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TO RUEHC/SECSTATE WASHDC IMMEDIATE 7968
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UNCLAS SECTION 01 OF 02 FRANKFURT 002857 
 
DEPARTMENT FOR EUR/AGS 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: EFIN ECON EU GM
 
SUBJECT: German Bank Consolidation Reveals Conservative Business 
Models 
 
ENTIRE TEXT IS SENSITIVE BUT UNCLASSIFIED.  NOT FOR INTERNET 
DISTRIBUTION 
 
REF: Frankfurt 2735 
 
¶1.  SUMMARY.  In a recent wave of acquisitions in the German banking 
sector, private German banks have taken over partners with large 
retail businesses to shore up capital and acquire steady, reliable 
sources of income.  These moves reflect a changing business model 
designed to help banks adjust to a new reality where previous 
sources of funding such as investment banking are more limited and 
capital is scarce.  In a series of conversations with a Treasury 
delegation, private bank risk officers discussed the new reality, 
forecasting that banks would be following more conservative 
strategies in the coming years.  END SUMMARY. 
 
Takeovers Reflect New Business Models 
------------------------------------- 
 
¶2.  On September 11, Treasury Deputy Assistant Secretary for 
International Monetary and Financial Policy Mark Sobel, Office of 
International Banking and Securities Markets Director William 
Murden, US Treasury Representative for Europe Mathew Haarsager and 
ConGen Econ Off met with risk officers at Dresdner Bank, Deutsche 
Bank and Commerzbank to discuss ongoing trends in the European 
financial sector (Note: These meetings took place a few days before 
Lehman Brothers declared bankruptcy and Merril Lynch was acquired. 
End Note.).  Deutsche Bank's chief risk officer (CRO) confirmed 
media reports to the group that the bank was in final stages of 
buying a 30% stake in Postbank (which is 50% owned by Deutsche Post) 
with an option to increase its share to a majority at a later date, 
a move which will greatly expand Deutsche's retail presence.  The 
move follows Commerzbank's acquisition of Dresdner Bank one week 
before (see reftel). 
 
¶3.  The Deutsche Bank executive welcomed the deal saying that it 
offered stable, profitable business on Deutsche's "own turf." 
Although retail banking is a crowded market in Germany, he expressed 
confidence that his bank offers better service and products than the 
many savings banks.  Commerzbank's chief risk officer expressed 
similar optimism about his bank's acquisition of Dresdner, saying 
the new bank would be a leader in lending to small and medium-sized 
businesses in Central and Eastern Europe and would follow a very 
traditional and conservative business model avoiding the pitfalls of 
some banks during financial market turmoil.  By expanding their 
retail business, both banks will gain access to capital, whose 
availability from other sources, such as equity markets, has 
diminished in the last year. 
 
Lessons Learned on Risk Management 
---------------------------------- 
 
¶4.  Dresdner Bank's chief risk officer agreed with his colleagues at 
Deutsche and Commerz that the main lesson from the credit crisis was 
that none of the banks anticipated  the rapid drying up of liquidity 
in August 2007.  When the crisis hit, Dresdner found that it was 
unable to unload asset-backed securities which it usually held on a 
six-month basis.  The assets have now become illiquid, forcing 
Dresdner to write down their values.  Dresdner, which has suffered 
negative earnings since the beginning of the turmoil, will be forced 
to keep the assets for the foreseeable future. 
 
¶5.  At all three banks, the CROs pointed to challenges ahead in 
staving off future crises and maintaining vigilance in risk 
assessment.  All sides agreed that the term "procyclicality" (the 
idea that market and regulatory conditions can amplify a crisis) 
remains vague and there is no wide-spread agreement on what it is or 
how to prevent it.  While Basel II may be a step in the right 
direction, the Deutsche Bank executive pointed out that it also 
operates as a "double whammy" on banks by raising capital 
requirements in already difficult times.  Moreover, raising capital 
requirements fails to differentiate among banks by ignoring the 
underlying quality of assets on balance sheets.  All of the 
interlocutors saw accounting standards as a vexing problem, as 
current mark-to-market rules fail to account for a dysfunctional 
market.  But there is seemingly no better way. 
 
¶6.  The three executives agreed that the role of the CROs in banks 
needs to be strengthened.  While Deutsche Bank cautioned against 
"going back to the Stone Age" in risk management, the Commerzbank 
executive argued that CROs need to define risk policy, think more 
about liquidity and be independent and strong.  The Dresdner 
executive expressed more fatalism saying that management would 
continue not to listen to CROs in high times, making the next crisis 
inevitable.  He argued that while a CRO can disapprove individual 
transactions, he or she can not change the whole business model, and 
can at times be either complicit in or not able to see the 
 
FRANKFURT 00002857  002 OF 002 
 
 
problems. 
 
¶7.  COMMENT.  The takeovers among German banks reflect a change in 
the business model to more traditional banking as well as an attempt 
to access fresh capital.  This strategy of risk aversion as well as 
diversification may also mean that German banks are positioned 
conservatively if and when market conditions improve.  Many of the 
debates about the way forward remain unresolved, leaving risk 
officers and senior management little choice but to pursue a more 
cautious strategy in the coming years.   END COMMENT. 
 
¶8.  This cable was coordinated with Embassy Berlin and cleared with 
Wilbur Monroe at the Treasury Department.