And after the crisis?

An attempt to answer the questions the financial crisis left unanswered

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Europe on the rise

Data published this Wednesday by the European Central Bank show clear signs of recovery for the Eurozone. The measures taken by European politicians during the last months seemed to have reassured the markets as a breakup of the Eurozone is becoming more and more unlikely. Are we out of the woods yet or are the latest numbers just a momentary pike in what still seems to be the world’s most volatile economic area?

A report by the ECB saw the M3 index, the bank’s preferred indicator of Europe’s health, rise by 3.9% – the fastest rate since early 2009. M3 describes the broad money supply in the member states and shows a clear upwards trend. Europeans have put €105 billions into their bank accounts and managed to take off a lot of pressure of the troubled financial sector. Although the findings seem to suggest that Europe’s “core” countries – Germany, France and the Netherlands – were mainly responsible for that sharp increase it also testifies that deposits have increased in Ireland and Greece which might indicate that the worst part of the crisis is overcome. At the same time M1 that focuses more on economic output has risen by 6.2%, its fastest since September 2011.

“Why now?”, some of you might ask. Of course, there is no clear answer to this question but a strong commitment to the single currency has certainly not done any harm to the state of the euro. The ECB was a central figure in this scenario and Mario Draghi’s declaration to do “whatever it takes” to prevent a breakup of the euro zone still stands out as one of the most memorable statements in the political debate.

And indeed, Draghi has done quite a lot recently to soothe the markets and send the right signals to investors. The press conference of the ECB on September 6th where the “outright monetary transactions” were presented to the public marked a turning point for the future of the continent. Dubbed as “unlimited bond buying” by the financial press, the new plan brings about some massive changes for all the actors involved – mostly for the ECB itself. While the OMTs are still linked to macroeconomic adjustment programmes (“bailouts”) and therefore new austerity measures for troubled states, the central bank agreed to give up its seniority status as a creditor. This means that in case of failure of any troubled state, they would not get a preferential treatment concerning their debts and are on par with private investors. This has massively restored trust in the single currency and saw both bond interest rates fall to new lows in Spain and Italy. The support of the euro has evoked outrageously positive reactions by the market but was not the last step in the seemingly neverending quest to save our currency.

Although a third Greek bailout was vehemently denied on the press conference in September, today it is only a question of time. And nobody even seems to care anymore. Even protests in Germany that called the ECB’s decision and “an economic disaster” only three months ago have ebbed away and analysts agree that the new billions for Greece will be nodded off without further objection.

What implications does this have for the banking sector then? Banks at the moment are trying their best in order to survive. One would argue that this should make them rethink their business models, but realistically speaking, radical changes in times of crisis are most unlikely to happen, if they are not forced. I have mentioned before that I am quite opposed to the bail-out-no-matter-what policies that seem to have been employed recently. Just yesterday, Spain’s banks were bailed out with 37 billions. But here in Europe this is a question of saving a single market that is essential for the world economy. By relaxing the markets and letting economic agents know that politics won’t fail them, we give them more room to act and to finally make some decisions that have the potential to be more sustainable in the long-run. We should hope so at least. With Europe’s banks now finally having a more stable future, we should expect them to have learnt some lessons from the crisis. And hope that it is really all about to change in the near future.


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Vogue Trading

7 years in prison – that was the verdict that the jury decided upon after breeding almost a day over the question what penalty is adequate for a man that blew $2.2501bn due to some (deliberately?) wrong decisions. I am talking about Kweku Adoboli, of course, the notorious rogue trader that was sentenced earlier on this week. This must be a unique case, some of you might think. I, on the other hand, am not too sure about that.

Abodoli testified that he was put under pressure by his superiors, that they expected earnings that could not have been achieved with discretionary business practices. A former colleague went on record as saying: “It (the desk) was doing amazingly well. Other senior traders would come to our desk to ask us for our advice. Everyone knew it was Kweku Adoboli and John Hughes doing the proprietary trading. They were the stars of the trading floor.”

