(Bloomberg) -- Germany’s economic downturn is reigniting fears in the government of Angela Merkel about the future of its two largest lenders.
The government’s push for Deutsche Bank AG (DE:DBKGn) and Commerzbank AG (DE:CBKG) to hold merger talks created a massive backlash and eventually failed. Potential buyers are steering clear. Now, the administration is running out of options just when a looming recession fuels fears Germany’s banks might not be prepared to weather another crisis, according to two senior officials with direct knowledge of the government’s stance. The German Finance Ministry declined to comment.
"If the economy enters into a recession, the banks are the first to get hit," says Danyal Bayaz, a Green party lawmaker on the lower house finance committee. The government can’t do much at this stage other than to launch a fiscal stimulus program to mitigate the risk of a recession, he added.
The plan to merge Commerzbank (DE:CBKG) and Deutsche Bank (DE:DBKGn) has been put on ice but not completely discarded, one person said. The idea would likely be resuscitated if either lender were to face a real threat to its future, the person said.
Deutsche Bank (DE:DBKGn), which once had ambitions to become a global player, recently announced painful restructuring that aims to cut a fifth of its workforce and rip away a big chunk of its trading operations. Its renewed focus on German exporters comes just as the trade war between the U.S. and China heats up and President Donald Trump has German car makers in sights.
New banking troubles could have serious repercussions for domestic politics as well, with the governing parties at historic lows in the polls and under attack from populists and environmentalists. With Merkel’s coalition hanging by a thread, a handout to bankers would be a nightmare for the chancellor as she seeks to shore up her legacy.
Earlier this month, the government, which holds the largest stake in Commerzbank (DE:CBKG), sought outside advice about the strategy of the bank led by Chief Executive Officer Martin Zielke. Limiting the government’s room to maneuver is the fact that Finance Minister Olaf Scholz spent much of his political capital backing a failed merger attempt between the two earlier this year.
A restructuring plan presented by Deutsche Bank (DE:DBKGn) and expected from Commerzbank (DE:CBKG) this fall may reduce costs in the long run but would do little to shield the banks should there be a sudden slump in activity, one of the people said. In fact, restructuring, which foresees costly compensation payments, slows down the planned buildup of a capital base at a time when investors are becoming increasingly risk averse, the official added.
Germany’s financial stability committee, made up of representatives from the central bank, the finance ministry, and the bank regulator, has repeatedly warned that the risk of recession for the German banking system shouldn’t be underestimated.
Bad Time
The slowdown comes at a particularly bad time for Commerzbank (DE:CBKG) and Deutsche Bank (DE:DBKGn). Both have been struggling for years to achieve a meaningful level of profitability. In the case of Deutsche Bank, the restructuring coincides with a thin capital cushion. A strong rise in credit defaults could force them to ratchet up their loan loss provisions and further deplete their capital.
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At the time, critics said the government was being too heavy-handed, that it wasn’t size but nimbleness that matter in banking.
Subsequent exploratory moves earlier this year for potential European mergers involving Deutsche Bank (DE:DBKGn) and UBS, as well as ING Groep (AS:INGA) NV, UniCredit SpA and Commerzbank (DE:CBKG) didn’t prosper. Since then the appetite for M&A has subsided significantly, with banks shifting their medium term priorities amid the economic slowdown, another of the two officials said.
The fate of Germany’s major lenders mirrors a broader debate as to whether sufficient fixes have been made to the financial system since the 2008 crisis. The European Central Bank in March published research showing taxpayer money was now better protected than a decade ago but that despite "significant improvement" the "regulatory work is not yet complete." The Basel-based Financial Stability Board commissioned its own probe, which is being led by Bundesbank Vice-President Claudia Buch. It’s expected to be published in late 2020.
