Germany, a country where the needs of industry trump the needs of banks, is a notoriously difficult banking market.
By Yves Smith of Naked Capitalism
Normally, when banks look into merging, the impetus is either opportunism, whether well informed or not, or desperation. The only thing that differentiates the possible combination of Deutsche Bank, long the sickest man of Europe, and not all that healthy Commerzbank is that the desperation isn’t driven by the usual urgency, that a bank is about to keel over, unless, as some wags speculate, Deutsche’s first quarter numbers are coming in so bad that the bank needs to have some of credible plan to Do Something before it announces the results. One commentor at the Financial Times reported that “DBK was and is having trouble with wholesale funding spreads widening very strongly.” That suggests that the German giant, after so many years of limping along, may be too close to a tipping point for the officialdom to sit pat.
Bloomberg also highlighted high borrowing costs due to credit risk:
For Deutsche Bank, the urgency to address the situation is exacerbated by high funding costs and the risk of a credit rating cut. Chairman Paul Achleitner is said to see an expansion of Deutsche Bank’s retail deposit base — which Commerzbank would bring — as one way to lower funding costs.
Germany is a particularly difficult banking market. Readers may recall how Michael Hudson, in his classic article From Marx to Goldman Sachs, pointed out how it had been inconceivable to Marx that finance-oriented capitalists would win out because their way of operating was harmful to manufacturing. Germany embraced an industry-oriented approach to capitalism, while Britain sought to be the world’s banker. Hudson argues that an unfortunate and not widely recognized outcome of Germany’s defeat in World War I was it helped advance finance-oriented capitalism into a dominant position.
While I can’t prove it (and I hope those who know the German banking market better will pipe up), some of the difficulties Deutsche and Commerzbank are suffering appears to be the results of Germany being ambivalent about bank profits, as in on some level (and perhaps explicitly in some circles) seeing them as a drag on commerce if they rise above a very modest level. The reason I suspect this is that when I worked with the Japanese, who are also strongly mercantilist, manufacturing-oriented, banking profits were seen as a bad thing. Japanese banks had fabulously low returns on assets by global standards and were extremely lean. Sumitomo Bank, which was a bad boy by seeking to be Japan’s most profitable bank, was pretty close to Citibank in total assets, had half as many foreign branches and about 2/3 as many domestic branches. In the mid-1980s, Citi had over 100,000 employees. Sumitomo Bank had 16,000 and was planning to reduce the number to 14,500…