An interview with the former Citigroup trader Geraint Anderson unveils that questionable trading practices seem to be much more common than generally thought. He quit his job as he couldn’t reconcile his job with his conscience anymore and wrote a book about the business ethics in Citigroup. “Cityboy” caused a scandal but did not evoke quite the reactions the author had hoped for.

Anderson described two forms of manipulation: “Pump and Dump” and the “Bear Ride”. The former depicts the spreading of rumours of a possible acquisition in order to higher the share price of a company and selling it all off as soon as the quotation has reached a certain level. The “Bear Ride” goes into the opposite direction: Rumours about the possible profit warning about a company are started right after its shares were sold short. Statistics prove that suspicious share price movements precede 30% of all share sales. According to the author, the “Cityboys” learn about the different tricks from superiors or colleagues who expect  them to be quiet about it at the same time for fear of regulators. The mentality that is lived within the company is profits at any cost. You are you bonus. And nothing else matters.

So the author wrote the book to deliver exactly that message to the public. To show that something is inherently wrong with our banking system. That we have to change our understanding of what it means to be successful in today’s business world. But guess what…

“The biggest tragedy in my life is that I have written this book in which I wanted to warn against the dangers of a life as a banker. But in response I got thousands of e-mails from young people between 16 and 25 who asked me if I could help them to get a job in City.”

That’s rather tough stuff. An author with the intention to warn against the dangers of a ruthless company accidentally makes it more attractive as an employee. Is it still fair then to say to constantly characterise the banking sector as appallingly amoral?

Certainly yes, if you think of LIBOR scandal that 16 of the world’s leading are entangled in at the moment? A whole industry seems to have engaged in collusion to deliberately trick customers and earn more money. But is that typical for banking only or does it not rather show that there is something wrong with society? In the course of the research I am doing for a paper I am currently working on, one of the interviewees elucidated the role that the public played in causing the current financial crisis:

“Customers have stormed, and this is my favourite example, the Icelandic banks [in Germany] because they offered call money. But they were not insured by the German Deposit Protection Fund. And I find it really sickening. People run to the banks for 1% or 0.5% and they do not go to a German bank, but to an Icelandic bank that is not in the Deposit Insurance Fund. And then go to the media with it: ‘I’ve invested 20,000 euros for my kids and the bank is now broke and how do I get my money?’ They were all obsessed with money and ran after it.”

I do not think that the banking sector is any different from any other with regards to the morals that are lived in the workplace. I do not think that bankers are necessarily greedier than the average man. I think that our Western society has generally become less value-oriented than a few decades ago. We want more and need more to be happy than our parents. And we have fewer scruples trying to get what we want. Whether this is good or bad is for you to decide.

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It is not only us who have lost trust in banking…

The looming downturn of the German economy and the soaring crisis seem to have taken their toll on the banking sector. A survey published yesterday by the consulting firm Steria Mummert reveals that 36% of the leaders of Germany’s 100 biggest banks expect the sector to underperform the overall economy. In times of economic recession, this might not shock anyone anymore, but the survey provides us with a detailed overview on what bankers find most worrying about the current developments.

A whopping 97% see the growing regulations as their main concern. The stern supervision, the demand for more equity capital and a better risk management raise growing concern among almost all bankers as they realise that the times of plenty are over.


Further reasons for the flaring pessimism among our financial leaders are the rising costs (75%), growing competition (71%) and the difficulties in CRM (71%). Now, the last point should hardly surprise anyone. Banks having troubles retaining their customers? Who would have thought that? The Global Consumer Banking Survey 2012 by Ernst & Young  confirms the rather somer prospects banks seem to have in the eye of the public.

But back to business. Looking at the Steria Mummert survey a bit more thoroughly, we can detect a few liaisons with some of my recent posts: The fear of growing competition is primarily due to the fact that there is a huge number of new entrants such as retailers that diversify into banking and the financial daughters of big car manufacturers (see blog post Oct, 24th). At the same time mobile banking undermines the traditional business model of Germany’s biggest banks (see blog post Oct, 15th).

