Just ten days after warning of huge upcoming losses, Germany’s largest lender, Deutsche Bank, has announced major organizational changes. What’s obvious right away is that investment banking is to take a hit.
After write-downs translating into an estimated loss of 6.2 billion euros ($7 billion) in the third quarter, John Cryan, Deutsche’s new co-head, is zeroing in on the bank’s structure.
“We want to create a bank that’s better controlled, more cost-efficient and more strongly focused,” he said after an extraordinary meeting of the board of directors in Frankfurt last weekend.
Details of the plan will only be announced on October 29, but the general direction is already clear after Sunday’s board meeting. The investment banking division (“Corporate Banking & Securities”) will be split into two, and several key executives will have to leave.
“It seems that the trading part will be spun off or put into a different part of their organization, separate from corporate banking”, Jan Pieter Krahnen, professor and head of the Center for Financial Studies at Frankfurt’s Goethe University, told DW. Krahnen interprets this as a sign that Deutsche Bank was now “swinging into the approach taken by the European regulator. That approach means creating more resilient and stronger financial institutions.”
Investment banking split
By separating trading from traditional lending, Deutsche Bank would move a step in the direction outlined in 2010 by the Liikanen report, named after a group of exports headed by Erkki Liikanen, governor of the Bank of Finland. Such a separation, the report argued, would make it easier to contain problems in the trading division, seen as the main culprit in the financial crisis that erupted in 2007.
This approach is “mainly driven by events and not really logical,” said Klaus-Peter Burghof, professor of banking and finance at the University of Hohenheim.
“After all, the next crisis might erupt in a different area.” But he conceded Deutsche Bank was following other institutions trying to send a clear signal that “investment banking is not a playing field, but a product that should serve customers.”
The details of the new trading unit are yet to be announced, and the big question – according to Jan Pieter Krahnen – is whether it “will be separately capitalized” in order to become “an important player in the European financial markets.”
But it’s already clear that Deutsche’s restructuring is a huge break with the firm’s recent history. For many years prior to the financial crisis, the lender’s investment banking had contributed the bulk of its profits. Anshu Jain, the former head of investment banking, made it onto the bank’s top post before being forced to resign in July.
While investment banking had long looked like Deutsche’s ticket to a leading position in global banking, it doesn’t look nearly as good in hindsight.
“Most of the non-performing loans that are being written off now come from investment banking,” Hans-Peter Burghof told DW.
The bank is also mired in around 6,000 different litigation cases and was fined a record 2.2 billion euros in May for its involvement in interest rate rigging, damaging its reputation.
“If you look at all this and do the maths, you will see that investment banking was not really that profitable,” said Burghof. “The profits were fake, because the losses were just moved into the future.”
The asset management division will also be reorganized, the bank said. An expanded board of directors, known as the Group Executive Committee, will cease to exist. Also, 10 of the 16 committees linked to the board will be done away with. Several top managers are set to leave the firm, among them the co-head of investment banking, Colin Fan, and the head of asset management, Michele Faissola.
Both had come under pressure for not doing enough to clear up recent scandals, including the rigging of interest rates in London and charges of money laundering in Moscow.
“Deutsche Bank is saying to regulators and authorities we will fully cooperate with you – and those who don’t can no longer work for us,” said Burghof.
On October 29, John Cryan is scheduled to announce more details about the bank’s structure. He’s to become Deutsche’s sole CEO in May 2016, with Jürgen Fitschen giving up his current position as co-chief executive.