Last week we had the news of the fine slapped by the United States on Deutsche Bank. The initial amount of the fine (it is being rumoured that it will be negotiated downwards) is much larger than the net asset value of this leading German financial institution. So, whichever way one looks at it, this bank will need to be recapitalised.
In the last months we also had the case of a number of Italian financial institutions that have toxic loans and would need to be taken off their balance sheet. For this to occur, while at the same time keeping these institutions alive, some form of recapitalisation is required.
The news related to Deutsche Bank shocked the financial markets as the uncertainty was originating not from the periphery but from the heart of the leading European economy; the economy that has served as the locomotive for growth in Europe for a number of decades.
It is pertinent to ask whether there is a connection between the crisis in the Italian banking system and the challenge Deutsche Bank is facing , as well as the difficulties that other German banks (large and small) have found themselves in. Although they are all different stories, they lead one to reflect on the future of the European banking system and the strategic direction of the EU and the ECB.
Deutsche Bank is the last remaining large investment bank in Europe. With the new regulations of the EU, Deutsche Bank is severely hampered in its operations, compared to its competitors which operate in much larger markets and for much higher commissions. Essentially, these new rules work against the operation of a bank such as Deutsche.
This new regulatory regime is meant to safeguard the interests of the savers and the public at large. However, it needs to be supported by measures taken at the EU level to render the banking sector more supportive of the productive economy
Therefore Deutsche is being forced not only to handle the crisis posed by the fine slapped by the US but is also being forced to change its model. Its trading activities need to be limited and its financial services need to be designed in a manner as to create synergies with its commercial banking arm. This model is very similar to that of the French banks and to which most large European banks aspire. This transition will bring about a sale of assets and drastic cost reduction and also a great deal of uncertainty.
For the smaller banks – whose profit margins are low, have a deteriorating loan portfolio and are undercapitalised – the change is expected to be very painful indeed.
The need for this transition lies across the whole of the EU, rendering this problem a European one. So the point about the strategic direction of the EU and the ECB in relation to the banking sector is very crucial. The ECB on its own cannot really set this direction as it is essentially a regulator. The function of a regulator is to regulate. National governments are seeking to introduce their own rules, keeping the national interests, rather than the European interests, in mind.
In this scenario, what is to be done about the banking union? What type of banks does the EU banking union wish to promote? The productive base is made up of small- and medium-sized enterprises. Large and very large companies have other sources of funds for their business. So should we have a banking sector that is capable of supporting small- and medium-sized enterprises or should we have a banking union that promotes excellence in investment banking?
The ECB as a regulator has shown itself very capable to think and act at a European level. Is the European Commission capable of undertaking this role in the banking sector in the role of a regulator? Is the European Commission capable to chart a direction for the European financial sector to exploit fully the opportunities of the single market while recognising that the interests of the individual economies need to be served?
Commercial banks across Europe, and in Malta, speak of the hindrances posed by the regulatory regime introduced after the financial crisis of 2008. This new regulatory regime is meant to safeguard the interests of the savers and the public at large. However, it needs to be supported by measures taken at the EU level to render the banking sector more supportive of the productive economy.