Can the crisis be over at Deutsche Bank? The immediate storm will pass if the US Department of Justice has dropped its demand for $14bn (£10.8bn) to cover mis-sold mortgage securities and is instead close to settling for a much lower sum. That outcome will calm market nerves and provide a vindication of sorts for John Cryan, the beleaguered bank’s chief executive, who always insisted that $14bn wouldn’t be the final figure.
Do not, however, think the story ends there. The past week’s drama at Deutsche, with Cryan issuing desperate memos complaining vaguely about “forces in the markets,” will not be forgotten in a hurry.
The episode has confirmed three uncomfortable truths. First, Deutsche is in a deep mess of its own making. Second, the entire big-bank business model looks ill-equipped to deal with the era of near-zero interest rates. Third, European regulators, by dithering since the 2008-09 crisis, have made a bad situation worse.
Few of Deutsche’s woes can be blamed directly on Cryan, who has been in his post for only 14 months. He, at least, has attacked the bank’s bloated overheads with greater vigour than his predecessors. But it is still disgraceful that, seven years after the crisis, Deutsche can still be a hostage to sins committed in the mortgage-backed securities market of 2005-07. The balance sheet should have been armour-plated by now. It has not happened because Deutsche has never been cured of its addiction to the feast-or-famine business of investment banking.
Even with the benefit of a lower settlement, Cryan may need to ask his shareholders for fresh capital. He will have to tell a better story than the current tale about a five-year shrink-to-fit programme of cost-cutting. Investors may now demand that Cryan uses even heftier machinery when making his cuts. They may also insist he finds a way to shed the underperforming German retail bank, Postbank, to simplify an institution that still looks overcomplicated and lumbering.
Yet the second factor – the low-interest-rate climate – probably reduces Cryan’s room for manoeuvre. Central banks’ aggressive easing on monetary policy, coupled with regulators’ insistence on healthier capital ratios, has undermined banks’ profitability. In a rational world, bonuses would be scrapped, or savagely reduced, to lubricate the wheels, but old habits are hard to kick. Deutsche shelled out €2.8bn (£2.4bn) in bonuses last year and even Cryan, who has himself complained about the madness of the system, will feel the pressure to buy the loyalty of his staff.
Yet the greatest culpability surely lies with European banking regulators, who have always danced around the central problem of the size of rotten loans on banks’ balance sheets. On some measures, European banks are sitting on $1 trillion of bad loans, defined as those in default or arrears. That backdrop makes investors instinctively suspicious of an industry not noted for its transparency.
Regulators have improved capital ratios but they still seem wedded to the idea that time is the best healer of banks’ balance sheets. Put another way, they hoped for the best. Such a policy was, perhaps, understandable when the eurozone was fighting debt fires in Greece. But the hard fact is that time has not allowed the bad debts to wash out of the system; now, if banks’ ability to generate capital via profits is curtailed, the problem could get worse. A sense of looming crisis will remain as long as investors fear that many banks, one way or another, will require yet more capital.
Deutsche is an extreme case of the malaise at the heart of European banking, but the question marks over capital extend to many German and Italian banks. European regulators could – and should – have confronted the problem years ago. By delaying, they have revived all the old fears about taxpayer bailouts. What taxpayers want is a financial system that is able to withstand unforeseen shocks. By contrast, Deutsche’s legal tussle with the US fell firmly in the “foreseeable” territory. If it could still cause last week’s chaos, regulators have been asleep.
Abandoning the EU could mean killing off the car industry
More good news for the British economy is anticipated this week. Health checks on the manufacturing, construction and services sectors are widely expected to show the bulk of the economy in rude health, adding further grist to the mill for Brexiters.
So far most signals have proved positive after the initial panic. Official figures last week showed the services sector, which accounts for roughly 75% of all economic activity, grew 0.4% in July on the previous month.
Pro-Brexit campaigners are understandably keen to point out Treasury forecasters were wrong to predict that a vote to leave the EU would send the UK into recession. Of course this view ignores the actions of the Bank of England, which needed to cut interest rates again, and new chancellor Philip Hammond, who was forced to renounce his predecessor’s aim of reaching a budget surplus by 2020.
But the threat of a hard Brexit and exclusion from the customs union still hangs over the business community. And when Nissan says it might scrap plans to build a new car in Washington, County Durham – one of the poorest parts of the UK – the problems faced by the government come into sharp relief.
For sure, it’s just one company, and one that could be said to be compromised in its view of Brexit by the controlling stake held in it by France’s Renault. Nevertheless, the car industry is a jewel in the UK’s crown and the Nissan factory is the most prominent diamond, boasting output equivalent to one third of the UK’s total car output.
The industry exports more than 80% of its cars and imports much of its components. Tariffs are its enemy. And that goes for Ford, Vauxhall, Honda and Toyota too. They cannot afford to scrap current investments: but the cost of a hard Brexit could be the slow death of one of Britain’s last great industries.
In dropping free inflight food, did BA make a bloomer?
In Michael O’Leary’s world, Ryanair is the cheeky upstart tweaking its rivals’ noses and stealing their customers with bargain-basement fares.
That sort of shtick doesn’t wash any more. Ryanair is a brute carrying more than 100 million passengers per year – Europe’s largest short-haul airline – and last week saw further confirmation of its grip over the airline industry. British Airways announced that it would jettison free meals on short hops and replace them with the option of buying Marks & Spencer sandwiches during the flight.
Cutting a deal with M&S allows BA to maintain an upmarket air, but this is another conversion by an aviation mainstay to Ryanair’s ways. Paying for inflight food would have been considered heresy by established carriers, and their customers, not so long ago. BA’s move shows that they are all children of O’Leary now.
guardian.co.uk © Guardian News and Media Limited 2010
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