Does Deutsche Bank deserve to be praised?
It’s been another week in which Germany’s largest financial institution had to confront its disastrous past once again. The long-awaited settlement with the U.S. Justice Department concerning rotten mortgage deals, finalized on Wednesday, will cost the bank more than $7 billion. But it was the harsh reproach by Attorney General Loretta Lynch that stung almost as much as the financial penalty: “Deutsche Bank not only deceived investors but also contributed directly to an international financial crisis.”
So far, so bad.
But there was also some hopeful news from the company this week. A day after the verbal slap in the face from the United States, the management board said it was renouncing its own financial rewards for last year and reducing the bank's entire bonus pool by around half.
Some will say that's not nearly enough. After all, the bank's horrific year of 2016, with all its impositions on shareholders, certainly makes an argument that not a single person at the bank deserves a gratuity for good performance.
But the decision by Chief Executive John Cryan and his colleagues is at least a signal that the bank is doing some re-thinking. It's a signal that is long overdue.
Deutsche Bank's dizzying ascent required a sort of mercenary mentality in investment banking.
With the expensive settlement in the United States, the bank is atoning for its sins of the past. The misdeeds in the U.S. real-estate market, for which it is paying so dearly, date back to the years 2005 to 2007. But then there's the culture behind the seemingly endless list of scandals that has marked Germany's largest financial institution for many years.
The need for a cultural change is part of the legacy Mr. Cryan inherited from his predecessors; his task is to complete this project as quickly as possible. That won’t be possible without sacrifices – not just from bankers but from the bank itself.
In decades past, Deutsche Bank accomplished a rapid rise in investment banking. From what was back then the provincial town of Frankfurt, it thrust its way over the course of the 1990s into the top league of global financial institutions.
But that dizzying ascent required a sort of mercenary mentality in investment banking. An underdog seeking to fight its way to the top has to punch even harder than the Wall Street bankers who are not exactly known for their gentle ways.
If the new chief executive really wants to put the era of scandals behind him, then he must actually change the culture at Deutsche Bank. An executive at a Frankfurt rival offers – anonymously, of course – an original suggestion: By simply eliminating bonuses entirely for two years, the risk junkies among the bankers would disappear on their own.
Even if the bank isn’t proceeding so radically, cutting the bonus pool by half is a respectable step in the right direction.
Investment banking will continue to be a core strength of Deutsche Bank, but it needs to be a different kind of investment banking.
Whenever there’s talk of slashing bonuses, bank executives almost reflexively repeat the same argument: It may be the right thing to do in principle, but we need to remain competitive with our rivals. Since that kind of logic applies to all banks, it’s safe to assume that little would have changed if bank supervisors and politicians hadn’t intervened after the financial crisis, imposing caps on rewards and demanding that payments be stretched out over several years.
Yet a new, more modest bonus culture not only helps anchor what is overall a healthier corporate culture. It can also support the search for the kind of innovative, sustainable company strategy that Deutsche Bank is still fighting to develop.
Mr. Cryan’s predecessor Anshu Jain believed that trading in bonds, currencies and derivatives, which was so important for Deutsche Bank’s rise to a top investment bank, would over time restore its former strength. That bet has clearly not paid off. The strict guidelines of the regulators since the 2008 crisis have undermined that old business model.
In the future, investment banking will continue to be a core strength of Deutsche Bank, but it needs to be a different kind of investment banking, requiring bankers with new qualities. If the chief responsibility of past “rainmakers” was to land as much business as possible – to ratchet up revenues come hell or high water – today the focus is on getting a grip on costs and optimizing the product mix and processes.
This doesn’t just sound more sober and less glamorous – it is. The era of the Masters of the Universe, whose cockiness and excesses led an explosive financial crisis, is (hopefully) finally over.
Today there is a need for new bankers. At the very least the bonus reductions at Deutsche Bank serve as a first sign of that undeniable fact.
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