In view of Europe's chaotic banking crisis, analyst Simon Nixon pointed out that the current Deutsche Bank is also a mess, while the Deutsche Bank crisis may be behind the "financial globalization" crisis.
Deutsche Bank crisis may mean "Financial Globalization" crisis
Nixon pointed out that, unlike the pressure on the banking industry in the past, Deutsche's share price has fallen sharply in recent weeks. But the reason is not that investors are worried about credit losses and sudden evaporation of liquidity, given that Deutsche Bank has received more than 20 billion euros in aid at no cost.
And even if the US Department of Justice wants to impose a $14 billion fine on Deutsche Bank, causing the market to sell off Deutsche shares recently, it is not because investors are worried about Deutsche Bank's lack of capital. At the heart of Deutsche's problem is that the market has lost confidence in the banks' global business model.
Nixon also pointed out that investors now doubt whether banks' profitability is in line with share prices, especially when regulators demand more, and the profitability proved by the number of shares held by banks is also worth rethinking.
Deutsche's profits have been more tightly regulated in recent years. In the environment of global negative interest rates, flattened yield curve and slowing corporate activity, higher capital requirements undoubtedly lead to lower asset management fees and lower financial transaction income in the banking industry.
Moreover, the symptoms of European banking seem to imply a broader globalisation crisis, which has had a particularly severe impact on international banks. The lesson of the global financial crisis is that the highly globalized financial business does not spread the risk well, which creates a channel for the spread of the crisis, which will lead to the failure of taxpayer banks and the sudden stagnation of the economy.
The globalization of financial business faces several challenges
The long-standing anti-globalisation movement has also become a fashionable political topic, with financial policymakers vowing to regain control and force banks to avoid risk through higher levels of capital and protections. But as a result, the fragmentation of the financial sector has piled up banking costs (including Deutsche Bank, which has to put its huge US operations in its US subsidiaries). Of course, Brexit could also lead to further fragmentation of the financial sector.
At the same time, banking revenues have been hit by a double whammy of stagnant global trade and dwindling financial transactions, making investment banks around the world feel "poor". Low inflation and stagnant wages have also created a political atmosphere in which companies are reluctant to invest and governments are reluctant to pursue higher productivity.
The global negative interest rate and yield curve are flattened, and these two trends also reflect the challenges faced by globalization. Ultra-low interest rates reflect the inability of central banks to boost domestic inflation in a globalised economy and a further hint that the globalised Deutsche bank's business model is extremely fragile.
Moreover, Deutsche Bank has paid a high price for its dream of global hegemony. Deutsche Bank is based on German corporate lending, but it also wants a piece of US investment banking, which means profits at the world's largest investment bank will be cut. Deutsche Bank is trying to gain market share through aggressive pricing strategies and to fight for reputation through "stupid money throwing". But as regulatory measures hit the investment banking industry, Deutsche Bank became one of the last banks to hit the wall.
The solution to the Deutsche Bank crisis is easier said than done.
Of course, policymakers can ease the pressure on Deutsche Bank at any time, simply by providing clear long-term capital regulatory targets and setting fines so that they do not endanger their viability. Deutsche Bank could also save itself through more aggressive cost-cutting.
However, the problem of banking business model is still "difficult and complicated". After all, Commerzbank, Deutsche Bank's domestic rival, announced last week that it plans to cut jobs by 20 per cent, hoping only to achieve a 6 per cent return on equity by 2020.
Faced with long-term low returns, Deutsche Bank and other banks may be able to ease by shrinking their balance sheets and withdrawing from low-margin businesses, but this is easier said than done.
It may take years for banks to exit low-margin businesses, during which time their operating costs will soar, which will further lower their returns. At the same time, poor integration plans, industry overcapacity and capital surcharges formed by new regulatory thresholds have also hampered banking profits.
In addition, as the banking sector shrinks, given that the risk of credit supply will be reduced, financing costs will rise and banks will charge higher fees, which will increase the pressure on global economic growth, which is itself a global crisis.