Page 17 - Monocle Quarterly Journal Vol 1 Issue 1 Q4

If one has any doubt about this, simply analyse case-by-case the banks that failed during and post-Crisis. Of the top 1000 banks listed in the Banker magazine for 2007, more than one hundred of them failed or were bailed out. In very few cases did any of these banks burn through their capital. eir declining capital ratios were simply the precursor to the liquidity squeeze that followed.
Going forward there is a further deleterious aspect to the raising of the capital bar for banking. To explain: in recently released 2nd quarter earnings reports, European banks have underperformed relative to their US peers. ere are several reasons, not least of which is the severe market shock of Brexit. But the two primary reasons are clear. First, that interest rates have declined to unprecedented levels, squeezing margins, and second, that large investment banking groups – Deutsche as a stand- out example – have slashed their investment banking balance sheets over the past several years to increase their CET1 ratio.
Deutsche Bank in particular has battled for some time to increase the numerator of the CET1 ratio, appealing to sources such as Qatari investment funds for several rounds of capital injection. More recently, however, in order to ensure that the bank passes stress tests and to appease analysts, their leadership has successively either sold o or allowed natural run-o of existing lending to organically reduce their balance sheet. Either way: a smaller balance sheet means less pro t. eir strategy to grow capital-light businesses, such as advisory, also seems to have failed – at least in the short term – owing to generally poor economic activity in Europe, as well as to di culties inherent in such businesses, where success is dependent on key rainmakers, and chunky deals coming through the pipeline.
To return to the chat room contributor’s question: of course the fate of Deutsche Bank as an individual rm – whose largest shareholder is now the Qatari royal family – is probably of little interest to overall society. What is of far more interest to overall society – or at least it should be – is that a bank such as Deutsche Bank has made a series of strategic decisions, and a series of missteps in the execution of these decisions, that are based primarily on a fear of breaching a new and arbitrary capital requirement level, rather than on sound business rationale. is is bad not because investment bankers will lose their jobs. is is bad because banking is critical to economic growth.
Regulators in their fervour have reined in banks, it is true. But they are also now hindering economic growth.
“ is is bad not because investment bankers will lose their jobs. is
is bad because banking is critical to economic growth.”
BANKING ANd the ShAcKleS of the cApItAl RAtIo
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