Saturday, 25 May 2024

Deutsche Bank's woes continue

5 min read

By Kevin Luarca

Deutsche Bank tries to regain its lost ground after internal issues and consecutive losses plagued the bank.

  • Deutsche Bank, under the guidance of Edson Mitchell, expanded its investment banking and managed to climb its way to become Europe’s most valuable bank
  • The bank overvalued its worth during the financial crisis, starting a chain of problems
  • Internal conflict and a terrible company culture are still affecting the bank

German lender Deutsche Bank has reported its third straight annual loss of $621 million for 2017, a total shift from what it has achieved a decade before. For many years, the bank has been a prime example of success to European banking, reaching its peak in 2007 to become the world’s biggest bank. Even during the 2008 financial crisis, Deutsche Bank fared better than its competitors, and it managed to remain seemingly stable until 2015, when it reported a net loss of more than $6 billion.

Aggressive growth turned rapid decline

Deutsche was already a major player in the German baking industry in 1995 but was still left behind by Wall Street giants such as JPMorgan, Merrill Lynch, and Goldman Sachs. When Edson Mitchell came on board and took over as chief executive officer of the bank, Deutsche Bank took several aggressive high-staked steps in investment banking, integrating itself with London bank Morgan Grenfell, selling off corporate shareholdings, poaching financial experts from rival banks, and purchasing US Bankers Trust in 1999. Those decisions paid off well and the bank successfully became a major player in the financial industry. Deutsche Bank’s quick rise can be attributed to its ability to foresee long term-growth, and willingness to take-on high-risk investments. Unfortunately, their willingness to gamble also became the reason for their troubles.

In 2010, the bank was investigated for overpricing assets in large portfolio derivatives, which overvalued the bank by $1.5 billion and effectively softening losses they incurred during the financial crisis. “I blew the whistle because I gradually came to realise that this bank was only semi-legal,” said Ben-Artzi, ex-Deutsche Bank employee and whistle-blower who publicly revealed the misconducts of the bank. The bank defended itself by saying that there was no industry standard for measuring risks in the derivative portfolio during the financial crisis.

Similar to how the bank overvalued its assets, Deutsche has been so aggressive in its desire to grow that it pushed regulations to the limit, in favour of earnings and bonuses. The bank and its employees were so competitive that they did not only compete with the rest of the world, but also amongst themselves. 

A competitive internal company culture

The best example for this fierce internal competition came from Kim Hammonds, Deutsche Bank’s chief operating officer, who described the bank as the most dysfunctional organisation she has ever worked for. It was reported that the consumer and transaction arms of the bank competed so heavily with each other that they would purposely hold back information from one another. It was also revealed that ex-chief executive John Cryan also had disagreements with the bank’s chairman, Paul Achleitner, for not moving too fast in making the bank profitable again. Cryan was eventually ousted during an emergency board meeting called by Achleitner, and replaced by Christian Sewing. His appointment was supposed to signify the bank’s desire to re-strategise and reduce its investment bank, which failed to keep up with the likes of JP Morgan and Goldman Sachs. More than 300 US based investment bankers have already been laid-off and plans to grow its wealth management in Italy and Spain have already been announced by the German lender. Deutsche Bank, under Sewing, is clearly determined to make a major turnaround.

Still, a number of issues persisted. Sewing’s appointment was initially credited as a “unanimous” board decision. However, numerous reports suggested that several board members withheld their votes. Also shortly after Sewing assumed his new position, it was reported that the bank encountered an operational error, accidentally transferring $35 billion to one of its outside accounts, although the issue was immediately resolved.

Nonetheless, despite recent attempts to regain its lost ground andrewrite its future, and considering recent developments, the troubles for Deutsche Bank seems to be far from over.

Keywords: Regulation, Transaction Banking, Investment
Institution: Deutsche Bank
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