FRANKFURT — Anshu Jain, the co-chief executive of Deutsche Bank, chuckled when he was asked on Monday whether the United States had become inhospitable to foreign banks. “There is a big advantage to being American in America,” he said.
In fact, zealous regulators and aggressive law enforcement authorities have prompted most other European banks to curtail their operations in the United States. On Monday, Deutsche Bank responded to the tense atmosphere with a sweeping plan to shrink its investment bank and reduce its dependence on borrowed money.
The changes probably make Deutsche Bank less of a threat to the global financial system. But they are sure to raise questions about whether Germany’s signature bank can continue to compete in the same league as Goldman Sachs or JPMorgan Chase.
Mr. Jain and the bank’s other co-chief executive, Jürgen Fitschen, insisted on Monday that they are not retreating from the idea of a universal bank that offers a full range of banking services to individuals and business worldwide. And they reaffirmed their determination to be a force on Wall Street.
But since the financial crisis, European investment banks have steadily lost market share to their United States rivals. In the first quarter, European banks accounted for 30 percent of global investment banking revenue, according to the data provider Dealogic. That was the lowest share since Dealogic began keeping track in 1995.
Deutsche Bank ranks sixth worldwide measured by investment banking revenue. The top five are all based in the United States: JPMorgan, Goldman, Morgan Stanley, Bank of America Merrill Lynch and Citigroup. In the United States market alone, Deutsche Bank is a mere ninth among investment banks.
Roy C. Smith, a professor at the Stern School of Business at New York University, said that Deutsche Bank’s best hope to compete with its American rivals would be to split off the investment banking activities. But that was not the plan presented on Monday.
Deutsche Bank will sell its Postbank network of branches in Germany by listing the unit on the stock market next year. But it will continue to operate a network of branches with the Deutsche Bank brand in Germany and some other countries, albeit in streamlined form.
“If anything you would have to say this is a muddling through,” said Mr. Smith, who has written about Deutsche Bank’s strategy. Deutsche Bank remains enormously complex and difficult to manage, he said. “It’s a big bull of a bank,” Mr. Smith said.
Mr. Smith pointed out that the name of the reorganization plan, Strategy 2020, means that even if Deutsche Bank meets all its goals, it will still have been 12 years since the beginning of the financial crisis “before they get to some kind of equilibrium.”
Investors clearly shared Mr. Smith’s pessimism. Deutsche Bank shares sank 4.6 percent on Monday in Frankfurt trading.
Regulators around the world, but especially in the United States, are demanding that all banks reduce risk. Deutsche Bank was particularly vulnerable because of its large exposure to businesses that can be lucrative in good times but toxic in bad, like derivatives contracts. The bank said on Monday that it would stop offering some kinds of derivatives and retreat from other risk businesses like commodities trading.
Meanwhile, aggressive law enforcement authorities last week extracted a$2.5 billion penalty from Deutsche Bank for misconduct related to an interest rate rigging scandal. The penalty, as well as criticism from regulators who said the bank failed to recognize signs of misconduct, damaged the reputation of the bank as well as Mr. Jain, who was head of Deutsche Bank’s investment bank operations in London, where most of the mischief took place.
He admitted on Monday that he shared the blame for what the United States and British authorities said was a failure to heed warnings that some traders were manipulating benchmarks used to set trillions of dollars in mortgages and other debt.
“The conduct of those people was reprehensible, and I was their leader,” Mr. Jain said. “There’s no stepping back from that.”
Adding to the damage, Mr. Fitschen, the co-chief executive, must appear in court in Munich on Tuesday with four former top managers of Deutsche Bank to stand trial on charges they gave false testimony in a civil suit. The lawsuit was brought by a German media company that accused the bank of driving it into bankruptcy.
Mr. Fitschen said on Monday that the charges were unjustified.
The reorganization that was announced on Monday will also include raising the so-called leverage ratio, a measure of the bank’s dependence on borrowed money, to 5 percent from 3.4 percent. (A higher number means the bank is using more of its own money and less debt.) United States regulators have been among the most zealous in insisting that banks reduce leverage.
For Deutsche Bank, the change will entail a reduction of hundreds of billions of euros in the bank’s use of borrowed funds. It also means that the bank will earn a lower return on the money it invests than in the past. The bank will aim for a 10 percent return on capital, down from a previous target of 12 percent and a far cry from the 25 percent return that Deutsche Bank sought to achieve before the financial crisis. In addition, the bank said it aimed to cut costs by 3.5 billion euros, or about $3.8 billion, a year.
The cuts would seem to suggest that Deutsche Bank will have little choice but to join other European banks like UBS or Barclays in scaling back its American operations.
But Mr. Jain argued that Deutsche Bank needed to be a force on Wall Street to serve blue-chip German companies that almost always have large operations in the United States. “It is critical for us to have a strong and credible presence in the U.S. in order to claim that we are a true global competitor,” Mr. Jain said.
True, he could point to a rebound in Deutsche Bank’s investment banking unit during the last quarter. The bank said that revenue generated from trading stocks, bonds and currencies was the highest in years. Revenue from investment banking rose 15 percent, to €4.7 billion. Operating profit for the unit fell by more than half, to €643 million, after subtracting a portion of the penalty paid in the rate-fixing scandal.
Mr. Jain said the bank will “avoid trying to be all things to all people.” But critics would say the bank, trapped in its image of itself as Germany’s beachhead in the financial world, is still trying to do too much.