbled through a series of disasters. The shares have lost more than 90% of their value since 2007 and almost halved in the last year alone. Investors were even starting to question whether the bank could survive at all.

The response? Under pressure from the government in Berlin, Deutsche's CEO Christian Sewing has dropped his opposition to a tie-up and is now in merger talks with its main rival Commerzbank. If the deal comes off, it would create the second-largest bank in Europe after HSBC. Even more significantly, the government seems willing to become a major shareholder. It already has a 15% stake in Commerzbank. And the likely shortfall in capital at the new entity will probably be plugged by an investment from the new fund Germany is creating to invest in "strategic industries". In effect, the new entity will be Germany's "national champion" in the financial markets and possibly for the whole eurozone as well.

A catastrophic history

The trouble is, the history of state-backed banks is a catastrophic one. One of the worst examples was Crdit Lyonnais, once the largest French bank, which went on a buying spree in Hollywood in the 1980s when it was owned by the state. It ended up financing hundreds of not very good films and then buying the MGM film studio, and it was a disaster for the state, with losses that ran into billions. State-owned banks in India and China have become notorious for lending far too much money, often to projects with political connections, and piling up big losses in the process.

The reasons are not hard to understand. A state-backed bank has access to easy funding. It doesn't have to raise as much cash as it otherwise would from shareholders and depositors, and that inevitably makes it more frivolous than it otherwise would be with its loans and investments. It will be pushed into backing politically sensitive companies even if they don't make much commercial sense. The government will in turn feel that it has to protect its "investment" by favouring the state-owned bank over any of its rivals.

Managed decline is a better option

You can see why Germany wants to find a solution to the Deutsche mess. The bank is systematically important to the country's industrial base and its losses might spill out into the rest of the eurozone at a moment when it is not in any state to take any more setbacks. That doesn't make it a good idea, however. Instead, the German government should allow Deutsche gradually to decline if it can't turn itself around. If it poses a risk to financial stability, as it well might, then it should hive off those losses into a separate state-run "bad bank" and let that sit on the government's balance sheet until they can be run down. At least then the problem would be contained. Instead, it is only going to be made worse.

Deutsche made a mess of things even when it was purely in the private sector. It couldn't keep its costs under control, nor could it find many niches of the capital markets where it could trade profitably. It is hard to see how bringing the German government in as a shareholder, and merging with another troubled bank, is going to fix any of that. Even worse, it may simply be tempted to use its access to cheap funding, together with a protected domestic market, to launch another round of global expansion. After all, that was what it always did in the past, and with very little success. In truth, the state-backed Deutsche-Commerzbank is a calamity waiting to happen and one that, if it does run up huge losses, as it easily might, could be dangerous for the global financial system.

Recommended

Stockmarkets have a spring in their step
Stockmarkets

Stockmarkets have a spring in their step

Global stockmarkets have been basking in the post-Covid economic recovery as GDP, retail sales and manufacturing are all on the way back up.
23 Apr 2021
Stockmarkets shrug off turbulence
Stockmarkets

Stockmarkets shrug off turbulence

Stockmarkets have hit their first bout of turbulence of the year, but most are clinging onto January’s gains.
4 Feb 2021
How to invest in biotechnology: the healthcare sector’s high-growth area
Biotech stocks

How to invest in biotechnology: the healthcare sector’s high-growth area

Dr Mike Tubbs provides an overview of this thriving industry, whose latest triumphs include the Covid-19 vaccines. He examines the best investment str…
14 May 2021
Vaccine patents: a bitter pill for drug companies
Biotech stocks

Vaccine patents: a bitter pill for drug companies

The US has suggested waiving drug companies’ vaccine patents to hasten the defeat of Covid-19, sending their share prices down.
14 May 2021

Most Popular

Inflation is taking off in the US and markets really don’t like it
Inflation

Inflation is taking off in the US and markets really don’t like it

US inflation is at its highest for 25 years. Stockmarkets – and tech stocks in particular – have taken the news badly. John Stepek explains why, and w…
13 May 2021
Inheritance tax planning: the rules around gifting
Inheritance tax

Inheritance tax planning: the rules around gifting

There are plenty of legal ways to minimise an inheritance tax bill. Perhaps the simplest is to give away assets to reduce the size of your estate. Dav…
11 May 2021
Is it time to top up on gold? Or should you wait for a better opportunity?
Gold

Is it time to top up on gold? Or should you wait for a better opportunity?

Fears of inflation, money-printing and a global pandemic are all conditions that should drive the gold price higher. But it has been struggling. Domin…
12 May 2021