Deutsche Bank is overhauling its treasury function to put its excess cash reserves to work as European lenders become increasingly squeezed by negative interest rates.
Germany’s biggest lender has combined all its treasury markets and investment operations, which raise funds and manage the bank’s cash and liquidity reserves, into a single team and hired François Jourdain, formerly of Barclays and the Bank of England, to run it.
Deutsche has €246bn in liquidity reserves — defined as cash and cash-like instruments such as sovereign bonds — and has identified a surplus of about €30bn it can use to retire expensive liabilities and invest in higher returning assets, treasurer Dixit Joshi told the Financial Times in an interview.
“What we are seeking to do is to offset the drag of parking cash at the central bank in a negative rate environment, for example by buying a bond that pays more than cash,” he said.
Additionally, the bank will start investing some of the surplus cash in longer dated assets that could earn even more, between 100 and 120 basis points more than it currently earns.
“That might be a highly collateralised loan, an asset-backed security as an example,” said Mr Joshi. “What I am describing is what every large, globally significant bank treasury already does routinely as part of core liquidity deployment. We are starting to do what we should be: optimising liquidity, whilst managing resources safely and soundly.”
Across the eurozone, banks’ earnings have been suffering from negative interest rates because it reduces the amount of interest they can charge to lend.
Deutsche estimates that repositioning its liquidity reserves to a more equal balance of cash and securities should add €300m a year to its revenues.
“We manage substantial cash balances every day, so optimising it is key,” said Mr Joshi. “Already by managing the balance sheet more aggressively and actively we have reduced our funding requirements this year.”
Last month Deutsche unveiled a dramatic overhaul of its business model to reduce its reliance on investment banking, under which it will cut 18,000 jobs, exit equity trading and set up a €288bn bad bank. Executives have made reducing its punitively high funding costs and improving its credit rating top priorities to improve lending margins and its competitive position against other top-tier banks.
It will be more difficult for Deutsche to increase revenues if the European Central Bank cuts interest rates further into negative territory next month — as is widely expected — in an attempt to counter fears it will miss its inflation target. The current deposit rate is minus 0.4 per cent cent, meaning it costs banks to place cash with the ECB.
Deutsche required regulatory approvals for the treasury division changes, which Mr Joshi said were granted after improvements to its models, data controls and governance.
Last month supervisors signed off on a temporary lowering of Deutsche’s minimum core capital level from 13 per cent to 12.5 per cent to reflect improvements in its treasury management and to give it breathing space to execute its restructuring.
Mr Joshi also pointed to the German bank passing both legs of the most recent US “CCAR” stress tests after failing in 2018, releasing its US unit from having to hold extra liquidity and lifting a ban on it paying dividends and performing share buybacks.
Mr Jourdain, the man charged with running the enlarged unit, was previously chief compliance officer for Barclays’ international unit and also head of the British lender’s treasury funding and investment operation.
“Combining a number of our market-facing Treasury units into one will streamline our decision making, reducing complexity and overlaps. It’s better to have just one person in charge,” said Mr Joshi.
Mr Jourdain will oversee a diverse range of operations at Deutsche from public capital markets issuance, private bond placements, liquidity pool management, money markets operations and central bank balances.
Cerberus, one of the bank’s largest investors, has been advising Deutsche on balance sheet optimisation and had been pushing executives to use its treasury operations more actively, the FT has previously reported.
The US private equity firm, led by former JPMorgan executive Matt Zames, advised on benchmark testing of Deutsche’s new treasury and liquidity models, checking they function efficiently and are neither too conservative nor too aggressive compared with peers, said Mr Joshi.
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