european bank nightmare far from over as fines and fintech loom -very good read

2/16/2016 European Bank Nightmare Far From Over as Fines and Fintech Loom Bloomberg Business

http://www.bloomberg.com/news/features/20160216/europeanbanknightmarefarfromoverasfinesandfintechloom 1/20

The NeverEnding Story: Europe’sThe NeverEnding Story: Europe’sBanks Face a Frightening FutureBanks Face a Frightening FutureFebruary 16, 2016

Edward Robinson

If you had to pick the moment when European banking reached the point of noreturn, which would you choose? The July day in 2012 when Bob Diamondresigned as Barclays’s chief executive officer amid the Libor rigging scandal?Or the fall morning later that year when UBS announced it was pulling out offixed income and firing 10,000 employees? How about Sept. 12, 2010, whenBasel III’s raft of costly capital requirements started upending the economics ofglobal finance?

All signature events, to be sure. But try May 21, 2015. That’s when DeutscheBank stockholders filed into the domeshaped Festhalle arena in Frankfurt totake part in one of the most venerated and, let’s be honest, boring rituals incorporate life: casting a vote on management’s strategy and performance. Itwasn’t dull this time. Almost 40 percent of the bank’s investors gave coCEOsAnshu Jain and Jürgen Fitschen a big thumbs down. While winning six out of 10votes is a landslide in politics, it’s a crushing blow at a publicly traded company.

http://www.bloomberg.com/authors/AD9-aRhmeXY/edward-robinson

http://www.bloomberg.com/news/articles/2012-07-03/barclays-ceo-diamond-quits-after-record-libor-rigging-fine-1-

http://www.bloomberg.com/news/articles/2012-10-26/ubs-said-to-plan-10-000-job-cuts-amid-investment-bank-shrinkage

http://www.bloomberg.com/news/articles/2010-09-12/banks-worldwide-face-stiffer-capital-requirements-as-basel-forges-accord

http://www.bloomberg.com/news/articles/2015-05-20/deutsche-bank-revamps-board-as-jain-assumes-strategy-oversight

http://www.bloomberg.com/



By the end of June, Jain was out and Fitschen had agreed to leave the companyby May of this year.

Investors are running out of patience with European bank chieftains, and nowonder. Since the fall of Lehman Brothers in September 2008, eight of Europe’sbiggest banks have announced layoffs adding up to about 100,000 employees,paid $63 billion in legal penalties, and lost $420 billion in market value. In2015, Deutsche Bank lost a record €6.8 billion ($7.6 billion). In midFebruarythe industry suffered an epic selloff as subzero interest rates, China’s slowdown,the oil crash, and looming regulatory and litigation costs triggered an outbreakof fear not seen since the fall of 2008. Just last year new CEOs took over atBarclays, Credit Suisse, Deutsche Bank, and Standard Chartered. Now they haveto find a way to prosper in a marketplace that’s being reshaped simultaneouslyby strict new capital regulations and myriad financial technology startups thatdon’t have to abide by them.

While American banks appear to have turned the corner since that gutchurningautumn nearly eight years ago, European institutions are girding yet again for

Illustration by David Foldvari



another round of restructuring. So much so that analysts in London call them“building sites,” Bloomberg Markets magazine reports in its forthcomingissue. Credit Suisse’s new CEO, Tidjane Thiam, is “rightsizing” the investmentbank and pushing for a 61 percent jump in pretax income from his internationalwealth management unit over the next two years. At Barclays, Jes Staley wastedno time cutting 1,200 investment banking jobs and closing offices in Asia andAustralia after taking charge in December. Meanwhile, John Cryan, the Britishexecutive who replaced the Indiaborn Jain, is pursuing an unprecedentedoverhaul of Deutsche Bank’s entire information technology infrastructure toshore up shaky riskmanagement systems.

