The Pros, the Cons and the Thorns in the Merger of Deutsch Bank & Commerzbank

Since the start of the global financial crisis of 2008 due to the bankruptcy of the investment bank Lehman Brothers Holdings Inc., the banking system of the Eurozone/EU and Germany-a member of the Eurozone/EU-was pressed terribly because of their exposure to U.S. securitization mortgages, known to all as “toxic bonds” which caused the specific financial crisis. 

by Thanos S. Chonthrogiannis-https://www.liberalglobe.com

The open “wounds” caused by the financial crisis of 2008

The consequences of the financial crisis of 2008 are becoming visible until today as Germany’s largest bank Deutsche Bank has a timeless problem in creating sustainable profits on a stable basis. The size of Deutsche Bank in terms of capitalization, its presence on all continents of the planet, and especially the presence of its investment arm in the U.S. makes it a world-size bank.  

Deutsche bank’s financial exposure and its association with other banks due to its investment schemes and financial investments forced the International Monetary Fund-IMF (2016) to classify it as the world’s largest risk for the global banking system in case of its collapse. This could happen as the accusations facing the bank in the US cause the imposition of a very high fine from US justice which can shake up any attempt to make a profitable recovery.

On the other hand, the second largest bank in Germany, Commerzbank, after its forced re-capitalization and rescue due to the financial crisis of 2008, it has not managed to redeem with its own funds a percentage of shares of more than 15% currently belonging to the German state. As a result of this event, the German government is the largest shareholder of the bank, in a way defining the future of the bank.

The pros of the merger between Deutsche bank and Commerzbank

The German government of the Chancellor Angel Merkel presses both banks to merge between them to more easily heal the wounds caused to them by the financial crisis of 2008. The German Government’s expectations are that through this gigantic merger will be achieved:

1. Increasing economies of scale due to the drastic reduction in costs and complementarity of the actions of the merging banking schemes.

2. In order to be successful this type of banking mergers should always be based on strategies that will give a greater degree of competitiveness and cost savings to the new created scheme.

3. Avoidance, in accordance with current circumstances, of any predatory takeover by the abroad of these two banks.

4. Painless treatment by the new bank in any state of recession that the German economy can display. In addition, the new bank will be able to cope much more easily with any future fine imposed since the Deutsche Bank has open cases with the Justice of the United States.

5. In Addition, the new large figure will be easier to finance the German economy.

The cons of the merger between Deutsche bank and Commerzbank

The negative effects of such a merger are limited but equally important since most of them have to do with the capital adequacy and culture of any new banking scheme. In more detail,

1. The financial value of this new bank would have reached close to €25 billion, while its assets (€1.9trillion) would exceed 1/2 of GDP of the German economy (German GDP, €3.3trillion, 2018, Source: Eurostat). This means full control of the German economy and German banking market equally (monopolistic status) but in the European and global market this new bank will be transformed into a major competitor, respectively, which currently the European economy and market is dominated only by the French bank BNP Paribas.

2. Because of the problems that these two banks have inherited from the financial crisis of 2008 and we have summarized above, the executives of the two banks will must first find a solution to these problems (e.g., high risk investments, overdue loans, etc.). The solution would be, for example, to be made by both banks first, before this merger takes place, a “bad bank” and transferred to this bad bank any type of high-risk investments, overdue loans, etc. which could hurt the balance sheet of the two merged banks.

Then all the products of the two banks should be examined by first assessing them at 2018 prices and then separating which of them can, for example, through restructuring, become viable. Then whatever assets and liabilities of the two banks judged to be of high risk and unsustainable can be transferred to the bad bank to be sold to the interested parties-investors at low prices.

Once this is achieved then these two banks net of “burdens” of the past will be able to merge and then to proceed in an increase the share capital of the new scheme. If this process is not implemented, the problems of the two banks will inherit the new created-like bank.

3. If the procedure described in the above paragraph 2) is not applied, then what will be the size of the index Loans/Deposits of the new bank? If this index has value more than 110% then in a recession of the German economy or in a very high fine, this indicator and given that the problems of the two banks inherited by the new bank have not been “cleared”, will eject this indicator above 130%.

In this case the new supranational bank will have to accept re-capitalization procedure with a huge amount of capital that will of course burden the German Federal State budget and the German taxpayer.

4. At the same time and after the conclusion of the re-capitalization procedure the new share of the German State (Government) would increase drastically in the new bank making the German State the main shareholder of this new bank. In this way the new bank would be controlled by the German government, with the consequence that the financing of the German economy was fully controlled by the state.

This poses many dangers, apart from the fact that the German economy and competition equally is becoming state-controlled and fully controlled by the German State. Because every German government could direct funding to friendly entrepreneurs by excluding other entrepreneurs who are hostile to it.

If take place the scenario which was presented in the above paragraph 3), in case of a re-capitalization of the new bank it would be difficult for investors to invest their funds in the new bank’s stock.

This will happen because no sane investor chooses to invest his funds in companies that carry on their balance sheets damages due to their past, which damages not only has not been eliminated but continues to exist and no matter how tempting could be made the prospective investment to them.

5. Any merger take place will have to be spent large sums of capital either for the “marriage” of the two banks’ information systems or for the installation of a new information system in the new bank.

The thorns of the merger

The different corporate culture presented by the executives and administrations of the two banks will create malfunctions in practice. For example, the Commerzbank is known for its specialization in the financing of medium-sized companies that form the basis of the German economy.

On the other hand, the very small presence of an investment department in the US and not only US, shows that the bank focuses on the most profitable operation and specialization of being risk-averse in the culture of its investment arm.

The Deutsche Bank and its investment arm operate more in the standards of large US and generally Anglo-Saxon type investment banks which are characterized by the slogan that the greatest risk gives the greatest performance-return (the culture of risk-lovers).

But in a bad year in terms of returns-performances, the investment arm of the new created bank can increase the damages, which in turn these damages could overcome any profits presented by the other sectors of the new bank. Will the Commerzbank executives accept that? 

Thanos S. Chonthrogiannis

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