The survey also confirms that investment banking is in a very critical state at the moment (see blog post Sep, 27th). A meager 8% of the participants plan to invest in the segment, down from 20% five years ago.

So what comes after the crisis according to Germany’s top bankers? Being asked which strategies they prefer in order to avert the current crisis, the participants gave the following answers:

  • Improve the quality of the services (89%)
  • Higher cost efficiency (89%)
  • Extend business with existing customers (87%)
  • Sustainability (82%)
  • Good governance (78%)
  • Growth with new customers (77%)

What we can deduct from this is that banks seem to have realised that they have to work on their images. However, this is not top their top priority yet. CSR-related activities are not as important as cost reduction and the improvements of the banks’ services. The focus on existing customers sounds a lot like damage control to me. This is confirmed by another answer that only 28% considered as a viable strategy for the future: Diversification.

What about the all the innovations we are currently experiencing? What about developing a business model that is attractive for those that might not yet match the profile of the typical customer? Unfortunately, these questions remain unanswered. Banks will probably jump on the bandwagon of sustainability and then selfcongratulatory decide that they have done enough for the society… and their image.

All in all, what can we expect from banks? An improvement of the quality of their services (=creating more financial products and derivatives?), cutting costs (=sacking staff?) and doing everything to keep their existing customers (=price battles and offers that are well below market rates and therefore unsustainable?).

The survey gives us a rather pessimistic answer to the question of this blog. And after the crisis…? At least right now, it looks as if everything will stay the same. 

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Barclays did it, Deutsche Bank is doing it, Goldman wants it: Universal banking

Earlier this year the announced strategies of many of the world’s best performing banks had an awful lot in common: A seemingly united affirmation of the universal banking model. Barclays then Chairman Marcus Agius endorsed the universal banking model, Deutsche Bank’s Jain and Fitschen promoted a more collaborative approach in the future and if you believe rumours, Goldman Sachs has plans to diversify into universal banking as well. The truth is, pure investment banks are dead since Goldman and Morgan Stanley officially became bank-holding companies at the height of the crisis in 2008.

So, what is it about universal banks that had the idea surge up when companies should rather look into downsizing given the current economic climate? In the eyes of the public the truth is as simple as contested: They want to become too big to fail.

But is it really that simple? Does the recent reunification of commercial and investment-banking activities reflect the company’s desire to have the state throw itself into the breach whenever they might be in trouble?

The regulators’ discussions on state and EU levels are hinting at it, to say the least. Arguments for the breaking up for major universal banks are often related to the unwillingness or even incapability to bail out more banks. Daniel Zimmer, head of Germany’s Monopilies Commission warns that neither does the state have any money left to bail out another bank, nor are taxpayers willing to do pay for it. A group of corporate leaders came out against the concept of high-risk investment operations being linked to other bank operations any longer. Regulators and politician consider investment banking the virus that has contaminated the commercial banking culture and argue that large banking conglomerates are sheer too big in order to be managed efficiently. They usually point their fingers at Citi Group that has been struggling with multibillion-dollar writedowns since 2007.

So they propose drastic measures to avoid further bankruptcies that will hurt taxpayers: Similar to the Glass Steagall act during the Great Depression, big universal banks should be broken up. That would mean segregating a bank’s investment banking operations from the rest of the business and regard them as two different entities. But can cutting off one leg really heal an ailing patient?

The answer is no. As much as I support a profound rethinking process of the current banking sector, a shortsighted approach like this would rather trigger more banks going bust than to protect the taxpayers from further harm. And apart from that, the argument the supporters of this cause use to justify their actions is also one of the main reasons against it. Banks that have become to big to be manageable cannot be that easily dissected without causing further damage. The splitting up of big universal banks is therefore not only a bad idea, but a rather idealistic one as well.