No event crystallizes the forces at work in European finance more than Jain’sexit and Cryan’s entry. Jain, 53, a fixedincome maestro who excelled on thetrading floor and the sales side, did as much as anyone to build Deutsche into aninvestment banking powerhouse with operations in 70 countries. No surprise,then, that when it came time for him to draft a fiveyear plan to confront theforces buffeting the institution, he balked at a fundamental reorganization alongthe lines, say, of what Sergio Ermotti did at UBS in 2012. In April 2015, Jainand Fitschen vowed to divest Deutsche’s shares in the German retail lenderPostbank and retreat from more than a halfdozen countries as part of a €3.5billion costcutting plan. Even so, as Jain put it, Deutsche Bank would “remainglobal … remain universal.” He said in a Bloomberg TV interview at the time,“There was quite a bit of speculation that we might have done something evengrander, even more radical. It really became a case of not altering the coreDNA.”

That wasn’t what investors wanted to hear, and Deutsche shares skidded almost10 percent over the next week. Analysts griped about the bank’s soaringlitigation costs. That month, Deutsche agreed to pay $2.5 billion in penalties toU.S. and U.K. authorities for its role in the Libor rate rigging. (No current orformer member of the bank’s management board was implicated.) Butsomething deeper was at work, too. European banks aren’t going through a

http://www.bloomberg.com/news/articles/2015-06-07/deutsche-bank-appoints-john-cryan-to-replace-jain-fitschen



stormy phase that will eventually clear and permit them to claim a new goldenage.The industry is undergoing a metamorphosis that will demand a thoroughand radical alteration of its core operating model.

Since the late ’90s, lenders on both sides of the Atlantic have sought strengththrough consolidation. They became financial supermarkets, crosssellingproducts and services to as many clients as they could reach. Theirs was a beliefsystem built on the promise of efficiency and growth; in the end, the regimefailed to deliver either in a sustainable way. Now universal banks in Europe areunbundling. “To play the game, a bank had to be integrated,” says ClaytonChristensen, a Harvard Business School professor who wrote a landmark 1997treatise on industrialscale disruption, The Innovator’s Dilemma. “What’shappening in their world is that it’s becoming more modular. More services canbe provided by independents. Little by little, customers will move away from theold and into the new.”

ZurichPhotographer: Mark Henley/Panos Pictures



But the banking industry is becoming more febrile as Cryan, Thiam, and theirpeers struggle to reengineer their firms in the face of an unforgiving market anda stalled European economy. On Feb. 8, Deutsche Bank shares nosedivedalmost 10 percent and the price of credit default swaps backstopping its debtsoared to its highest level since 2011, according to data compiled by Bloomberg.The cause? A warning from credit analysts in London to clients that Deutschemay be unable to service some of its riskiest bonds next year. Cryan wasted notime in telling the marketplace that the bank was “rock solid” and would notmiss bond payments. Still, it was an ominous flashback to the months leading upto the 2008 crash when one bank boss after another assured investors that theirfirms weren’t sliding into a capital crunch.

At the same time, peertopeer lending, mobile banking, and the advent of theblockchain, the software powering bitcoin, are mounting a challenge to banks—simplifying finance by making it easier to manage money and send paymentsoverseas. Banks are racing to catch up by establishing accelerators to incubatestartups, sometimes joining forces to pool expertise, and even patenting theirown digital currencies. More than 100 startups are now attacking the coreservices of retail banking in the U.S. and U.K., according to CB Insights, a NewYork research firm. “The intimacy and distributed power of a smartphone in thehands of a person is so different than anything we’ve faced in our businesscareers,” Brian Moynihan, CEO of Bank of America, mused during a roundtablediscussion at the World Economic Forum in Davos in January.

For all the changes imposed by policymakers, it’s the propellerheads in London,New York, and Silicon Valley who may truly rewire the business of banking.

http://www.bloomberg.com/news/articles/2016-02-08/deutsche-bank-says-it-has-at1-payment-capacity-of-1-1-billion



Venture capitalists, angel investors, and bankers themselves have plowed morethan $24 billion into fintech startups worldwide in the last two years, accordingto Innovate Finance, a Londonbased trade group. “There’s a fundamentalchange taking place in banks,” says Sam Hocking, who was once cohead ofglobal sales at BNP Paribas’s prime brokerage unit. “They see the unbelievablecosts in their technology, and if there are ways to bring them down by workingwith outside firms, that’s got to be meaningful.” Hocking now runs AltX, a SanFranciscobased startup that produces portfolio analytics for hedge fundmanagers and investors.

