German banks earn better, but not well

Good morning dear readers,

“What is breaking into a bank compared to founding a bank?” Bertolt Brecht once asked, and in relation to Germany one has to say: in most cases the lesser evil.

There’s only a few years in prison for burglary. On the other hand, anyone who invested their money in a bank had the best chance of ruining themselves completely in recent years. Of the EUR 100 invested in Commerzbank shares 15 years ago, there are still around EUR 15 left today – not including inflation and dividends.

In addition to all sorts of mismanagement, the zero interest rate policy of the central banks caused bad numbers in many German banks. The lower the interest rates, the smaller the margin that commercial banks can demand from their credit customers.

Interest rates are now rising and the banks have better chances of making money again. German banks are likely to achieve a return on equity of 5.3 percent in 2022, according to the Global Banking Annual Review of the management consultancy McKinsey. This is the highest value in ten years.

In an international comparison, the German financial institutions still perform poorly – even if one considers that many German banks and savings banks balance comparatively conservatively and prefer to allocate part of their profits to the reserves. Globally, banks’ return on equity is likely to have risen to between 11.5 and 12.5 percent. International banks were last more profitable in 2007 and thus before the outbreak of the global financial crisis.

According to McKinsey, one of the main reasons for the yield gap is the comparatively fierce competition in the German banking industry. Freely adapted from Brecht, it can therefore be said: If a bank is to be founded, then it would be better not in Germany.

Federal Finance Minister Christian Lindner (FDP) has to listen to a lot of criticism because he has built up large shadow budgets with the special assets for the Bundeswehr and the billion-dollar fund to finance the gas and electricity price brakes, which should make the official federal budget appear a little less red.

In fact, Lindner’s billions pale in comparison to the hidden debts accumulated by state-owned companies. This is shown by a study by the Leibniz Center for European Economic Research (ZEW), which is available exclusively to the Handelsblatt. According to the study, the liabilities of public companies make up almost 35 percent of the total national debt. In addition to the regular German government debt of 2.05 trillion euros in 2019, there are another 718 billion euros in liabilities that do not appear in the official statistics.

Both the number and the size of state-owned companies have increased significantly in recent years. In 2008 there were still 14,704 companies from the federal, state and local governments, in 2019 there were already 19,009 – starting with Deutsche Bahn, municipal utilities and real estate companies to state wineries.

ZEW study author Friedrich Heinemann says he was surprised by the growth and size of the sector: “Ultimately, Germany is in the process of reversing the era of privatization from the 1980s to 2000s.”

Admittedly, it cannot be proven that politicians are deliberately tricking the debt rule by founding public companies. But, according to Heinemann: “It is striking that there was such a massive increase in public companies in the decade when the debt brake was introduced.”

Martin Greive, responsible for financial policy at the Handelsblatt, passes a devastating verdict in his editorial: “Germany of all places, which sees itself as a haven of financial stability, as an anchor of trust in the European monetary union, has been acting as a fiscal charlatan for some time: Europe’s largest economy interprets its debt rules in a way that suits government politicians.”

This promises to be an interesting showdown: the most powerful authority in the world against the richest man in the world. In a video call, EU Commissioner Thierry Breton pointed out to Twitter boss Elon Musk that internet companies could lose their operating license for Europe if they systematically violate tightened European online safety laws.

Breton announced Wednesday night after speaking with Musk: “Twitter must establish a transparent user policy, significantly increase content moderation and protect freedom of expression, take a firm stand against disinformation and limit targeted advertising.”

All of this requires adequate “human resources” — a nod to Musk’s decision to lay off half the Twitter workforce.

Background: The EU’s Digital Services Act, or DSA for short, which recently came into force, imposes comprehensive requirements on the operators of online platforms. Among other things, companies must adapt their algorithms in such a way that political debates and elections are not manipulated by these systems.

Companies violating the Digital Services Act face fines of up to six percent of global sales. If this happens again, there could even be a threat of “a ban on activities on the EU internal market”.

Musk’s response, according to Breton, was that Musk assured that he had “read the Digital Services Act carefully” and considered it “a sensible approach.”

BTW: I’m considering commenting on my next discussion with the police that I’ve read the Highway Code and think it’s a sensible approach.

For today’s preliminary round thriller Germany against Costa Rica FIFA, the world football association, has nominated France’s Stéphanie Frappart for the first time to referee a match at a men’s World Cup. And the only question you ask yourself is: why only now?

Frappart has been whistling in Ligue 1, the French counterpart to the Bundesliga, since 2019. In May, she refereed the final of the French Cup.

Now we can only hope that someone has taught Frappart the most important rule in international football, as once put by British striker Gary Lineker: “22 men chase a ball for 90 minutes and in the end the Germans always win.”

I wish us a day that proves Lineker right.

Best regards

Her

Christian Rickens

Editor-in-Chief Handelsblatt