Things just keep getting worse for Deutsche Bank. The latest mishap for the German giant was an inadvertent $35 billion wire sent to an external account as collateral for a derivatives position. If you’re wondering what the big deal is, realize that this is more than the entire market cap of Deutsche Bank (the correct amount should have been $35 million). The execution of a wire with three extra zeroes should have been detected numerous times before being sent. It’s these kinds of errors that give risk managers nightmares.
This error, from Deutsche Bank’s operations department, obviously should have been preempted by internal controls, especially after a similar event occurred back in 2015. Then, a junior banker made an erroneous $6 billion payment to a U.S. hedge fund client, which was luckily reversed the following day.1
Mishaps like these indicate serious inefficiencies with Deutsche Bank’s legacy IT programs. In fact, the bank relies on 32 separate operating systems in its day-to-day operations.2 This led the former IT head to issue the now infamous statement, [Deutsche Bank is] “the most dysfunctional company” she’d ever worked for.3
But a more systemic problem apparently exists, outside of just IT issues. Recent history reveals the German bank has had problems deterring money laundering- Russian clients illegally sent money offshore on a daily basis, unbeknownst to Deutsche Bank.4 There have also been Libor rigging scandals, and recurring fines from the bank’s role in the structured products that exacerbated the financial crisis.
Moving Forward for Deutsche Bank
Here are three ways that Deutsche Bank might tweak their business strategy to better compete in banking down the road.
Utilize Big Data Analytics
With nearly 100,000 employees worldwide, the environment at Deutsche Bank is ripe for inefficiency. Communications and transactions between employees, departments, subsidiaries, partners, and clients create redundancies and reduce productivity. Greater adoption of business analytics and data science programs is an absolute must for Deutsche Bank and the company has admitted plans to invest heavily in digital technologies.
Deutsche Bank could use analytics to better monitor its employee’s communications so any type of rate-rigging scandals would be a thing of the past. The insights should also help the bank better understand the identity and connections of their vast number of clients. This is especially important as many use a web of complex offshore shell companies to move money illegally, dodge taxes and mask ownership. Deutsche Bank must ensure compliance with international regulations and sanctions- not an easy thing to keep track of.
Another ‘risky’ area the bank should closely monitor with big data analytics is derivatives. Here, the bank’s footprint is massive globally and they serve as counterparty on several different types of financial contracts. These range from interest rate and credit default swaps to foreign currencies transactions. Amazingly, the bank has amassed $40 trillion in notional value of derivative contracts, although the net amount is much lower, $18 billion.5 Still, derivatives remain arguably the bank’s biggest risk.
Analytics may help detect if any of their counterparties are in trouble before it becomes obvious to the market. That way, the bank can take proactive measures to preserve capital.
Realign the Workforce Towards Risk Management
With the bank so crucial to the EU, especially post-Brexit, it’s imperative that risk management be at the forefront of corporate strategy. For some perspective, the bank has total assets of roughly $1.6 trillion, larger than the total Gross Domestic Product of Italy. The emphasis must be on systemic safety and compliance, not risky trading strategies or winning Wall Street investment banking business.
We’re likely to see a realignment of employees at the bank- towards risk management and away from top-line growing positions like sales, trading and capital markets. It’s already begun- earlier this year, the bank’s Chief Regulatory Officer vowed to boost hiring for compliance, regulatory and anti-corruption initiatives by another 400 employees (to total 3000).6 Expect that number to rise substantially and for the bank pay up for top talent.
Be ready for this hiring boom by earning a Degree in Finance.
Generous compensation at the bank has been a consistent theme despite the scandals and declining operating performance. In fact, Deutsche Bank’s Managing Directors are reportedly the third-highest paid group of all major banks, behind just Goldman Sachs and JP Morgan.7
A Brand Remake
Deutsche Bank should consider their transgressions as an opportunity for a rebranding campaign to improve their reputation. They might consider a page from Wells Fargo’s new marketing strategy. The San Francisco-based bank has had its own scandals to deal with over the last decade. In fact, Wells’ transgressions were arguably more damaging since they breached the trust of individual customers by misappropriating their private data to open up phony accounts.
Wells Fargo recently released its ‘mea culpa’ campaign, which has actually been well received. A media barrage of advertisements centers around not only apologizing for the breach of trust as well as the future of Wells Fargo and its 2018 ‘re-establishment’. While just a slogan, it is a start. Deutsche Bank could introduce its own new campaign aimed at both institutions and individuals.
Further, Wells Fargo has stopped the practice of individual sales quotas-this was at the root of the problem of the client account scandal. Deutsche Bank could follow suit by reevaluating bonus incentives for traders and market makers. This could go a long way in reducing rogue trading and/or rigging scandals. The focus could switch to the more stable assets under management model prevalent in wealth management today.
Opportunities for Women at Deutsche Bank
The current push for enhanced diversity around the financial industry is a welcomed development. Our Women in Finance series has been paying homage to successful businesswomen for years now. Arguably, there has never been a better opportunity for women pursuing careers in finance.
And Deutsche Bank appears to be ahead of the curve with women’s initiatives. In a statement, “the bank will continue to build a pipeline for female talent for technical and STEM roles, with a clearer path to career progression across all areas of the bank”.8 The ‘clearer progression’ hopefully means more women will make the jump into more senior roles at the bank.
With the focus on STEM recruiting, those who can effectively marry technology skills and business vision should be strong candidates for management positions. Couple these statements with Deutsche Bank’s commitment to closing the gender pay gap and other initiatives could mean serious opportunities for well-qualified women at the bank.9
Masters Degrees Make Professionals More Valuable
Classic graduate degrees such as a Masters of Economics degree or Masters in Finance are always valuable credentials for aspiring financial professionals. But at Deutsche Bank, more specialized programs like a Masters of Financial Crimes and Compliance Management or an MBA with a concentration in Business Analytics should go a long way as they better align with the bank’s new direction. They are also relatively new disciplines so you’ll likely stand out among the many candidates vying for positions. Many of these advanced finance degrees are now offered online, providing flexibility for working professionals and other non-traditional students.
Deutsche Bank has made plenty of mistakes, but the future could still be bright. There are opportunities for professionals with the proper skill sets, including risk management and business analytics, to transform the bank from a dysfunctional behemoth to an efficient banking powerhouse.