Lessons from Deutsche Bank

The global financial markets have been rocked by the latest news from German banking giant Deutsche Bank. It was slapped by the U.S. Justice Department with a fine of $14 billion for selling toxic mortgages during the financial crisis nearly a decade ago. Its share prices nose-dived and financial markets shook on fears of another shockwave as perilous and widespread as the Lehman Brothers’ collapse.

Jitters were somewhat eased after the bank is said to be trying to cut a deal to scale down the fine to $5.4 billion and the German government could inject an emergency liquidity fund to the bank.

The 146-year-old Deutsche Bank is Germany’s biggest and one of the largest investment banks in the world. It is the sixth in global rankings, but until a few years ago, it had been one of the top three. The bank became nearly the largest in terms of assets a decade ago and it still commands a 100,000-strong workforce in 70 countries.

But it became a ticking bomb after it was embroiled in a series of scandals and management flops since the financial crisis. The European stock market suffered a rout early this year upon reports that the bank might not be able to afford to pay the interests on its Coco bonds.

As a result, the bank’s stock prices are record-low levels upon reporting astronomical losses last year. It will also be fined for manipulating foreign exchange rates.

The International Monetary Fund named the bank as the most risky bank in the world. Size does not speak for competitiveness. Deutsche Bank’s woes stemmed from various factors. When interest rates fell below the negative territory after being long kept at zero percent, banks no longer could generate revenue from savings and loans. They had limited access to the investment banking sector due to stronger regulations from various governments. They were heavy giants that could not accommodate to the rapid changes in today’s society.

Local banks must draw lessons from the ordeal with Deutsche Bank. Koreans are most comfortable in a world of Internet and mobile banking. Visits to banks have become increasingly unnecessary. They have become less crowded and people are taking out less money from ATMs. Internet-only banks will soon open. But local banks remain complacent. They rely on cheap mortgage loans to ride on the record low interest rates. Few have any plans for the long-term and viability of the financial sector as they mostly chase short-term profits and selfish interests. The shaking of a multinational giant should be a wake-up call to them. None of them are safe.

JoongAng Ilbo, Oct. 4, Page 30