The real price of the “too big to fail” crisis
Does this sound like the reality that you and I are living in? Ten years ago our too-big-to-fail-banks were on the verge of failing and convinced us all that we needed to save them. Trillions of Euros were promised and more than a trillion spent to directly bail out Europe’s banks.
Understanding "Too-Big-To-Fail"
As the crisis in the Eurozone took hold governments were bailed out largely so banks could get their money out. To save the banks, enormous pain was inflicted on Ireland, Spain, Portugal and Greece. Democratic process were overridden to make those governments, and others, agree to harsh austerity as a condition for European rescue funds. Crippling austerity followed right across Europe as governments chose the worst way to revive their recessionary economies (or not really revive them as things turned out).
Denied fiscal tools the ECB launched an unprecedented program of lending to banks because they were in such poor shape they wouldn’t even lend to each other. That program that is still with us, so called quantitative easing, it rewards holders of financial assets but does nothing to ease our social and environmental crisis.
Meanwhile the human cost to normal people is enormous, with social indicators right across the spectrum from health to homelessness showing that normal people have paid the price (in 2014 the OECD said ‘the financial crisis has fuelled a social crisis … social consequences could linger for years’). Meanwhile bankers pay has started to rise again – just recently Deutsche Bank more than doubled the pay of the head of its ‘struggling investment bank’ to €8.6m by adding €250,000 a month to deal with Brexit! So maybe too-big-to-fail is not a problem for the chairman of the board and the head of the investment bank – but it certainly is for the rest of us.
Failed Reforms
Of course, in the immediate aftermath of the crisis the politicians made some noises about changing things. The Financial Stability Board came into being and each year publishes a list of Global – Strategically Important Banks of G-SIBs. To choose them they look not just at too-big-to-fail, but also at too-complex-to-fail, too-connected-to-fail and a number of other ways in which banks become Strategically Important (polite talk for too big to fail). Deutsche Bank retains pride of place near the top of this list as Europe’s too-biggest-to-fail bank along with HSBC.
Two too-big-to-fail banks
Which brings us to the potential merger between Deutsche Bank and Commerzbank. Deutsche Bank’s history is largely one of mergers and takeovers, from the turn of the 20th century onwards. Like many banks things went really wild in the 90s, especially with the purchase of Morgan Grenfell in 1989 and Bankers Trust ten years later. This propelled Deutsche towards the holy grail of the US “bulge bracket” banks like Goldman Sachs and JP Morgan – behemoths that dominate financial markets all over the world. It turned DB into a powerful investment bank financing projects from Trump to Las Vegas and made it an important player in most financial markets.
Up until the crisis struck. Since then things aren’t going so well. Nowadays the bank is veering from one recovery strategy to another and the financial markets collectively value their assets far below their individual accounting values.
Meanwhile Commerzbank followed a similar strategy but not quite so turbo-charged (or not quite so successfully perhaps?). Culminating in a merger with Dresdner Bank which did not result in increased stability (the same can be said for Deutsche’s giant merger with Postbank). So the merger in the end is between Europe’s 4th biggest banks (and leading G-SIB) and it’s 23rd biggest to make Europe’s 2nd or 3rd biggest.
A merger for job cuts and easier bail outs?
And what will this bring us? Credit flowing to environmental and social projects to tackle the social and environmental breakdown that threatens the very future of humanity and thousands of other species? No. What they promise is job cuts. The main rationale for the deal is to eliminate jobs in the less exciting world of retail banking, serving normal people and Germany’s famous SME sector (the Mittelstand). Except Deutsche already tried this when they bought Postbank (including part-bought, fully bought, thought about selling, changed their mind again, etc). A dollop of job cuts and handful of so-called fintech (e.g. shut bank branches and launch a mobile banking app) were supposed to be the recipe for domestic retail banking success but so far they can’t make it work. In short, its job cuts for bank tellers, pay rises for traders and top dogs.
It’s not that all bank mergers are bad, they can potentially give us stronger, better capitalised and better run institutions that better serve customers and the public interest. But mergers for the sake of size alone, between banks that are already too big to fail, will do nothing to solve these problems – they will only create new ones. And size alone might not be the only motivation…
Why would the German government support such a plan? After all a recent poll indicated that only 17% of Germans are in favour, with 43% against (the rest either didn’t answer or didn’t know). Well the first thing to know is that the German government is still a shareholder in Commerzbank (remember those bail outs?). One idea, put forward by the FT, is that the German government is willing to put up with the merger so that it could have an easier way to inject capital into the joint Deutsche-Commerzbank as and when it got in difficulty! So much for banks standing on their own two feet, so much for ‘never again will the public pay for the bankers losses’!
We also know regulators are worried about Deutsche Bank: not so long ago, the ECB was asking Deutsche Bank to run a stress-test that would test the bank’s capacity to withstand the separation and resolution of its capital markets activities. Nothing came of that, but it seems that instead of trying to diffuse the situation before a crisis, regulators are now reverting to their standard model of working how to clean up the mess when things go bad.
In short…
Deutsche Bank and Commerzbank are still too-big-to-fail. Merging them is only going to make matters worse and will likely cost normal Germans their jobs as well as closing branches for bank customers. It is the public that pays for too-big-to-fail. Meanwhile it would be game, set and match for the top investment bankers and bank executives who have little to lose, they carry on in a world where they think it’s ok to say that our banks are “too-small-to-scale” and not “too-big-to-fail” and governments back them up.
Duncan Lindo (@lindod1972 on twitter )
