Sometimes when reading an article, I find buried within a long story a hidden gem of insight for the banking world. This most recently occurred whilst reading in the New York Times about a conflict between the German government and Cerberus Capital Management regarding the strategy for Commerzbank – an investment held by both of them. Cerberus is also an investor in Deutsche Bank. In the article it stated: “Cerberus’s attempt to wring some profit out of the two banks pits it against a German banking system structured to provide cheap credit to industry, not returns for investors.”
For those of us with an Anglo-Saxon background, it is too often assumed that the only strategic approach for any company is to maximise financial returns. However, when it comes to banks, it should be realised that profits for banks come from reduced profits or financial well-being of the bank’s clients – individuals and enterprises. It is generally a zero-sum game with money either being made by the bank or its clients. Whilst it may be possible that some banking products actually create new wealth, it is much more likely that the profits come not from economic value added activities but stripping out profits from the real economy.
Clearly the German banking system has been built on the premise that clients should be the beneficiary of the banking system and not a source of unreasonable levels of profit. There are of course many follow on issues to address such as:
- What level of profitability in banking is required to attract the needed capital to support the banking system?
- Do banks in systems focused on client well being end up being more inefficient due to lack of financial focus?
- What financial products actually create economic value in the real economy?
These are all good questions but the decision to position the German financial system as a support to the real economy rather than a stand alone profit opportunity is a valid one. Perhaps it is also a decision that has led to a very strong business climate in Germany for small and medium enterprises leading to economic growth and health.
