Banker's criticism is not helping euro crisis

Euro Zone: Josef Ackermann, the chief executive of Deutsche Bank, has won many battles in his career, but he looks set to lose what is being billed as his last fight as the head of Germany's biggest bank.

Josef Ackermann, the chief executive of Deutsche Bank, says 'the problem isn't the capital base of banks'.
Powered by automated translation

Josef Ackermann, the chief executive of Deutsche Bank, has won many battles in his career, but he looks set to lose what is being billed as his last fight as the head of Germany's biggest bank.

Road to ruin or recovery?

Euro Zone The National charts Europe's struggles as it attempts to through of financial crisis. Learn more

The ebullient 63-year-old Swiss national has launched into a head-on confrontation with Angela Merkel, the German chancellor, over plans for a forced recapitalisation of European banks to help them withstand a Greek debt cut, which is looking increasingly inevitable.

Speaking to German business leaders in Berlin this month, he said he doubted "whether politicians are still in a position to find a lasting solution to the crisis". The recapitalisation idea was "counterproductive", he said. Governments, and not banks, were to blame for getting Europe into this mess, he said.

"The problem isn't the capital base of banks but the fact that government bonds have lost their status as risk-free assets," said Mr Ackermann.

The arrogance of his refusal to own up to at least part of the blame for the debt crisis has staggered even the conservative politicians of Mrs Merkel's centre-right coalition, who have traditionally been at pains to accommodate the demands of the country's top bank.

The chief executive, who will step down early next year and switch to heading Deutsche Bank's supervisory board, won credit for steering the bank through the 2008 financial meltdown relatively unscathed, and he is evidently confident that he can get the bank through this crisis, too, without government help. For him, refusing state interference is a matter of personal pride.

But his criticism is damaging efforts to get to grips with the crisis, because it is obvious that many European banks will need more capital if Greece's debt is cut by 50 per cent or more.

The problem is not just that banks with major holdings of Greek bonds - including a number of top French banks - would face major write-downs. Their holdings of bonds issued by other debt-laden nations such as Italy and Portugal would also have to be written down because a Greek cut would cast greater doubt on the creditworthiness of those countries.

Mr Ackermann did not do himself any favours with his remarks. He does not appear to have fully grasped how quickly the world is changing outside the shining glass facades of his twin-towered headquarters in Frankfurt.

Thousands of people across Europe demonstrated against the banking industry at the weekend in solidarity with the Occupy Wall Street movement. More important, politicians are starting to listen to them because they have sensed how forcefully the public mood has shifted against the financial industry.

The reputation of bankers has hit rock bottom in the euro zone in the course of the debt crisis, and any sign that they are obstructing a solution will only worsen their image.

After all, bankers such as Mr Ackermann were only too ready to lend Greece and other nations billions of euros, and their investment banking departments have been busy raking in profit by betting against those countries, secure in the knowledge that if the worst comes, taxpayers will foot the bill, just as in 2008.

Besides, the debt crisis would not have happened if nations had not had to build up huge debts by bailing out their financial sectors in the 2008 collapse, which resulted from high-risk speculation with complex financial products by banks seeking to maximise profits.

The financial lobby has since been battling to block reforms that would curb the financial industry's future profitability. The market for high-risk credit default swaps, for example, remains as obscure as ever.

And the fact that banks have stopped lending to each other, forcing the European Central Bank to step in again to furnish the financial system with liquidity, makes it obvious that banks are part of the problem. They don't even trust each other.

From Deutsche Bank's point of view, Mr Ackermann's objections are understandable. The bank has reduced its Greek bond holdings to just €900 million (Dh4.59 billion), a tiny proportion of its €1.8 trillion balance sheet, and while its capital ratio falls short of planned EU requirements, the bank is relatively well-placed to weather the crisis.

But Mr Ackermann has a wider responsibility than just his bank. He is seen as the second most powerful figure in Germany after Mrs Merkel.

The plan by the European Commission to require banks to raise their core capital ratios from 4.5 per cent now to 9 per cent next year will force many, possibly even Deutsche Bank, to seek state aid to do so if they cannot raise the required additional capital in the market.

That aid would entail the ignominy of having government officials on the supervisory boards, and curbs on bank bonus payments - anathema to a red-blooded banker such as Mr Ackermann.

Mrs Merkel's coalition is even warming to an idea proposed this week by the leader of the opposition Social Democrats, Sigmar Gabriel, to require banks to split their investment and commercial banking activities into separate units - a decades-long requirement for US banks under the so-called Glass-Steagall Act that was introduced after the Wall Street crash of 1929 but finally repealed in 1999 as part of global market deregulation.

This would lead to radical changes for Deutsche Bank. After Mr Ackermann's vocal criticism last week, German politicians may relish the prospect of hacking his bank in half. It would be a powerful message that would resonate with the public: elected governments, and not banks, call the shots.