All Articles Finance Modern Money While You Were Working - August 30

While You Were Working – August 30

Deutsche Bank in the Oval Office, the dynamics of bank runs, and Brexit-induced regulatory arbitrage

3 min read

Modern Money

Deutsche Bank

Is Deutsche Bank missing an opportunity in the Oval Office? (Dan Kitwood/Getty Images)

The Trump-Deutsche Bank Liebesaffäre

The complex relationship between President Donald Trump and Deutsche Bank is one of my favorite Wall Street and Washington stories. Much of the reporting this far has only really scratched the surface about how the decades-long relationship has meandered its way to the point where a foreign lender holds the note on a host of loans for the man sitting in the Oval Office.

For my money, the story isn’t about how Trump might show leniency toward Deutsche Bank if/when some of its past transgressions, which are already being investigated, come to be punished by US regulators. No, the real story is about how Deutsche Bank is not leveraging the relationship enough to shape its futures gains. For example, Trump often says he hates international bodies like the Basel Committee on Bank Supervision. However, some aspects of the never-ending Basel negotiations might one day boost Deutsche Bank’s bottom line. 

It seems like Deutsche Bank might know the number of the right guy to call when they need US delegates in Basel of vote along lines that will help Deutsche’s bottom line. But for some reason, John Cryan et al haven’t been picking up the phone.  

A study about bank runs came to an obvious conclusion

Researchers at the Bank of England and the University of St. Gallen looked into the dynamics of bank runs vis-à-vis the banking crisis in Switzerland in 2007-09. Not surprisingly, they found that the strength of the client-bank relationship was a big factor in determining whether a client pulled their money out of a distressed bank. That’s kind of a no-brainer, but here is more:

“Our results provide important insights for policy makers concerned with liquidity risk in the banking sector. We document that strong customer relationships are crucial towards mitigating the withdrawal risk of retail deposits from banks. This finding provides an empirical underpinning for the discrimination of “stable” versus “unstable” deposits in the recent Basel III liquidity requirements. Moreover, it emphasizes the relevance of client-bank relationship characteristics for the management and regulation of banks’ liquidity risk. While a strong discrimination of “stable” versus “unstable” deposits might mitigate withdrawal risk, it can make it difficult for depositors to switch funds and, thus, undermine competition.”

Bank boards and corporate governance

In general, I’d say it is never a good thing when a regulator has to go to great lengths to explain how a new rule will not “lower the bar” for expectations put on bank Directors or make banks more likely to take on pre-crisis levels of risk.

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