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Big Banks Discuss Their Future

October 10th, 2016 by

bankAt meetings in Washington, D.C. held by the International Monetary Fund (IMF) and the less well-known Institute of International Finance (IIF), many of the world’s biggest banks trained their attention on what the future of their industry may look like.

In some ways, the discussion amounted to an existential question for the entire banking system.

Focus on Deutsche Bank

Naturally, given the deluge of negative news surrounding Deutsche Bank (DB), Germany’s biggest lender and one of the most systemically important banks in the world, a great deal of the focus at these meetings centered on Deutsche Bank’s troubles.

Source: Elliot Brown via flickr. CC BY 2.0

Source: Elliot Brown via flickr. CC BY 2.0

DB is facing a massive $14 billion fine from the Department of Justice (DOJ) relating to its sale of mortgage-backed securities (MBS) in the lead-up to the financial crisis. The bank admits that it has set aside less than half of that amount as a “litigation fund” to deal with these sorts of pecuniary punishments. In the aftermath of the announcement, shares of the company’s stock cratered but have recently stabilized.

Beyond the individual difficulties facing DB, the spillover to other financial institutions and possible consequences for Europe’s banks in general have also warranted discussion. The building up of sufficient bulwarks against such contagion have spared most other major banks from the DB fallout. According to Reuters, “Since the crisis of 2008, banks on both sides of the Atlantic have shored up their defenses against future losses, adding hundreds of billions of dollars in equity capital and shedding loss-making assets.

International Outlook

gold-piggy-bank-brokenIn regard to shoring up defenses, U.S. banks are faring better than their European counterparts, however. Deflation and uncertainty about the future of the euro bloc itself have eaten into “wafer-thin” profits of European banks—not to mention the unprecedented introduction of negative interest rates by the European Central Bank (ECB). The IMF has warned banks in Europe—Germany, Italy, and Portugal in particular—that “urgent action” is needed to address problems with their business models as well as the large number of non-performing loans that are still on their books.

There are a few factors that have given American banks an advantage over those in Europe. They settled their fines from the financial crisis sooner, were able to get bad loans off their balance sheets more quickly, and enjoy the benefit of the U.S. economy outpacing Europe’s. The fallout from Brexit is also diverting some clients to the States, as well.

Nonetheless, it does appear that the existential question mentioned earlier is something that big banks across the globe are dealing with. How will the business of banking look in a world that has stricter regulations, a long (indefinite) period of low interest rates, and less money to be made in the traditional services of lending and payments? While the attendees of the IMF and IIF summits searched for answers, Reuters points to consumer lending and asset management as two key areas where banks ought to focus their attention to deal with growing markets in the future.


The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product.