Deutsche Bank has been in the press for the wrong reasons recently, as it battles to reduce a $14bn penalty from the US authorities for mis-selling mortgage bonds.
However, unfortunately, the problems of Deutsche Bank don’t end there.
German banks are traditionally cautious, with the sector dominated by savings and co-operative banks and not-for-profit institutions. Deutsche Bank however, has followed a different path, aggressively pursuing expansion overseas in much the same way that Royal Bank of Scotland did. This started in 1998 with the purchase of the UK merchant bank, Morgan Grenfell, and continued with global expansion.
For a decade, the plan worked: profits soared and the share price rocketed. Deutsche Bank even managed to weather the financial crisis of 2008 without seeking help: but in doing so, critics argue, it became arrogant, less risk-averse and started to cut corners.
The bank is now paying a heavy price for those risks: the $14bn fine for mis-selling mortgage bonds comes on top of penalties for manipulating LIBOR rates and fixing gold prices. Unsurprisingly, the bank has few assets left – apart from a famously impressive art collection – and is struggling to retain its key staff.
The IMF has called Deutsche Bank, ‘the world’s most dangerous bank’ – not surprisingly because after 25 years of expansion, it is linked to a myriad of financial institutions around the world. As one insider at the IMF remarked, ‘If Deutsche Bank goes down, everyone else has a problem too.’
Right now, the person with the biggest problem is Angela Merkel. Deutsche shares have recently been at a 30 year low and the German government has been forced to deny reports of a bailout in which it would take 25% of the bank. With the hard line Germany has taken over any potential bailout of the Italian banks, things may get difficult for Mrs Merkel from here, but don’t think for a minute that Deutsche Bank is purely a German or a European problem: it has the power to affect us all.