Writing in the Financial Times yesterday, Josef Ackermann – CEO of Deutsche Bank (NYSE:DB) – argued that larger banks are not more dangerous to the health of financial system (and thus to taxpayers) than smaller banks. According to him, system danger arises primarily from the degree to which banks are “interconnected”.
Inadvertently, Mr. Ackermann makes a strong case for banking system reform. You can break this down into five parts.
1) There is no “either/or” structure to the discussion of size vs. interconnectedness vs. leverage vs. herding behavior of management. “All of the above” is a completely plausible answer, and Mr. Ackermann helps to make the case that relatively small banks also need to be addressed.
2) No doubt smaller banks will not be thrilled by his point – we should expect more Robert Wilmers-type diatribes, next time against Deutsche rather than Goldman. This, of course, is exactly the kind of division within bankers’ ranks that you need to push for meaningful reform. Divide and reregulate effectively, before they close ranks.
3) Mr. Ackermann nowhere mentions that Deutsche Bank’s leverage was, at its peak, judged by some market participants to be around 50:1, making it arguably the biggest hedge fund in world history. Deutsche’s response in 2008 was that such estimates were based on mismeasurement and its true leverage was “no higher than that of Citigroup.” Ouch.
4) Deutsche’s experience, its effective bailout by the German government, and the current misery of European banking more broadly emphasize the need for much stronger capital requirements across the board as part of our eventual response. Of course, these can be higher in percentage terms based on size, interconnectedness or anything else you want to worry about; but all of banking has become too dangerous (to your fiscal health). European-type loopholes, such as “off-balance sheet” activities, must be removed and – as Mr. Ackermann implicitly acknowledges – only action at the level of the G20 can really ensure cross-border bite on such rules.
5) Mr. Ackermann’s endorsement of the current G20 action plan is further confirmation that this plan does not constitute serious progress. Unless and until you get agitated pushback from the world’s biggest bankers, your reform efforts are not real.
Interestingly and surprisingly, Ackermann also makes only a weak case for large banks (in his last paragraph, which seems tacked on awkwardly). If this is the best his staff can do, the case for very big banks is in no way compelling.