The World Mind

American University's Undergraduate Foreign Policy Magazine

Economic Integration vs Economic Nationalism: The Deutsche Bank Merger

EuropeSamantha Diaz

Introduction

The European Central Bank (ECB), founded in 1998, established  monetary policies after the creation and implementation of the euro as a transnational currency in the Eurozone. The Euro currency, used by the majority of members in the European Union, helps create a single market, which is essentially one large region which allows for trade to be done between European countries without any form of regulations or tariffs. The Euro system promotes more than economic cooperation; it promotes integration and merging of different European banks to further promote the financial cooperation the ECB strives towards. While strides have been made in order to further integrate European banks, there has been push back from European nations such as Germany to have a  “national champion”  in the financial system in order to support national companies. German believes this national champion is Deutsche Bank, one of the oldest banks in Germany whose foundation was based upon supporting German exports.

However, this once powerful bank is currently on the verge of collapse. Beginning from the financial crisis in 2008, Deutsche Bank is at the center of financial scandals, low profits,and other issues which will be discussed later. Members of the management board of Deutsche Bank and German politicians believe the solution to saving Deutsche Bank is by merging with competitor Commerzbank, another old failing bank who focuses more on domestic companies. While German politicians are hopeful that the merger with Commerzbank will help solve many problems surrounding the German banking system, it does not eliminate the underlying desire for a German bank to aid German companies. Germany’s agenda to have a national bank support national companies goes against the ECB's long-term plan to establish a Pan-European banking system between different European banks.

Deutsche in Danger

Without any form of reformation, Deutsche Bank is heading down the path to be Germany’s equivalent to the fall of Lehman Brothers. The global financial crisis of 2008 was the beginning of the decline for the German bank, which only deepened as scandals and conflicts internally within the bank as well as with outside actors continuously arose one right after the other. For example, in 2018, Deutsche Bank released its net profits on the company website for the first time since 2014. The numbers show an underperformance in comparison to the targeted reports. In 2018, Deutsche Bank only made a net profit of $390 million, which is lower than the Reuters projected target at $517 million. Another issue, which only makes matters worse, is their dependency on foreign companies. In a market where competitors are banks such as J.P. Chase Morgan and Citi Bank group, whom dominate market in and outside of the United States, Deutsche Bank relatively is small compared to its competitors. This, among other financial issues, declining revenues, and adverse market conditions have laid out the foundation to the pending doom of Deutsche Bank. These issues do not fully address different external scandals Deutsche Bank has fallen under for the past several years with outside actors.

These external scandals only make Deutsche’s road to recovery even harder. For example, Deutsche Bank recently came to a settlement with the US Department of Justice for $7.2 billion for misleading investors in the purchases of residential mortgage-backed securities. Other scandals, such as the one in which Deutsche Bank lost about $1.6 billion worth of bonds bought in 2007, and a tax evasion scandal that led to Deutsche Bank to pay $94 million, spill over a large amount of money the German bank owes to different countries, specifically the United States. While such scandals are not necessarily rare in the banking world, their accumulation and the long period it is taking for the German bank to pay back the settlements only make Deutsche’s situation worse.

A Complicated Merger

If the merger happens, Deutsche Bank will reap more benefits than Commerzbank. It will cause  cost cuts will need to be done in order for the newly merged bank to soundly operate. One way this could be executed is through cutting employees. While a measure such as this is normal to any bank merger or acquisition, the reductions required from Deutsche Bank would be substantially less than if the bank restructured itself.  While the alliance allows both banks to expand their markets domestically and internationally, Deutsche Bank’s expansion into the domestic market will diminish its dependency on any international trade operations or need to lend to international companies.

Due to the fact that Commerzbank’s main clientele are small-medium enterprises in Germany, the merger of these two banks would create  the largest lender in Germany. The concept of having one large bank financing various companies in Germany follows an agenda of many German politicians, which is a large German bank supporting German companies. This concept of a megabank promotes the idea of a  national champion, which the German government favors. By having Deutsche Bank as the country’s primary bank to finance majority of Germany companies, politicians hope this will decrease the global footprint of foreign banks such as J.P Chase. Although the merger is a protectionist-like measure to limit external interference, it does not fix the flaws in the German banking system. The merge might even make the banking system of Germany more complicated.

The country’s banking is currently suffering from overcrowding. Overall, there are three pillars in which all German banks fall. The three pillars are; private banks, which are banks that deal with the financing of specific individuals; public banks, which normally pertains to commercial companies and co-op banks which is a combination of both private and public banks. With the amount of banks in each pillar ranging  from as small as 385 banks to as many as 1000 banks, this results in a system that is weak and underperforms. Although banks, including s Commerzbank, have attempted to salvage the situation through consolidations and merging with smaller banks, it did not prove to be helpful in reducing the number of players in the system since it did not erase the fact that there are too many banks in Germany.

This merger, if it occurs, will result in this new bank being the third largest bank in the Eurozone. While Germany is overall in favor of this merger, it still needs the ultimate approval of the European Central Bank in order for it to fully take place.

The European Central Bank has given a set of criteria which must be met by both banks for the merger to be approved. Nevertheless, the merger goes against the broader plan of the European Central Bank to have a Pan-European banking system where banks within the Eurozone will merge with other banks in the regions as well as finance companies beyond their national border. In 2018, the ECB created the Target Instant Payment Settlement (TIPS), which allowed transactions between European banks to be processed instantaneously, regardless of where the primary base of a bank is. Although only a few European countries use the TIPS, the hope is that all member-states will use the system to make financial transactions more timely and efficient. The Deutsche-Commerzbank merger will not wholly dissolve this program, but it will weaken the goal of having financial integration among member states. If the European Central Bank is promoting the idea of European banks merging and financing companies outside of their national borders, the idea of German companies only being supported by German banks goes against the agenda of the European Central Bank.

Recommendations

German politicians should focus their efforts on reforming their entire banking system instead of focusing  on saving Germany’s oldest, and not most efficient, banks. While it may be in Germany’s best interest to have German banks  support domestic companies, it is more important to reform the banking system. Through this, Germany will hopefully create a more financial market which will enhance the performance of banks within the financial system as well as reducing the risk in banks collapsing. The reforming of Germany’s banking system can also ease any worry of the European Central Bank system about Germany’s protectionist path. Although board members of the ECB have not released any form of hard push back against the merger, they have listed different demands or criterias which need to be met in order to gain the full approval for the merger to occur.  One of these criterias given by the ECB is for Deutsche Bank to increase their fresh funds, which is the amount of funds that are neither withdrawn or newly deposited funds into a bank. Criteria such as increasing the amount of fresh funds is just one way for Deutsche bank to create a safety net in case the merger is not successful.

All in all, the merger reflects many things internally in Germany as well as the Eurozone. Internally in Germany, the ongoing negotiations to save one of the oldest banks in Germany is a reflection to preserve their pride of national banks financing national companies. Even in an overcrowded banking system, politicians hope the new merged will be the answer to their prayers. Externally, through the lens of the European Central Bank, the possibility of the third largest bank in all of Europe who wants to have a global footprint as large as American banks and finance all German companies is an ambitious dream for Germany to have their cake and eat it too.