Unlike other big banks, Deutsche Bank can’t shake its problems

Thursday, The Wall Street Journal reported that the Federal Reserve had designated Deutsche Bank’s U.S. banking business as being in a “troubled condition.”

As the Journal observed, this is a rare censure for a major financial institution that has contributed to constraints on its operations.

{mosads}The bank’s U.S. problems are just one aspect, though, of the German bank’s long-running and seemingly intractable problems across the entirety of its banking activities. The bank remains well-capitalized, so it is not in danger of failing, but U.S. regulators have been troubled by its continuing inability to resolve its problems.

Deutsche Bank is one of the world’s largest banks, with a long and storied reputation. For decades, it was seen as a pillar of strength in Germany, both for its retail banking activities as well as the investment banking services it provided to German businesses. Many saw the bank as stodgy, yet very strong financially.

Until Deutsche Bank acquired New York-based Bankers Trust in 1998, it had a relatively limited presence in the United States. Before that deal, Bankers Trust had shed its retail banking activities so it could focus on its investment-banking business — securities trading and raising capital for corporate customers and governments.

After that deal, Deutsche Bank’s U.S. presence was comparable to Goldman Sachs or Morgan Stanley, yet it was not as well established as they were in U.S. investment banking. At the same time, it had no base in the United States of individual depositors and small-business borrowers to cushion the vicissitudes of investment banking.

Citigroup and JPMorgan Chase, major players in the investment-banking business, benefit from having substantial, relatively stable retail banking businesses that give them a balance that Deutsche never established in the United States.

Like other banking companies, Deutsche Bank suffered heavy losses following the financial crisis of 2007 and 2008.  During just the 2015-17 period, Deutsche Bank lost over $10 billion, triggering turmoil within the bank and turnover within its management ranks.

Unlike most other large banking companies, Deutsche Bank has not been able to move past its problems. Those never-ending issues earned the bank the wrath of its U.S. regulators, leading to its designation as a troubled bank.

Just last month, Deutsche Bank replaced its CEO of less than three years, John Cryan, with Christian Sewing. While Cryan was an outsider, having worked for other banking firms before joining Deutsche Bank as CEO, Sewing has been with the bank his entire career. 

With his extensive insider knowledge of the bank, Sewing should be well-positioned to continue the turnaround that Cryan launched. Key to that turnaround will be right-sizing Deutsche Bank within Germany, which may lead to yet more branch closures, while restoring a positive relationship with its U.S. regulators.

An open question is what will be the character of Deutsche Bank’s presence in the United States several years from now. It is unlikely to build a retail banking business even as Goldman Sachs and Morgan Stanley take cautious steps in that direction.

Instead, the bank probably will focus on a reduced range of investment banking activities in the United States that fit well within its global banking activities, especially as those activities focus on serving the global banking needs of its German customers.

Given its prominence in Germany, Deutsche Bank almost certainly will remain an independent institution as a flagship of the German banking industry. Hopefully it will soon move past its problems of recent years so that it can properly serve its customers while being a forceful competitor in the financial marketplace.

Bert Ely is the principal of Ely & Company, Inc., where he monitors conditions in the banking industry, monetary policy, the payments system, and the growing federalization of credit risk. Prior articles by Ely on banking issues and cryptocurrencies can be found here. Follow Bert on Twitter: @BertEly