Let us look at it from the practical side: Firstly, banks are selling products and giving credits with maturities of more than a decade. They are liable to their customers and cannot just stop engaging in IB activities. Secondly, one of the strengths of universal banks is the truth that the two business lines support one another. Synergies and economies of scales are the reason for the success of Citi and the like. In the case of separation, none of the newly created banks might survive on its own. Thirdly, a business that has grown together over the years is far too entangled to divide it with a clear cut. To stick to medical metaphors: The tumour has spread. And although we don’t know yet whether it’s good or evil, it’s too late to operate.

When comparing numbers, one can actually see that universal banks are also a lot more stable in the long term. On paper, the diversification seems to work. However, a resigned Wall Street banker resumes that “not their superior business model, but the mere access to their clients huge deposits is what has saved universal banks from ruin up to now.

The European Commission is currently looking into so-called coordinated restructuring and liquidation plans. This would mean that any bank that exceeds a certain size was to submit an outline of how to separate the bank in the event of a crisis. This would then facilitate the actual spinoff.

But banks seem to be adamant in clinging to their beloved universal banking activities. Anshu Jain and Jürgen Fitschen announce that ‘[t]here is no plan B.’ But how can too businessmen be so sure about a model that seems to be bombarded from every possible side? The answer is simple and goes down right to the bottom of modern politics: They have a lobby. And as frustrating as it might sound to the advocates of perfectly democratised political procedures among us, the fact that there is a lobby as powerful as the financial industry’s means that nothing drastic will change in the near future.

I would usually be fretting about the obvious undermining of political procedures by industry representatives. But in this case, I am not. They are right to crush plan that were patched together in such a haphazard manner, far from reality. We have to adopt a more realistic approach here. Banks that are too big to fail will stay like this for the next few years. Since the beginning of the crisis legislators are trying to correct everything that’s supposedly wrong with the system within a timeframe of a few months. And if it’s not working the year after, new regulations have to be passed. It is true that some aspects needed to be fixed. But it is also true that the market sometimes fixes itself. If you let him.


Heese, M. and Pauly, C. (2012). EU Considers Splitting Up Major Banks. Spiegel Online. Available at: 

Riecke, T. (2012). Universalbanken vor der Bewährungsprobe. Handelsblatt. Available at:

The Economist. (2012). Together, forever. Print Edition. 18 August 2012.

Bailing out bad businesses: The ugly face of the crisis



11.5bn euros – that is the number that caught my attention today when scanning the financial headlines. Another bank bailed out. Given the current economic climate one would suppose that news like this does not shock anybody anymore. But this case is special. The bank that was bailed out today was PSA Finance. Does that ring a bell? Certainly not as a big player in the financial world. PSA Finance is not one of the ‘systemically important financial institutions’ like Lehman Bros or RBS. It is merely the financial daughter of the (in?)famous French carmaker Peugeot. Peugeot has caught our attention during the last few months for only one reason: The continuous announcements to cut more and more jobs and the plans to close down production facilities (lastly in July when they announced to eliminate more than 8,000 positions). At least, this is how I perceived it when compiling the daily news reviews during my internship in Paris this summer.

So, what happened? Peugeot puts emphasis on the fact that the bank is still profitable. A look behind the scenes reveals that there is something utterly wrong with the system. PSA Finance’s main activities are the financing of car sales. Many big carmakers have their own banks that offer credits well below market rates for potential customers. Having worked for Volkswagen myself, I can tell you that their financing products are more than tempting. Zero percent financing and the offering interest rates well above market value makes it hard for employees to even consider other banks.

But it is no secret that Europe’s carmakers are struggling at the moment. The European market seems more and more saturated with sales dropping by 18% in France, 26% in Italy and 37% in Spain. As a consequence, carmakers have lowered prices (Volkswagen has just announced that their revenues for 2013 are expected to rise whereas profits will probably stagnate) and embarked on what is now an open discount battle. A way around this was to offer even more attractive financing schemes; at least this seemed to be a suitable solution for Peugeot. Et voila, the zero percent financing was born. If you can’t offer a good car, you have to offer a good credit. That banks following such a business model will sooner or later encounter problems of refinancing should hardly surprise anyone. Even whether they are still profitable remains questionable for me.

