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The withdrawal of Deutsche Bank from the stock market casts a shadow over the city of London. Nestled at the corner of London Wall and Old Broad Street, not far from the traditional home of the London Stock Exchange, Deutsche Bank was the last full-fledged European challenger of the Wall Street elite to have its bank headquarters investment in the heart of the Square Mile.
The bank's unusual location where the "Big Bang" has occurred speaks of the abandonment of the Old City as the geographical center of the financial services sector in London. Its withdrawal from the business model that underpinned the sudden deregulation of financial markets in the 1980s also reflects the decline in equities as a capital market sector. History suggests that the first change will be permanent, but that the second may not be.
In 1983, when plans for deregulation of the city were announced, activities focused on the narrow streets and lanes of EC2. This complex geography was accompanied by a fragmented economic model. Stock and gilts trades took place in a central marketplace, the floor of the stock market, but strict rules separated the participants.
Brokers had to run trades through specialized companies called jobbers, and business advice was a completely separate activity in the hands of generally repugnant investment banks. In a rapidly globalizing sector, small businesses in their tiny offices and their protected markets risked being left behind by more progressive off-exchange bond markets and the new deregulated Wall Street banks.
In 1986, the year of the Big Bang, the economic model and the theater of action had changed. Equities were a growth sector for investment banks, fueled by institutional investors seeking to protect their capital at an inflationary age, governments eager to privatize state-owned badets, and investees seeking alternatives. to expensive debt.
The arcane rules were swept away and investment banks combining trading, brokerage and business advice on the Wall Street model were created. The old merchant banks wanted to play. Morgan Grenfell was one of them, buying a jobber and building a broker. Cluttered offices in the heart of the city could no longer absorb the newer and larger companies that migrated to its airport perimeter and, later, further east to Canary Wharf.
Things did not go exactly as planned and many of the new investment banks were quickly dismantled. Morgan Grenfell was one of the first to leave, closing Morgan Grenfell Securities in 1988 and sold to Deutsche Bank in 1989 as part of the German lender's efforts to become a universal bank. Ten years later, Deutsche buys the American derivatives specialist, Bankers' Trust, and moves into a new building in the heart of the city, ready to use its balance sheet to challenge Wall Street.
In the 2000s, Deutsche became one of the "flow monsters" of age, climbing the rankings and threatening to disrupt the old order. Then, like other big banks, the 2008 financial crisis prevailed. The response has been slower than others and after the death of a thousand cuts, last week's announcement ended a 30-year strategy.
The experiences of another European bank suggest that this might not be quite the end of the story. In 1997, Barclays sold its equity business to refocus its investment banking on fixed income bonds. Several observers, including myself, quickly qualified Barclays as a serious player in investment banking, but we made a mistake. Next came Bob Diamond, who turned Barclays Capital into a powerhouse and, in 2008, opportunistically rescued Lehman's US equity business from the disaster. Barclays was back just ten years after its release from the market and remains the only full service European alternative to Americans. Is history repeating itself with Deutsche Bank?
Not soon. The empty spaces on the London Wall are not only an unsuccessful strategy, but also a paradigm shift in the financial markets. The number of publicly traded companies is steadily declining, initial public offerings are elusive and central stock markets are losing ground against internalized transactions between institutions. Huge private capital and sovereign wealth funds are available to finance activities, and the investment bank Big Bang model that mediates between investors and issuers in government markets is being questioned.
With binding governance requirements, even heavier investor investors willing to take the plunge and offering a simple alternative to private money: "Why go public?" Is an issue that many private companies are asking themselves. These are the new terms of exchange on the financial markets and they are here to stay.
However, if 40 years of watching this industry taught me one thing, nothing is everlasting. The triggers for re-balancing may include an increase in interest rates to change the calculation of risk capital funding, the return of inflation and policy interventions – for example in the areas of regulation or taxation. If some or all of these events happen, the primary equity markets would regain some momentum and some of the future leaders of Deutsche Bank could ask Diamond to replenish a full – service investment bank. After all, this has already been done.
The writer is the author of "The bank that has lived little: Barclays in the era of very free market"
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