There’s No Place Like Home: Deutsche Bank’s Return to Germany
How isolation in the form of Brexit influenced the company’s decision to relocate its UK operations to Frankfurt
Even before the Brexit vote in June 2016, Deutsche Bank’s CEO John Cryan shifted the direction of the company to its home market. “Our core business will be international banking, international capital markets, rooted in Germany.”[1] This action coupled with Brexit has created an unique opportunity for Deutsche Bank to proactively reorganize its operations ahead of the official exit of the UK in May 2019.[2]
Implications
With the UK voting to leave the European Union (EU), London’s status as the financial center of Europe is likely to be compromised. Deutsche Bank, which books hundreds of billions of euros of non-UK business through London, must mitigate disruptions to client relationships and thus, its business.[3] To accomplish this, Deutsche Bank is acting now by “assuming a reasonably worst outcome” or a ‘hard’ Brexit.[4] A ‘hard’ Brexit means the UK leaves the EU and does not remain a member of the European Economic Area (EEA).[5] As a member of the EEA, member-states have agreed to a common body of financial regulation which allows firms to offer services in all member-states after receiving authorization in one. Following the official Brexit, the UK may no longer enjoy this privilege.
Action
To combat this uncertainty, Deutsche Bank has taken several decisive actions. First, the firm has decided to transfer the “vast majority” of its assets in the UK global markets business to Frankfurt, Germany, a current EU member-state.[6] With its economic stability, highly qualified talent, and the headquarters of the ECB, Frankfurt has the potential to become a global financial services hub.[7] Secondly, the company recently announced that it will move four thousand of its UK employees, approximately half of the UK workforce, to Frankfurt.[8] Thirdly, the firm is proactively contacting clients to resolve conflicts in legal documentation. Finally, the firm is working with German authorities to amend labor laws that prevent firing as well as working with regulatory bodies to establish clearinghouses outside of the UK to address potential disruptions in the medium-term. [9]
Additional Considerations
In my opinion, Deutsche Bank should also consider two other important aspects of its supply chain: the effects on employee acquisition/retention and the disruptions to the cycle of information between clients and the firm. The transition to Frankfurt presents a change at the top of the talent acquisition funnel due to language barriers, work authorizations and differences in corporate culture. Deutsche Bank must continue to prioritize an internationally-focused, inclusive, and progressive culture in the German business context. Additionally, Deutsche Bank must also consider how information, whether client orders, confirmations, or contracts, flow through London and Frankfurt to the rest of the world. From a trading perspective, the firm must determine how client relationships will be managed across sales and trading teams. A great customer experience should not be compromised. To accomplish this, Deutsche Bank should fully understand the implications to its supply chain both from a talent acquisition perspective and through the flow of information.
Future Uncertainty
Given the competitive landscape and the recent regulatory and financial struggles of the company, there is little room for error. Although the company is assuming a ‘hard’ Brexit, what are the implications on the business if a ‘soft’ Brexit occurs? Should the company take the most conservative approach when dealing with uncertainty?
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[1] Gould, Jonathan. “Deutsche Bank CEO aims for universal bank with German roots.” Reuters, March 2, 2016. Accessed November 12, 2017. http://www.reuters.com/article/us-deutsche-bank-postbank-ceo/deutsche-bank-ceo-aims-for-universal-bank-with-german-roots-idUSKCN0W40ZZ.
[2] Arnold, Martin, Katie Martin, and Laura Noonan. “Citigroup and Deutsche Bank give Frankfurt a Brexit boost.” Financial Times, July 20, 2017. Accessed November 11, 2017. https://www.ft.com/content/1b38eb1a-6d55-11e7-b9c7-15af748b60d0.
[3] Ibid.
[4] Ibid.
[5] Armour, John. 2017. “Brexit and financial services.” Oxford Review Of Economic Policy 33, S54-S69. Business Source Complete, EBSCOhost (accessed November 11, 2017).
[6] Arnold, Martin, Katie Martin, and Laura Noonan. “Citigroup and Deutsche Bank give Frankfurt a Brexit boost.” Financial Times, July 20, 2017. Accessed November 11, 2017. https://www.ft.com/content/1b38eb1a-6d55-11e7-b9c7-15af748b60d0.
[7] Koch, Christian. 2017. “Frankfurt: The German finance hub is touted as the city to lure bankers from Brexit Britain. But whether at London’s expense or not, its trade environment is creating opportunity for UK business. Leaders and experts explain.” Director 70, no. 8: 40-43. Business Source Complete, EBSCOhost (accessed November 11, 2017).
