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Deutsche Bank-Commerzbank union ‘risks negative side effects’

Deutsche Bank faces resistance to its plans for a merger with rival Commerzbank from Qatari shareholders, reports Bloomberg. They fear that any union would dilute their holdings, if Deutsche Bank is forced to raise equity in a share sale to help fund the deal.

A growing likelihood that the two German banking groups will merge to create a national banking champion is triggering various dissenting voices, including that of German economist Isabel Schnabel, professor of financial economics at the University of Bonn in 2015 and a member of the German Council of Economic Experts, which was established in the Sixties to examine the government’s economic policies.

Writing in the Financial Times, Professor Schnabel warns that the negative side effects of such a merger could be substantial, creating a bank that is too systemic to fail and too complex to manage. She suggests that Germany’s wish to address the problem of low bank profitability may involve breaking a taboo and permitting more fundamental structural changes in the sector

Schnabel notes that the once “big” German banks have shrunk in recent years, in the face of collapsing stock prices and meagre profitability. This is less of a short-term problem caused by low interest rates, but rather a structural problem going back to the a990s and perhaps earlier – although low interest rates exacerbate the situation worse and there is no prospect of any early rate hikes

Risky strategy

The German government, which reportedly had encouraged a Deutsche Bank-Commerzbank merger, now insists it is a private sector decision. although it still owns a 15.6% stake in Commerzbank following a rescue.

Schnabel warns that large banks of the kind that would result from this merger pose a financial risk. Even if the two banks already benefit from implicit government protection to some extent, such guarantees would be expanded substantially by creating a single German “national champion”. The small increase in capital requirements projected for the merged bank, due to its higher systemic risk, would hardly compensate.

“The merger is highly risky,” she adds. “Cost synergies may not be easy to achieve if they entail the redundancy of tens of thousands of people. It will be hard to convince the trade unions that such lay-offs would be unavoidable, even in the absence of a merger.”

Reduced refinancing costs are possible but would mainly involve shifting risks to German taxpayers. Deutsche Bank is already complex, thanks to its different business cultures of investment and traditional banking, while restricted by an outdated IT system. A merger with the more focused Commerzbank, which struggles with problems of its own, is unlikely to solve underlying structural problems.

By facilitating the merger of Germany’s biggest banks, the government risks consolidating its role in the banking sector and imposing further financial burdens on taxpayers if the combined bank runs into trouble.

“It would be much better for the two banks to sort out their problems by themselves, if needed with supervisory pressure,” Schnabel concludes. “For Deutsche Bank, in particular, this means shrinking rather than growing. Both banks also need to continue to cut costs. Most importantly, they must develop profitable business strategies, as others have done, even in Germany.”

Meanwhile, the German government would best address the problem of low profitability by reducing its involvement in the banking sector. Loosening the three-pillar system would also help to ease the segmentation of the European banking market, and potentially pave the way for profitable mergers in the future.

This item appears in the following sections:
Bank Relationship Management & KYC
Financial Risk Management

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