Currencies

China capital curbs reflect buyer’s remorse over market reforms

Last year the reformist head of China’s central bank convinced his Communist party bosses to give market forces a bigger say in setting the renminbi’s daily “reference rate” against the US dollar. In return, Zhou Xiaochuan assured his more conservative party colleagues that the redback would finally secure coveted recognition as an official reserve currency […]

Continue Reading

Capital Markets

Mnuchin expected to be Trump’s Treasury secretary

Donald Trump has chosen Steven Mnuchin as his Treasury secretary, US media outlets reported on Tuesday, positioning the former Goldman Sachs banker to be the latest Wall Street veteran to receive a top administration post. Mr Mnuchin chairs both Dune Capital Management and Dune Entertainment Partners and has been a longtime business associate of Mr […]

Continue Reading

Banks

Financial system more vulnerable after Trump victory, says BoE

The US election outcome has “reinforced existing vulnerabilities” in the financial system, the Bank of England has warned, adding that the outlook for financial stability in the UK remains challenging. The BoE said on Wednesday that vulnerabilities that were already considered “elevated” have worsened since its last report on financial stability in July, in the […]

Continue Reading

Currencies

China stock market unfazed by falling renminbi

China’s renminbi slump has companies and individuals alike scrambling to move capital overseas, but it has not damped the enthusiasm of China’s equity investors. The Shanghai Composite, which tracks stocks on the mainland’s biggest exchange, has been gradually rising since May. That is the opposite of what happened in August 2015 after China’s surprise renminbi […]

Continue Reading

Financial

Hard-hit online lender CAN Capital makes executive changes

The biggest online lender to small businesses in the US has pulled down the shutters and put its top managers on a leave of absence, in the latest blow to an industry grappling with mounting fears over credit quality. Atlanta-based CAN Capital said on Tuesday that it had replaced a trio of senior executives, after […]

Continue Reading

Categorized | Banks, Economy

Strategic challenge facing European banks


Posted on September 30, 2016

The logo of Germany's biggest lender Deutsche Bank can be seen during the company's annual shareholders' meeting in Frankfurt am Main, western Germany, on May 19, 2016. / AFP / DANIEL ROLAND (Photo credit should read DANIEL ROLAND/AFP/Getty Images)©AFP

It has been a torrid week in Europe’s banking sector. Deutsche Bank, the focus of investors’ anxiety, saw its shares drop to levels not seen since the 1980s, after a $14bn demand from US regulators led to new concern over its capital position. Talk of a government rescue plan, which Berlin has denied, is premature. Indeed, rumours of a deal with regulators fuelled a rally in the shares on Friday. However, John Cryan, the bank’s chief executive, cannot simply batten down the hatches and wait for the storm to pass. He has to convince investors that the bank has a business model worth backing. Moreover, Deutsche Bank is merely the most prominent victim of structural problems afflicting many eurozone banks.

Germany’s biggest bank should be at little risk of an acute funding crisis. Its capital position is stronger than during the global financial crisis and well above the regulatory minimum. It has an ample cushion of liquidity.

    In extremis, it could turn to the European Central Bank. A bail-in of bondholders would risk repercussions in a fragile eurozone financial sector, and the German government, conscious of the demands it has made of Rome in dealing with Italian banks, insists there will be no bailout by taxpayers. Yet few believe that Berlin would ultimately allow Deutsche Bank to fail.

    It is not enough for Mr Cryan to blame
    nebulous “forces in the market” for creating a “distorted reality”. The initial $14bn demand from the US Department of Justice may well be reduced to a manageable penalty, judging by the settlements other banks have reached in similar cases. Yet it is likely to remain a sizeable problem; this week’s turbulence could result in damage to Deutsche’s business if it causes clients and counterparties to go elsewhere. Moreover, the justice department demand was merely the trigger for the latest sell-off. The underlying issue is that investors are not convinced by Deutsche’s strategy.

    Deutsche Bank’s ambitions as a leading European investment bank, seeking growth in markets such as Greece and Italy, took a severe knock after the global crisis. Rivals such as Barclays, facing similar challenges, have been able to fall back on a reasonably solid retail business. Yet Deutsche’s home market is not an attractive one.

    Large German companies, the bedrock of its business, are flooded with cash, able to borrow cheaply in bond markets and see limited opportunities to invest at home. Germany’s ageing population is more inclined to save than to borrow. The profitability of the country’s banks suffers from the fragmentation of the sector, which has more than 1,500 lenders, many of them small, municipally owned savings banks. The ECB’s ultra-loose monetary policy merely compounds these problems.

    There are several steps Deutsche Bank could consider to improve its capital position, ranging from asset sales to more speculative ideas such as bonus clawbacks. The German government is right to intimate that it should solve its own problems. However, Deutsche will struggle to raise fresh capital until it can present a convincing long-term plan.

    The bigger question is whether Germany’s banking sector still has a business model. Indeed, Mario Draghi, ECB president, argued last week that one of the chief problems afflicting eurozone banks was that the sector had become too big relative to the needs of the economy. Individual institutions are under pressure to adapt to changed conditions.

    Policymakers may need to recognise the need for the sector to shrink.