[8] Sidders, Jack, and Steven Arons. “Deutsche Bank Seeks New Post-Brexit Frankfurt Office.” Bloomberg L.P., November 1, 2017. Accessed November 13, 2017. https://www.bloomberg.com/news/articles/2017-11-01/deutsche-bank-is-said-to-seek-new-post-brexit-frankfurt-office.
[9] Arnold, Martin, Katie Martin, and Laura Noonan. “Citigroup and Deutsche Bank give Frankfurt a Brexit boost.” Financial Times, July 20, 2017. Accessed November 11, 2017. https://www.ft.com/content/1b38eb1a-6d55-11e7-b9c7-15af748b60d0.
Deutsche Bank approach to Brexit seems to be fully aligned with their prior announced pivot to basing its operations in Germany. However, one prior question arises: How will they manage a business focused in international banking and capital markets all from Germany given the large and massive market differences present in the world? Deutsche should probably set up a plan to mitigate the effects of misinformation or lack of local market knowledge if they are to carry out such a plan. It is true that London was neither a location exposed to all the different characteristics of each market but it was a better fit for that than Frankfurt is.
My second reaction is that no assessment of the impact on the bank’s operation in the UK has been published comparing the different Brexit scenarios. What if the cost of a soft Brexit is lower than the cost of relocation? What if even a hard Brexit is less disrupting than the proposed plan? Should not the proposed plan try to maximize returns for Deutsche Bank given the aforementioned tight financial situation? It seems difficult to believe that the proposed solution is the best for any outcome of Brexit, regardless of its conditions. Deutsche should probably provide more insights on this issue to convince shareholders that their plan is sound.
I thought that the actions that’s Deutsche Bank is taking to protect itself and its operations from the global isolationist trend is very interesting; and represents the bank doing what it can to stabilize its operations in an uncertain world. Prepare for the worst, and hope for the best.
I think that if a “soft” Brexit occurs there is a chance that Deutsche may be at a disadvantage to other banks that left their operations in Europe; however this disadvantage is considerably less than the advantage Deutsche will have if it does result in a “hard” Brexit.
This is an interesting take on the implications of Brexit. My perspective is that Deutsche should worry about taking actions prematurely when there are available options to ‘hedge’ risk until the type of Brexit that will occur become clearer. As the above comment points out, the worst case scenario is they act in preparation for a hard Brexit but a soft Brexit occurs. Instead, Deutsche has strategic options that let it hedge risk until the situation becomes clearer. For example it can make trades to reduce currency fluctuation risk and begin improving its recruitment/talent pipeline in Germany. But taking irreversible steps before it becomes clear if there is a hard or soft Brexit coming from the UK Government could lead to the company to be vulnerable.
Great article, thanks for posting. Your question – what are the implications on the business if only a ‘soft’ Brexit occurs? – is one that almost every major multinational financial services organization is currently asking. To me, the biggest risk for Deutsche Bank of executing the most conservative strategy is if Deutsche Bank’s competitors stay in London, and then a soft Brexit plays out. This could put DB at a competitive disadvantage, since it will cost capital and potentially talent for Deutsche to move, while its competitors might not be making the same expenditures. Unless Deutsche Bank believes it has reliable and unique information regarding the likelihood that a ‘hard’ Brexit will occur, I believe it is critical for the financial services industry players to communicate with one another about their views on Brexit. With one voice, the multinational financial services industry will have a stronger lobbying position. Acting in the most conservative manner instead of working with the industry may ultimately be too much of a knee-jerk reaction – and thus not the most conservative strategy at all.
Interesting article and comments above. To my mind, Deutsche Bank might be caught between the devil and the deep sea here. Having had a rough 7-8 years (stock down 70% from its post-crisis high and ~85% since pre-crisis, LIBOR scandal, fines for violating US sanctions, money laundering, depleted capital levels, the list goes on), investors are showing much higher levels of scrutiny towards the company and its risk mitigation initiatives. Do not demonstrate a comprehensive plan of action and concrete steps towards preparing for a “hard Brexit”, and investors might criticize the company for being too complacent yet again. Have a contingency plan on paper and play the waiting game in anticipation of a possible “soft Brexit”, and investors would be up in arms if a “hard Brexit” caused yet another round of event-based value destruction of the bank stock. Ultimately, Cryan is simply sending a strong signal to the market as to where the bank sits today on the spectrum of conservatism. For now, the move does not seeming to be affecting investor sentiment as much (stock is up 50+% since June 2016), only time and the benefit of hindsight will tell how this eventually pans out for the embattled banking giant.