There’s no better place to get a feel for the fintech moment than the 39th floor ofOne Canada Square, a pyramidtopped tower in the heart of the Canary Wharfcomplex in London’s East End. Three years ago, Claire Cockerton and Eric Vander Kleij, entrepreneurs who specialize in developing startups, set out to buildLevel39, the biggest accelerator for this new breed of startups in Europe. It’sowned by Canary Wharf Group, the property developer that’s long been theLondon landlord for the world’s biggest banks. Having been whipsawed in thecrash, Canary Wharf concluded it might not be wise to depend on banks for itsfuture growth. It’s literally constructing the future on the eastern edge of itsland: a cluster of towers that one day will lease space to fintech startups, some ofthem incubated practically inhouse.

On any given weekday, Level39 is buzzing as entrepreneurs attend conferencesand commiserate with investors in a loungeworkspace with views ofskyscrapers bearing the logos of Citigroup, Credit Suisse, and HSBC. UBS hasbeen running experiments on issuing “smartbonds” in its blockchain lab here.Dopay, a startup based here that enables companies to pay their employees viaan app, has joined forces with Barclays. “After the crash, everyone thought itwas going to be tough for a while and there would be layoffs but then sentimentwould return,” Van der Kleij says. “What no one expected was fintech.”

http://www.bloomberg.com/news/articles/2014-09-28/london-fintech-incubator-nurtures-rebels-defying-banks



“If you coul

d invent a bank today, w

ould you?”

If there’s one chief executive who’s hip to this epic moment, it’s Cryan. AsUBS’s chief financial officer from 2008 to 2011, he helped steady the Swissbank as it lost billions on toxic subprime mortgages and related debt. Now he’scharged with fixing 146yearold Deutsche Bank—a task that requires him tolive up to his reputation, in the words of a German newspaper, as “the icecoldhousecleaner.” A better moniker might be: teller of uncomfortable truths. At abanking conference in Frankfurt on Nov. 23, the 55yearold CEO took on therich paydays for investment bankers: “Many people in the sector still believethey should be paid entrepreneurial wages for turning up to work with a regularsalary, a pension, and probably a healthcare scheme and playing with otherpeople’s money.” On Jan. 28 he slashed bonus pools at the bank “as a matter ofjustice.”

Cryan has even pined for the stability of American banking. “The bank I wouldlove to run at the moment is Wells Fargo,” he said in a press conference on Jan.28. “I would love to make 400 basis points in retail banking and have arelatively easy life.” The San Franciscobased lender, which recorded $23billion in profit in 2015, recently became the world’s most valuable bank.Cryan’s envy is understandable. With most of their legal bills paid and DoddFrank’s rules written and implemented, U.S. lenders are getting back tobusiness. JPMorgan Chase hauled in a record $24.4 billion in earnings last yearin a nearzero interest rate environment. The S&P 500 Financials Index

http://www.bloomberg.com/news/articles/2015-11-23/deutsche-bank-co-ceo-cryan-says-bankers-are-still-paid-too-much

http://www.bloomberg.com/news/articles/2016-01-28/deutsche-bank-board-members-won-t-get-2015-bonuses-cryan-says



outperformed its European counterpart, the Euro Stoxx Banks Index, by 14percentage points in the 12 months ended Feb. 12.

Forced to balance different political, cultural, and financial rules in a multitudeof nations, the euro zone’s leaders didn’t manage to put together a bankingunion until 2013. “If you realize how dependent we are on the banking system,you also realize how foolish we were to deal with the banks late,” said JeroenDijsselbloem, the Netherlands’ minister of finance, during a panel discussion inDavos. “The U.S. dealt with the banks very quickly, made them recapitalize,made them take their losses, and it took us three, four, five years more.”

