Explainer: Why Germany wants a merger to support Deutsche Bank

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FRANKFURT (More Bank) – The German government has lobbied Deutsche Bank to discuss the merger with Commerzbank, a state-funded body, amid worries over the the flagship bank of the country, according to informed officials.

FILE PHOTO: The financial district that houses the headquarters of Germany's largest investment bank, Deutsche Bank, is photographed in the early evening in Frankfurt, on January 29, 2019. More Bank / Kai Pfaffenbach / File Photo

WHY IS THE GERMAN GOVERNMENT worried about the DEUTSCHE bank?

Deutsche, the largest bank in Germany, the largest economy in Europe, escaped the financial crash unscathed but lost ground.

In 2016, the International Monetary Fund described the bank as "the biggest potential risk in the world among the competitors of the financial system" because of its links with other banks.

The German authorities fear, for example, that a recession or a big fine will compromise the fragile recovery of the bank.

Berlin wants a reliable national banking champion to support its export-oriented economy, known for its cars and machine tools.

Deutsche and other European banks took longer to recover from the financial crisis, losing ground against stronger rivals from the United States.

WHY COMMERZBANK?

In addition to Deutsche Deutsche Bank, Commerzbank is the last major bank in Germany after a series of mergers. The government holds a 15% stake after saving it during the crisis, giving it an important voice.

Like Deutsche, Commerzbank struggled to rebound and German authorities say they are vulnerable to a foreign takeover. If an international rival took it, it would increase Deutsche's competition on its territory.

Berlin also wants Commerzbank's specialty – the financing of medium-sized companies, the mainstay of the economy – to be in the hands of the German.

WHAT WOULD A COMBINED DEUTSCHE AND COMMERZBANK LOOK LIKE?

The amalgamated bank would have about 1,800 billion euros of assets, such as loans and investments, and a market value of about 25 billion euros ($ 28 billion) . It would have a fifth of the German retail banking market.

Deutsche and Commerzbank together manage 2,500 branches in Germany and employ 140,000 people worldwide. A merger endangers at least 10,000 jobs, according to unions.

WHO IS FOR AND WHO IS AGAINST A FUSION?

Proponents of a merger include the German government and US investor Cerberus, a shareholder of both banks. Opponents include other shareholders of Deutsche Bank and unions.

Deutsche's chief executive, Christian Sewing, said he would like more time to stabilize the bank before proceeding with a merger, people familiar with the issue said.

WHAT IS THE STATUS OF THE DISCUSSIONS?

In February, Deutsche's management committee gave Sewing the go-ahead for exploratory talks with Commerzbank, a person familiar with the case said. There were contacts among a small group of executives. Discussions could end without agreement, said the person.

Now that discussions are open and Berlin is still seeking an agreement, companies are under pressure to understand the mechanism of a merger and decide whether it is viable or not. This decision is seen in the weeks.

WHAT ARE THE RISKS OF A MERGER?

One of the main risks is how to fill what a German official told More Bank will be a financial hole of several billion euros, because a merger could result in an adjustment of the valuation of certain bank investments.

Commerzbank, for example, has about 30.8 billion euros of debt securities, such as Italian bonds, which now represent 27.7 billion euros, a decrease of 3.1 billion euros. A link could crystallize this loss. Deutsche has these securities at market value in its accounts.

The deal would make the German government a shareholder in the country's biggest bank and leaders would like to limit its influence.

The two banks could also get bogged down in a restructuring, such as the integration of different technological systems, to the detriment of their rivals.

OTHER THAN A FUSION, ARE THERE ANY OTHER OPTIONS FOR THE DEUTSCHE BANK?

German officials have had exploratory discussions on the merger of Deutsche and UBS, but interest in Switzerland has sparked little interest, say people familiar with the subject.

These officials believe that sticking to Deutsche's current plan to cut costs and reduce high-risk banking operations leaves little hope for a turnaround.

The constant pressure of Berlin complicates the task of Deutsche. The merger with a state-owned lender, in the opinion of officials, offers a haven of peace.

However, if the negotiations unfolded badly, Deutsche could react to pressure from some investors for a further reduction in investment banking, especially in the United States.

DEUTSCHE HAS A LOT OF BAD PRESS. What is it?

Deutsche has long been unpopular with ordinary Germans because it was considered by many to be a symbol of capitalist excess.

His image has been tarnished by numerous lawsuits and billions of dollars in fines.

These included an alleged "conspiracy" to rig the price of financial market bets and fictitious transactions between Moscow and London that transferred money from Russia to foreign countries.

In its latest financial report, Deutsche set aside 1.2 billion euros for litigation. This is a fraction of previous years, but nevertheless more than three times its earnings of 2018.

WHAT DOES DEUTSCHE DO RIGHT?

The bank has been handling the bulk of lawsuits since the economic crash and has improved its finances.

Announcing the first profit since 2014 last year, Sewing Chief Executive Officer said the group was "on the right track". But German officials were not convinced and continued to press for negotiations with Commerzbank. He has now yielded to this pressure.

Report by Tom Sims and John O Donnell. Edited by Jane Merriman

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