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The titanic struggles of German banking

The decline of Deutsche Bank may be grabbing the headlines, but the woes of German banking run far deeper. Low interest rates and tighter regulation are hurting all the private-sector banks. That simply adds to concerns that Germany’s banks cannot, or perhaps in politicians’ eyes should not, be profit-hungry institutions. But are the statebacked banks that still dominate German banking reaching a limit on their ability to fund themselves? And does that mean that the famed three-pillar system is heading for disaster?





Germany’s banks go down with the ship


Rates put Germany’s financial ecosystem at risk


When fears over the size of a Deutsche Bank fine coincided in late September with news of a drastic business restructuring at Commerzbank, it seemed like the crisis in European banking had suddenly shifted north. 

The problems facing Germany’s two biggest private-sector banks are of course different. But they are both symptomatic of the lack of profitability afflicting the three pillars of German banking. 

Low interest rates are a pan-eurozone problem, but German banks are more vulnerable than most because of their reliance on net interest margin and because their return on equity is already only in the low single digits; higher only than Greece and Portugal, according to the European Banking Authority. 

While headline-grabbing jumps in spreads of five-year senior and subordinated credit default swaps are not a direct driver of bank borrowing costs, it is hard to see how the big German private banks can drive their funding costs lower amid regular bouts of panic about solvency.

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