The mechanism that has been decided upon by the French government is rather complicated. French state officials deny that the proposed solution was a state bailout. The plan is that 30 private sector banks inject funds into PSA Finance while French state provides a guarantee. Peugeot itself declines to comment. Sounds pretty much like a bailout to me…

How does all that fit into my blog, some of you might ask. The future of finance will not be influenced much by yet another bailout. However, if you remember last week’s post, I was writing about the future of retail banking. One aspect that I didn’t mention was the increasing trend in the private sector to provide credits as part of their business models. I originally wanted to bring up the question whether businesses themselves might be tomorrow’s retail banks. A paragon for this upcoming model would be the Brazilian retailer Magazine Luiza that finances its 75% customers purchases from the network of its branches. But today’s headline had me rethink my former quintessentially positive assessment of this strategy.

With such innovative financing solutions being bailed out in case of failure we have reached a whole new level of competitive distortion. It comes as no surprise that Lower Saxony, Volkswagen’s second biggest shareholder, has already made clear that it strictly opposes the French government’s plans.

To some this might seem like another ‘too big to fail’ story. For me, it seems like something else: The backing of a business model that is unprofitable in its core.  What about all the people that end up losing their jobs?’, some might ask. Admittedly, this train of thought is a very liberal one. But if the crisis will never produce any losers, where are the lessons learned? Nothing would change, an “And after…?” simply won’t happen. But in order to overcome the crisis, we have to learn from our mistakes. We have to let go of business models that turned out to be badly thought out. If we continue bailing out with a similar easiness, all we do is prolonging the crisis. And who knows, maybe for the first time in history we will encounter a triple-dip recession.


Boxell et al. (2012). France nears deal to rescue Peugeot. Financial Times. Available at:

Handelsblatt. (2012). Peugeot setzt auf Staatshilfe und Allianz. Oct 24th 2012. 

Stock, O. (2012). Autoindustrie – nach dem Doping folgt der Kater. Handelsblatt. Oct 24th 2012. 

The Economist. (2012). Branches: Withering away. Print Edition 19th May 2012.

The Economist. (2012). Forward and reverse. Oct 24th 2012. Available at:

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The Future of Retail Banking

A big glass front, a lounge-like atmosphere, dozens flat screens on golden walls – that’s what I saw when I recently walked into BNP Paribas’ new flagship store in Paris. I was feeling like entering the reception room of the Ritz which is just a few blocks down the street, but could not believe that I had just gotten a glimpse of what appears to be a new concept of retail banking.

Some hours of research later, this new trend makes a lot more sense to me. The reasoning behind it is the following: In a sector where the Internet has massively undermined the concept of wholesale banking, a dense network of branches has become increasingly costly. Often situated in a premium location and with a certain number of staff to pay, one might ask whether it is really worth the extra investment just to be seen. On the other hand, according to John Stumpf, CEO of Cargo Wells , “location is still the first and most important decision-maker when you choose your branch”. Hence, banks continue to extend their branch networks, sometimes swallowing up to 60% of its total cost of operations.

But there are quite a few signs that the concept is about to change or at least massively questioned at the moment. This is due to three reasons:

  • Firstly, the financial crisis and record-low interest rates have had a huge impact on profits for retail banks. Together with new regulations such as the Dodd-Frank law in the US, competition has tightened up and many of the global palyers were forced to massively cut costs.
  • Secondly, internet and mobile phone banking is on the rise, the latter especially in the developing world. (An interesting other blog post on that can be found here.) Studies have shown that, when using your bank account from an electronic device, transactions increase rapidly. Profits do accordingly. An example for that is JP Morgan’s Quick Deposit app that was a huge success in the States.
  • Thirdly, customers themselves have evolved. They feel much more comfortable administering their money online that they were a decade ago. So, the main challenge for banks today is to lure in more customers, as the dependency on an actual physical presence seems to be sinking. The numbers do speak for themselves:

An original approach to tackle the decreasing profitability of wholesale banking comes from a country that has not necessarily been associated with successful banking recently – Spain. With roughly 43,000 banks i.e. more than one branch for every 1,000 inhabitants, its retail bank branch density is about six times higher than the UK’s. Spain is now one of the main exporters of bank management systems as they have pioneered the industry by standardizing computer systems. One click allows any employee to get an overview about all activities with a certain customer or the profitability of a certain branch. And as absurd as it may sound, but many banks today have not reached that level of coordination yet. Only by daring to implement innovative solutions in order to offer the best services to their customers can retail banks rebuild their competitive advantage.

This is what brings us back to Paris: At BNP Paribas customers are engaged into conversations about financial products when taking a cup of coffee or learn about new investment strategies via one of the numerous iPads or flat screens. The employees avoid talking of a “branch” and try to engage directly with their clients. The aim is “more proximity, more interaction, more personal contact”, according to Nathalie Martin-Sanchez, the responsible of the “concept store project”. When I walked in there, however, nobody approached me. Employees seemed shy behind their desks and rather seemed to ask themselves whether I got lost on my way to the ATM or really wanted financial advice. I felt lost within the pompous hallways and did not see any other customer. Neither did I see proximity, interaction or personal contact. While the concept was to create a social space for banking, I felt a lot more inhibited than by the normal retail bank just across the corner. There, you could at least talk to the people in the queue.

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Is it all about to change?

The financial world is in turmoil. Profits are low and the reputation has hit rock bottom of a sector that used to be one of the most liquid and prestigious in the world. The crisis is unprecedented: The last time the world economy has experienced such a far-reaching and devastating downturn was nearly 85 years ago – the big stock market crash in 1929. Economists are still trying to figure out how that many bubbles could have built up and then burst at the same time. Suggested solutions are manifold and the first books have already been published trying to give explanations on how global economy could collapse to such an extent. I leave it to the financial analysts and the Harvard professors among us to offer a more detailed view on the how’s and why’s of the current dilemma.

The question that is important to me is: Now what?

An article from last week’s Economist suggests a rather somber answer. It basically says: Investment banking is dead. But is it?

Investment banking has been emblematic for the financial sector since a long time, mainly due to two reasons: Firstly, it was regarded as the supreme discipline among the many jobs at a bank, simply because most of the money was in “IB”. Big names like Goldman Sachs, JP Morgan Chase and Morgan Stanley are busy recruiting the top graduates all around the world and if you ask finance majors what they want to become in their later life, they will answer you: the next Gordon Gecko. This leads us directly to the second point. The reputation. The classic investment banker is the personification of the banking system for many a man. Thirsty for money, without any moral scruples he is seen to be sitting in his office on the 40th floor, handling multi-million dollar transactions and selling products that nobody but him really understands or needs. The public blames people like him and their greed for profits for the current crisis. People like him have now become the system. Well, thanks, Gordon.

Recently, however, the cracks begin to show. Deutsche Bank plans to cut about a 1,000 positions at its IB branch, Barclays is said to cut one of its main operational pillars by as much as 20% and Nomura is backing out completely of a sector that was once hailed as the land of milk and honey. The headcount in London’s financial industry is down by 100,000 and up to date, there is no end in sight.

This might be justified as countercyclical measures. This might be called a temporary solution. But numbers do not lie. According to analysts at Deutsche Bank revenues will be down to $240 billion this year, an appalling $100 billion drop from what it was three years ago. The sector’s profitability is shrinking and along with that, the world of banking might be about to change forever.

It only remains for me to add that this post barely covers the broadness of the article. The reason why I found it so inspiring was because brings up a lot of questions, such as:

  • Will investment banking return to its former levels of profitability?
  • How will the upcoming regulations change the game?
  • Are universal banks going to resurge?
  • Will mid-sized banks find ways to catch up?
  • Will London continue to be the world’s financial centre?

The possible answers to these questions are as diverse as the questions itself.

But don’t worry, you will read about them here, next week.