Steve Schwarzman, the chairman and CEO of private equity giant Blackstone,suggested in the same discussion that regulators were stifling economic recoveryin Europe by leaning too hard on banks. “Regulation has made the world moredangerous,” Schwarzman said. “Please don’t say that we have overregulated thebanks,” said Dijsselbloem, who also serves as the president of the Eurogroup,which is made up of the euro area’s finance ministers. “We still have a numberof issues to deal with to make the banks able to support economic growth again.Rather than saying regulatory regimes put in place are smothering economicactivity, I think it’s actually the opposite. What’s smothering economic recoveryin Europe is the effects of a financial crisis. That wasn’t caused byoverregulation.”



Just because banks are welcoming innovation doesn’t mean they can control it.Startups are reinventing the business of retail banking. Londonbased FundingCircle has arranged more than $1.5 billion in loans to small businesses inGermany, the Netherlands, Spain, the U.S., and the U.K. since 2010, deliveringan average annual return of 7 percent to lenders. The startup is still tinycompared even with midsize banks. By matching borrowers and lenders on itswebsite, it doesn’t have to use its own balance sheet to make loans. Plus, it gainsan enormous cost advantage by not maintaining a branch network or a mountainof money to comply with capital ratios. “If you could invent a bank today,would you?” asks Samir Desai, Funding Circle’s CEO and cofounder.

Funding Circle and its ilk, of course, have yet to be tested in an economic crisis,and investors clearly aren’t sold on the revolution they promise: Shares inLendingClub, the No. 1 online lender in the U.S., plunged 68 percent in the 12months ended Feb. 12. And banks could just acquire fintech companies and tryto fold them into their operations. But Christensen says no large organization inany industry has ever been successful in building disruptive technology on itsown. There’s too much legacy in their operations, culture, and managementpractices to make such a leap. Christensen says he found JPMorgan Chase’srecent decision to distribute smallbusiness loans through On Deck Capital, aNew Yorkbased online lender, groundbreaking. The bank is essentially tellingthe marketplace that it trusts On Deck’s methodology for managing risk. That’s

Canary WharfPhotographer: Mark Henley/Panos Pictures



huge for the burgeoning peertopeer industry.

Yet Christensen urges JPMorgan Chase not to bring the tieup inside the castlewalls and risk smothering the innovation. “They have to set up these thingsseparately and keep them separate so they can grow in a new space,” he says.“Then one by one the customers of the traditional bank will leave and do moreof their banking in these new structures. So you won’t take the new technologyand integrate it into the old bank. You’ll take the customers out of the old bankand integrate them into the new one.”

Pretty radical, right? At Davos, Cryan surprised his fellow VIPs by embracingthe gauziest fintech dream of all—a cashless society. “Cash in 10 years’ timeprobably won’t exist,” he said. The quote made headlines across Germany. LastOctober, Cryan dispatched Chief Operating Officer Henry Ritchotte to set up adigital bank. “We’re currently building an attacker whose only job will be toattack Deutsche Bank,” Paul Achleitner, chairman of the bank’s supervisoryboard, said at the time. “It’s exciting.”

In the end, the banking industry’s troubles can be traced back to one thing: thecost of complexity. From the moment banks went global in the late ’90s,skeptics decried these behemoths as too big to manage, let alone too big to fail.But the institutions thrived on the very creation of complexity in their productsand in the markets. Now, to paraphrase what former Deutsche Bank CEO JosefAckermann said then, there’s once again a flight to simplicity. That’s what

http://www.bloomberg.com/news/articles/2016-01-25/biggest-global-banks-at-davos-we-re-all-fintech-innovators-now



regulators are demanding. And that’s what legions of customers are expecting asstartups deliver financial services at the tap of an app. The unbundling ofbanking is undoubtedly complicated and perhaps even fraught with unseendangers. And yet it’s really all about getting back to basics. —With NicholasComfort, Ambereen Choudhury, and Jeffrey Voegeli

Missing Malaysia Jet MH370Missing Malaysia Jet MH370Weeks Away From KeepingWeeks Away From KeepingSecrets ForeverSecrets ForeverFebruary 16, 2016

Angus WhitleyAngusWhitley1

http://www.bloomberg.com/authors/AEaJLmK35vQ/angus-whitley

http://twitter.com/AngusWhitley1



An unidentified man walks past MH370 related street art under a flyover in Kuala Lumpur,Malaysia.

