Deutsche Bank Offers a Tough Lesson in Risk

All banks are weak, but some banks are weaker than others. This is the chief lesson of the market turmoil surrounding Deutsche Bank. Yet there is also a host of further lessons: the approach taken to punishing banks for their failings is more like firing a blunderbuss than a rifle; and it is still hard to recapitalise banks without public money. Above all, more than nine years after the start of the global financial crisis, worries over the health of the financial system remain significant, especially in Europe. This should not be surprising. But it should be disturbing. In sum, the problem of banks has not disappeared. A fundamental part of the danger is that these are inherently fragile institutions. It is also likely that the balance sheets they inherited from the excesses of the pre-crisis period are insufficiently profitable and so will need to shrink. Most important of all could be the impact of new information technologies and business models on the health of the historic banking industry, particularly given the damage done to its reputation for competence and probity. Many would add to all this the impact on profitability of central banks’ ultra-loose monetary policies.