Deutsche Bank is in crisis mode and its collapse could signal the beginning of a whole new set of economic woes for Germany, the EU and even the entire global financial system, expert Michael Schröder told EURACTIV Germany. But he insists that state aid is not the answer.
Michael Schröder is a senior researcher at the Centre for European Economic Research (ZEW) and a senior research consultant at the Financial Research Centre at Shanghai’s Fudan University.
He spoke to euractiv.de’s Nicole Sagener.
Minister for Economic Affairs Sigmar Gabriel has suggested that bad management is to blame for Deutsche Bank’s current malaise, yet the bank itself has put the blame on speculation. What’s your take?
I’m no insider when it comes to Deutsche Bank, but there are certainly a few things at play here, including zero-rate interest policies, tightening of banking regulations, rising costs for investment banks and restricted business opportunities. Of course, speculation does affect share price, but it doesn’t necessarily affect the actual value of the company, so if it can survive people panicking and acting like sheep, the negative consequences are only going to be short-term. Deutsche Bank could be better off with different management, but that’s a general argument that would have to be covered on a case-by-case basis.
The bank is still reeling from the prospect of having to pay a $14 billion fine, imposed on it by the US Justice Department. What will happen if Deutsche Bank can’t secure some leniency from the Americans?
If Deutsche Bank has to pay the full amount then it’s in trouble, because it hasn’t legislated enough for that amount. How big a loss they would run is difficult to say, but the bank would risk going under.
The IMF has labelled Deutsche Bank the most dangerous bank in the world, because of how sewn into the global financial system it is. Would its collapse trigger a new crisis?
It’s not just Europe that could be plunged into crisis, the turbulence caused would probably go global. The markets would probably panic and this would have a devastating impact on share prices. Nevertheless, state aid would lead it to ruin as well.
State support is not the way to go?
The EU’s stability mechanism has never yet been tested to this extent. If a bank found itself in trouble then the owners, i.e. the shareholders, and creditors would take action because share prices would plummet and bank bonds would start failing. Bank deposits would be lost. If the bank was staring down the barrel then the state would have to intervene, as it did with Commerzbank, and take over temporarily. It would have to inject a lot of equity and would probably become the bank’s most important co-owner. In the worst case scenario, the state could be dragged under by the bank if it struggled to keep providing the capital needed and borrowing would have to increase. I don’t see the German government doing this, but the consequences of Deutsche Bank going under would be dramatic and would probably trigger a new global financial crisis.
So there’s a chance that state intervention would work…
They could try and rehabilitate the bank, saving and converting parts of it, eventually putting it back into the capital market, as was done for numerous banks in the US following the last crisis. The Americans dealt with the aftermath particularly well, through intelligent recapitalisation and reprivatisation.
Those in favour of state aid argue that if the government had a stake, they could exert greater influence over the way it does business.
State support and recapitalisation doesn’t work so easily this way, when the bank is so close to bankruptcy.
Critics have pointed out that the business of speculation makes it more difficult to protect regular investors. What’s your analysis?
There’s a two-tier banking system in Germany and Deutsche Bank has got to change the course it is currently on. The real question is: is their business model still viable. The majority of its dealings are in investment banking. It mostly operates through capital market and investment transactions, but this model has reached a dead end, as regulation has attempted to limit or make these kind of risky transactions more expensive.
Has the bank responded too slowly to these stricter rules?
It actually came out relatively well from the 2007 and 2008 crisis years. It is one of the only investment banks in Germany and is the largest in Europe. But the commercial bank sector is competitive and Deutsche Bank has struggled, especially in Germany, where it has been up against the very successful savings and cooperative banks that many people favour.
Is Deutsche Bank going to be able to save itself?
The share price has fallen, but it has somewhat stabilised, so for the last few days at least, it has been sailing in calmer waters. Let’s all keep our fingers crossed that it can climb its way out of this one, because it is going to be extremely expensive for all of us if a bailout is needed.