Interbank FX dealers should show more respect toward their core customers – institutional FX companies – Op Ed
Deutsche Bank, one of the world’s largest FX dealers, is experiencing even more turmoil as shares drop a further 7.5%, however it is astonishing that the bank does not value its main customers – the institutional FX firms of London, not the tumbleweed-strewn, bailout-dependent retail abyss that is Europe
Deutsche Bank has had a disastrous year and a half in terms of revenues.
So much so, that its appalling corporate performance attracted the attention of German finance minister Wolfgang Schaeuble earlier this year, his response to the company’s extremely precarious position being “don’t panic!”
Back in October 2015, FinanceFeeds first reported way ahead of the mainstream media that the interbank FX giant had estimated a third quarter loss of £4.4 billion, with sentiment from within the FX industry, especially surrounding the circumstance in which the loss of approximately 5.8 billion Euro was contrary to the forecast of 1 billion Euro profit.
Deutsche Bank is the second largest interbank FX dealer in the world with 14.54% of global market share in 2015.
“No, I have no concerns about Deutsche Bank,” Mr. Schaeuble told Bloomberg Television in Paris after a meeting of French and German finance officials in October last year.
Indeed, Mr. Schaueble does not have concerns. The dreadful position that Germany’s major institutions, along with many European peers find themselves in is pretty much aligned with the entire fiscal policy and economic ineptitude that marks out the entire European Union as a socialist, anti-business abyss whose major cities utilize 1970s infrastructure and whose leaders have never in their entire careers left the chambers of a government office.
The real reason Mr. Schaueble has no concerns is because he knows that on home territory the inability to modernize, the lack of participation in global electronic markets and the overbearing ineptitude of Europe’s business environment does not ultimately matter, because never mind Deutsche Bank’s several thousand retail traditional banking facilities which conduct business with High Street customers in a method which is about as modern and relevant to today’s global financial market economy as the Merneptah Stele in ancient Egypt, he knows that just one Deutsche Bank office out of thousands provides the vast majority of profitable business for the firm.
That’s right, the Canary Wharf facility, from which Deutsche Bank was responsible in 2014 for handling 14.54% of the entire world’s FX order flow. Not the European retail banking branches which make unsecured loans at almost zero interest to people with no collateral and no income.
If it were not for that one office, Deutsche Bank would be either moribund, or the subject of the usual mainland European cap-in-hand trip to the International Monetary Fund or European Central Bank for a bailout.
The only reason that Deutsche Bank has not resorted to selling its debt to its own retail customers – the European taxpayers – is because of its FX business, the very business that it shows disdain for, and the very business whose top of the line location in London among the giants of the entire world’s financial and technological ecosystem is the subject of derision by the German government, the European Commission and shamefully, Deutsche Bank itself.
Today, a further drop emerged for Deutsche Bank shareholders as the year and a half of low share prices and corporate loss has been emphasized even further.
Shares in Deutsche Bank plummeted yesterday by a massive 7.5% to 10.55 EUR following German Chancellor Angela Merkel’s statement that no state assistance to the bank would be proffered.
Speculators are now considering that Deutsche Bank is too big to fail, but the reality is that the firm is living from its FX order flow commission revenue, yet biting the hand that feeds it continually, along with other interbank dealers at the top of the market share list, by continually restricting credit to prime brokerages and non-bank electronic communication networks, and even worse, making the occasional call for a move to Europe from London.
If Deutsche Bank wants to disappear into oblivion, the way to do it is to continue to restrict Tier 1 liquidity to massive primes with huge capital bases and to continue to deny banking facilities to FX brokerages for lodging client trading capital and operational resources, as these firms are the lifeblood of the banking sector.
Without aggregators, or without the likes of Thomson Reuters FXall, ICAP’s EBS, Currenex or the large prime of primes in London there would be no more Deutsche Bank, along with several other potential casualties.
Too big to fail really means too reliant on London’s institutional FX order flow to continue to bolster a failing business based on old fashioned principles in the failing economic mire that is the European Union. Yet they will not open commercial bank accounts for FX firms, will not hold client funds, will expose their own core business customers and most loyal and worthwhile generators of business to the dangers of having to place capital with 3rd tier banks which FinanceFeeds investigated last week.
This banal business model is rather like a major car manufacturer spending millions of dollars employing people to go to everyone’s house and confiscate their driving licenses.
Comment from within the FX industry on Deutsche Bank’s position is of great interest indeed.
Neil Wilson, an analyst at ETX Capital in London this morning stated “Deutsche is too big to fail. I don’t see how the German government could let it go under. There would have to be a backstop along the way and, in good European tradition, there’ll be a fudge found to sort it, I’m sure.”
Speaking to mainstream media this morning, Jasper Lawler, Market Analyst at CMC Markets said “There is a fear that Deutsche Bank is setting up as Europe’s Lehman Brothers moment. US banks have been taking advantage of the difficulties in the European banking sector by taking market share but trouble at a multinational with a big presence in US capital markets like Deutsche Bank carries huge counterparty risk.”
In the spring of this year, Deutsche Bank Co-CEO John Cryan stated publicly that institutional investors should trust the counterparty credit rating that the bank has from Moody’s Investors Service (!!), rather than the cost of insuring Deutsche Bank’s debt, which grew dramatically during the early parts of this year. Interesting, bearing in mind that Moody’s keeps downgrading it.
The prime brokerage gained client balances even as hedge funds suffered their worst withdrawals since the financial crisis, yet Deutsche Bank’s market share dropped from 14.54% in 2014 to 7.5% in 2015 for global FX interbank order flow.
“When we focus clients on the A2 rating, I think they’re more than satisfied with us as a counterpart,” Cryan said on a call with analysts. “In our prime finance and the repo business, they like the service level, they like the products we offer, and we are keen to grow balances there.”
“We’ve made a lot of progress with most of our major institutional counterparts in communicating to them” on total loss-absorbing capital, Mr. Cryan also said, despite the firm having not provided a summary of quarter on quarter earnings for the first part of 2016.
This outmoded commercial attitude toward providing good quality Tier 1 liquidity to the top quality non-bank prime brokerages of this highly advanced industry must stop.
The sooner that banks such as Deutsche Bank, which will lick its wounds for a considerable amount of time if it continues to focus on its defunct home market rather than its standing as one of the top liquidity providers in the world’s financial capital of London, the sooner they will not only drag themselves out of the financial mire, but they will end their paranoia toward extending credit to the very OTC derivatives firms that are their most lucrative and least risky commercial customers.
Deutsche Bank must make a priority that London’s institutional sector is the place to do business, and the place which will haul it out of the financial mire, not its native Germany, for reasons that are quite apparent indeed.
Will any of such banks repatriate their Canary Wharf offices to Europe long term? No chance!