Too Big to Fail? The Link Between German Banks and Industry
Deutsche Bank has had a rough few months. Not only did it lose almost half of its market capitalisation, but its debt rating has been put on a negative watch by Fitch. Then of course there is the question of a multi-billion dollar penalty in the United States. But Deutsche Bank is not alone in the current crises, although it is its most recognisable name globally. Commerzbank (Germany’s second largest bank) has also announced plans to cut almost 20% of its workforce amidst tightening margins.
Since 2008, many people have come to expect stresses in the banking system and job cuts as a general trend in the industry. However, what is critical about the events of the last few weeks is that, like in the case of American banks in 2008, Deutsche Bank is too big to be allowed to fail for Germany. With USD 1.7 trillion of assets, it is almost half the size of the German GDP. Politically even, a country like Germany which has been propping up some of the peripheral Euro zone economies can ill-afford to have a financial crises which puts the stability of the entire economic union at risk.
A friend in need
There is usually an informal understanding in international banking and finance which goes something like this: If a French company wants to expand to, say, the Philippines, they will make sure to give some of their business to BNP Paribas, Credit Agricole or another French Bank. It’s the same with most other countries and Germany is no exception. This was put into perspective by a quote by Jürgen Hambrecht, who is the chairman of the chemical company BASF, “The German industry needs a German bank that accompanies us out into the world”. Another German stalwart, the carmaker Daimler also came out in support of Deutsche Bank with CEO Dieter Zetsche remarking, “Deutsche Bank has a great tradition, a solid base and, building on that, also a good future. I’m convinced of that”.
Nobody doubts the massive success Deutsche Bank achieved globally and how well it did in alien markets. However, the outpouring of support from German industrial champions serves to show the symbiotic and critical relationship shared between banks and the industry. Companies like to have multiple banking relationships so that they can always get the best pricing but having one bank which shares their cultural and business values and accompanies them “out into the world” is still a priority. It gives companies the confidence to boldly venture into new markets, confident that they have a partner who would be willing to share the financial risk with them, just for the sake of their relationship. In the words of Siemens CEO, Joe Kaeser, “Management is pursuing the right goals and has our full support. Deutsche Bank for us is a long-standing and reliable partner”.
The future beckons
It is hard to predict what the future holds for Deutsche Bank. Some have hinted at state support while there is also speculation that top German companies may band together to take up a small stake in the bank. In the 1990s, Deutsche Bank had helped prop up a number of struggling German companies and ironically it seems that the cycle has come full circle.
The truth is that nobody wants to see Deutsche Bank struggle. German industry can ill afford to lose their international partner, the German state cannot allow it to happen and even competing banks would be negatively affected if such a thing was to happen. The right approach in such testing times is never obvious and never easy. However, Deutsche Bank can at least take some comfort in the fact that the customers that they supported in their hour of need are more than willing to return the favour.
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