Deutsche Bank's announcement that it will close its equities division, cut €6 billion ($10.1b) of costs and axe 18,000 jobs sounds extreme. But for Germany's biggest bank, which has muddled through the decade since the financial crisis with only incremental reforms and no credible vision for the future, the plan represents the kind of radical action that is needed.
A string of scandals and a persistent record of anaemic profitability have pushed down the share price to record lows. But while chief executive Christian Sewing should be applauded for a decisive plan, it would be premature to celebrate success.
Announcing reforms is one thing, implementing them flawlessly is quite another. The retreat from equities, the central plank of the plan, is logical. Deutsche's heritage is as a fixed-income house, and it was always an also-ran in equities. The unit loses about €600 million a year.
Yet simultaneously maintaining other parts of the group's investment banking operations, such as its equity capital markets unit — which launches flotations and issues new shares for companies — will be far from straightforward. A share-issuing client of an investment bank would normally expect the bank to facilitate the continuing trading of those shares.
Without that service, the client may go elsewhere. Similarly, an asset management client may want to use the same investment bank to trade equities and bonds.
Given the risk of this kind of business attrition, the bank's revenue projections, implying annual growth of up to 3 per cent, look ambitious.
The other big headwind will be the operating environment. To keep revenue growing, and simultaneously offload unwanted assets via the new "capital release unit", Deutsche will need markets to remain benign. With an economic downturn widely expected, the restructuring plan could well come unstuck at some point between now and 2022, when implementation is due to be completed.
This is not to say that Sewing's plan is wrong-headed. In fact, after being one of the last global banks to respond decisively to the market and regulatory changes caused by the financial crisis, with its restructuring Deutsche may actually set the agenda for others.
Its decision to exit the equities business reflects not only the weakness of its own franchise but also a broader truth about the declining importance of this area of banking.
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The increased regulation imposed on publicly traded companies has coincided with a boom in private equity funding, spurring a dramatic decline in the number of public companies that rely on equities bankers to trade their shares.
In the US, the number of publicly traded companies has nearly halved in 20 years, according to the World Bank. In Germany, the tally is down by a third in 10 years. Other banks will not be immune to the pressures that Deutsche has faced.
For Europe's political economy, there are implications, too — all the more so in the light of Brexit. EU policymakers may welcome the shrinkage of Deutsche Bank from a systemic risk point of view. But if, as the EU has posited, European companies should shift their funding away from a reliance on bank borrowing towards capital markets, a local investment bank would be a natural partner.
The retreat of continental Europe's biggest homegrown investment bank comes at a bad time for the EU, just as pressure mounts for a capital markets union. But Deutsche could no longer escape the need for taking radical action.
Written by: The editorial board
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