Europe needs Deutsche Bank as its champion

Deutsche Bank is the last heavyweight contender. While the other European investment banks - Barclays, UBS and Credit Suisse among them - retreat to retail and private banking amid investor discontent and a regulatory squeeze, it is doing the opposite. It wants to become more like Goldman Sachs, not less.

"I am not a very patient person," Antony Jenkins, chief executive of Barclays, declared last month, hinting that lacklustre results at its investment bank may provoke him to cut it back. Deutsche is patient. Despite upheavals, setbacks and suspicion in its conservative home market, it has grown its investment bank over three decades, since buying Morgan Grenfell in 1989.

I am glad that Deutsche has, and that it still wants to compete with what was once called the "bulge bracket" - banks and brokers led by Goldman Sachs and Morgan Stanley. Europe needs at least one global investment bank champion. Without one, it is in danger of leaning too much on Wall Street to shape and run capital markets that its companies - large and small - require.

We have witnessed the excesses of financial trading and regulators have tightened the rules. They are right, but one effect is to reinforce US hegemony. "If it is not done by a large American financial institution, it will be done by a large non-American financial institution," Jamie Dimon, chief executive of JPMorgan Chase, warned this month. The true risk is the opposite.

The top five fee-earners for investment banking services such as equity underwriting in the first quarter were all US banks - JPMorgan Chase, Goldman, Bank of America Merrill Lynch, Morgan Stanley and Citigroup - according to Thomson Reuters. When Wall Street is doing so splendidly, it is fair to ask whether they get more of a break from regulators than European rivals.

Europeans face new hurdles on Wall Street, such as the requirement to ringfence capital for US operations, but it is not the main problem. The Federal Reserve and other US regulators have also been tough on their own banks, especially the "too big to fail" banks, which have been forced to exceed global capital standards and pass repeated stress tests.

The real US advantage is twofold and old-established. First, its domestic market is far bigger; the pool of investment banking fees in the Americas was $11.5bn in the first quarter, compared with $5.3bn in Europe. "The costs of being global have risen greatly because of regulation, so having a profitable home market is a big advantage," says Huw van Steenis, European banking analyst at Morgan Stanley.

Second, US banks led the field for decades before European banks challenged them with sheer financial weight - the capacity to lend companies money and deploy a lot of capital. As regulators have made this onerously expensive with new rules, the traditional expertise of Goldman and Morgan Stanley has come to the fore again.

Europe's banks are now being forced to shrink. They are larger than US banks in relation to domestic economies because so much European financing is done by banks rather than capital markets. EU banks' assets were 274 per cent of output in 2013, compared with 83 per cent for US banks, which can offload the balance sheet risk of mortgage loans to agencies such as Fannie Mae.

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Because this is happening piecemeal and gradually, it is easy to forget how significant a historical moment it is. Credit Suisse and UBS spent decades nurturing investment banks, from Credit Suisse acquiring First Boston in 1990 to Swiss Bank Corporation (which later merged with UBS) buying S.G. Warburg in 1995. Europe's long challenge to Wall Street is fading.

Thankfully, Deutsche does not have this choice. It lacks the strength in private banking of Swiss rivals, and German retail banking has low returns due to competition from public savings banks. Anshu Jain and Jurgen Fitschen, its co-chief executives, could abandon retail banking or, more likely, spin off its Postbank subsidiary to focus on commercial and investment banking, and asset management.

It is arguable that nationality in finance is not vital, that Goldman and other US banks have been in London and Frankfurt for a long time, and the name on the door is less significant than whether the institution supports European investors and companies. The City has always thrived by not being nationalistic or protectionist.

But as the European Commission tries to forge a capital markets union to redress the continent's reliance on bank-based lending, it requires institutions to support the transformation. Europe's investment banks need not all be global in scale, there is an important role for domestic ones serving smaller companies and asset managers, but one or two would help.

They would make it less likely that European finance dries up in a crisis as US banks retreat; less likely that rules are made in New York that Europe has to follow; and more likely that competition thrives. If no others accept the challenge, Deutsche should.

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