The man leading the search for Malaysia Airlines Flight 370 is showing thestrain after almost two years of fruitless toil.

Martin Dolan, head of the Australian Transport Safety Bureau, said he strugglesto sleep at times, gnawed by thoughts that wreckage from the Boeing Co. 777may have slipped through the sonar net scanning 120,000 square kilometers(46,330 square miles) of the southern Indian Ocean.

MH370 is weeks away from becoming aviation’s biggest unsolved mysterysince Amelia Earhart disappeared in 1937. Of the 3 million components in thejet, only one has turned up a barnacleencrusted wing flap on ReunionIsland, thousands of miles from the search. There have been no traces of the 239people on board, their luggage or even the life jackets that were supposed tofloat.

Photographer: Joshua Paul/AP Photo



“There’s always this question: Have we missed something?” Dolan, 58, said athis office in Canberra. “That’s the sort of thing that will occasionally keep meawake at night.”

Some of the world’s most experienced searchandrescue experts increasinglyaccept that the A$180 million ($130 million) search may fail. Without freshclues, the hunt should end about June, when four ships are due to finish combingthe seas off western Australia, Dolan said. Within a rectangle the size of NorthKorea, vessels have scoured most of the patch believed to be the likely impactpoint and come up empty.

Failure Possible

Workers look for debris of the MH370 on the coast of Saint Andre,Reunion Island in August 2015.Photographer: Arnaud Andrieu/EPA



Nor are investigators any closer to ascertaining what happened inside the planeafter it took off from Kuala Lumpur on March 8, 2014, for Beijing.

“We were ready for most things, but MH370 has been unpredictable all the waythrough,” Dolan said. “It’s a possibility we will not succeed.”

In the aftermath, the International Civil Aviation Organization is pushing forcommercial aircraft to report their positions every 15 minutes. And theunderwater locator beacons inside their black boxes will have to last for 90 daysinstead of the current 30, under European Union proposals. But neither ruletakes full effect before 2018.

Asia’s aviation industry, meantime, is expanding at a breakneck pace with 100million new passengers taking to the skies every year, according to Boeing. Inthe next two decades, the world’s fleet of 22,000 aircraft is set to double.



BelgiumSized

Larry Stone, chief scientist at Reston, Virginiabased consultant Metron Inc., hastracked missing aircraft and ships for half a century. Stone mapped out theresting place of Air France Flight 447, which was found two years afterplummeting into the Atlantic Ocean with 228 people aboard in 2009.

The location, size and characteristics of the underwater search for MH370 makeit the toughest he’s ever seen. “I wouldn’t be surprised if they didn’t find it,”Stone said.

The waters in the search area are up to 6 kilometers (4 miles) deep and pepperedwith trenches and submerged peaks. Last month, a towed sonar vehicle collidedwith a volcano rising 2,200 meters (7,200 feet) from the seabed. The device wassevered and sank to the bottom.

Vessels still have to scan about 35,000 square kilometers an area bigger thanBelgium. The newest reinforcement is a Chinese ship with highdefinition sonar.

Some time around June, Australian authorities will finish scouring a120,000 square kilometer search area for missing Malaysia AirlinesFlight MH370. The plane disappeared in March 2014.Sources: Australian Transport Safety Bureau, Boeing, Bloombergresearch



The Dong Hai Jiu 101 will focus on areas of the ocean floor that are difficult toscan with conventional sonar when it arrives this month, Dolan said.

Hot Spots

Ships are rechecking about 100 locations, some of them inside an ovalshapedpatch toward the southern end of the search area, Dolan said. This hot spot ismost likely to contain the wreckage, according to Australia’s Defence Scienceand Technology Group, a government agency normally devoted to nationalsecurity.

