Deutsche Bank: make like MetLife, and shrink
Deutsche Bank is not simply too big to fail, it is too big to function. It's time to shrink.
Deutsche is still counted among the six largest systemic banks but, unlike its US peers, restructuring has not helped it resolve its pre-crisis problems, and it cannot seem to make progress as a big, modern investment bank.
But smaller can be beautiful, or less ugly at least. In the insurance sector MetLife took the view that bigger was not better and, having focused and simplified its business, is now arguing it is no longer a systemically important financial institution.
Deutsche should aim to fall out of the Financial Stability Board’s G-SIB bucket, reducing its capital requirements by 50bp in one fell swoop. Such moves are not unprecedented. The FSB reduced the capital surcharge on Royal Bank of Scotland from 1.5% to 1%, while BBVA was knocked out of the list entirely last year.
In an effort to raise money and capital, Deutsche is already deleveraging. It has started work on selling Deutsche Postbank, its stake in HuaXia Bank and Abbey Life. But more needs to be done, including perhaps selling its prized asset management unit.
To be clear, reclassification by the FSB would not magic away Deutsche’s problems, but it might take them out of the spotlight. And by reducing the scope of its operations, the world’s most systemically dangerous bank might hope to sort itself out.
Investors do not judge banks on how far they have come — by and large Europe’s banks are far better capitalised than they were eight years ago. They judge them against their peers, and they judge them against the new regulatory standards.
Perhaps it’s time for Deutsche to stop batting in the big leagues.