But even the most comprehensive search won’t satisfy the victims’ families if itfails.

“We are going to try as hard as we can to lobby for the search to continue

Phoenix Autonomous Underwater Vehicle (AUV) Bluefin21 iscraned over the side of Australian Defence Vessel Ocean Shield inthe search for missing Malaysia Airlines flight MH 370 in April2014.Photographer: Leut Kelli Lunt/Australia Department of Defence viaGetty Images



beyond June,” said Grace Subathirai Nathan, 28, whose mother was a passenger.“I need an answer.”

The disaster unfolded when airtraffic controllers lost contact with MH370 lessthan an hour after takeoff as it approached Vietnam. Military radar showed theplane took a left turn, looped back across Malaysia and headed northwest up theStrait of Malacca.

Satellite Pings

Radar contact then was lost, but an orbiting satellite picked up pings from theplane. Analysis of those hourly checkins indicates MH370 cruised south overthe Indian Ocean for about six hours.

“They’ve done a remarkable job to get anything useful out of it at all,” saidVaughan Clarkson, a specialist in radar and tracking at the University of

Flight Lieutenant Jayson Nichols looks at a map as he flies over thesouthern Indian Ocean in search of the missing Malaysian Airlinesflight MH370.Photographer: Pool/Getty Images



Queensland, Australia who helped calculate the flight path. “You’re trying totrack a fastmoving aircraft with updates only about once an hour.”

The extent of human intervention in the silent disaster isn’t known. The lastrecorded words from MH370’s pilots, at 1:19 a.m. on March 8, were: “Goodnight Malaysian Three Seven Zero.” In a world where a $100 smartphone can betracked for free, the $250 million jet vanished.

Malaysia Prime Minister Najib Razak has said the plane was deliberately steeredoff course, and the homes of the pilot and copilot were searched. The U.S.Federal Bureau of Investigation also analyzed the pilot’s personal flightsimulator to no avail.

“All the evidence says classic autopilot flight,” Dolan said, emphasizing thatother authorities are trying to reconstruct events inside the cabin.

Mathematical ProbabilityThe disaster was the beginning of the end for Malaysia Airlines as a listedentity. Four months after MH370 disappeared, Flight MH17 was shot down overUkraine. A Malaysian government investment company bought out the airlinethe same year as passenger traffic slumped and losses widened.

A failed search “would leave a bad impression on the industry as a whole, butparticularly on Malaysia Airlines,” Christoph Mueller, the chief executiveofficer, told Bloomberg Television on Monday.

Back in Canberra, the ATSB is investigating about 130 incidents in total ranging from a freight train derailment in Queensland to a seaplane crash offnortheast Australia.

Yet Dolan says he’s consumed by MH370. He speaks mostly in a soft, low tone,



pausing often as he chooses his words. At a table in his office, he refers to a mapof the search zone in front of him as he outlines the analysis of the plane’s finalmoments:

The right engine runs out of fuel first, and within 15 minutes so does the left.There’s just enough fuel remaining for the satellite data unit to reboot and beama final message. Then the plane probably banks left and spirals into the ocean.

Based on that sequence, searchers are prioritizing an area within 20 nauticalmiles of the aircraft’s last transmission.

Last ChanceInvestigating the other possibility that someone was steering the plane andglided it without power until it hit the water would mean tripling the searcharea. That’s a very unlikely scenario, and it risks overwhelming investigators,Dolan said.

“Governments are just not willing to put the resources into that sort of potentialextension,” he said.

Ships scanning the seafloor already collected about 20 petabytes of imagingdata. That’s enough to house the entire digital collection of the U.S. Library ofCongress several times over.

Even after acknowledging the difficulties of searching a massive, remote and



deep area of the ocean, Dolan said he was confident the plane will be found.

“Every morning I wake up and check what’s going on, and I hope that today’sgoing to be the day,” he said.

Underwater search area map.Source: Australian Transport Safety Bureau

european bank nightmare far from over as fines and fintech loom -very good read

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