Deutsche, HSBC say goodbye to being too-big-to-manage by Geoffrey Smith @FortuneMagazine April 27, 2015, 4:39 AM EDT E-mail Tweet Facebook Google Plus Linkedin Share icons The realization is dawning that it no longer pays to be a large, complex bank. Over the last week, two of the world’s biggest and most sprawling financial empires have taken big steps toward becoming simpler and smaller, pushed in that direction by new regulation that no longer tolerates banks that are either too big to fail, or too big to manage. Germany’s Deutsche Bank AG DB said Monday it would shrink its investment bank by around €200 billion ($218 billion), exit certain markets across the world and cut its retail bank branch network by over 25%. Those moves come on top of a decision it announced late Friday to sell a majority stake in its Deutsche Postbank unit, a German retail bank which was a valuable source of cheap funding during the crisis, but which has been a drag on the group’s earning power. Meanwhile, across the North Sea, the U.K.’s Sunday Times reported that HSBC Holdings Plc HSBC is preparing a full separation of its two biggest operations: its British main street bank and its Asia-focused commercial and investment bank. HSBC had said on Friday it was considering relocating its headquarters, and speculation that it is heading back to its historic home of Hong Kong surged after the former British colony’s central bank, the Hong Kong Monetary Authority, said it would welcome HSBC if it chose to move back. In both cases, the developments reflect the difficulties of sustaining profitability in a world of higher capital requirements and reduced tolerance towards unethical behavior such as money-laundering and market manipulation. Deutsche, which until 2010 had still clung to a belief that it could generate a 25% return on equity, cut its target for a third time in four years Monday to a sober 10% from 12% previously. Deutsche was one of the prime targets of new rules drafted by the Federal Reserve forcing big foreign banks in the U.S. to create “intermediate holding companies” with their own capital base. In addition, Deutsche is subject to a heavy capital surcharge because of its status as a globally “systemically important” bank. The cost of past misdemeanors was evident in Deutsche’s first-quarter earnings, released late Sunday, which included a €1.5 billion hit for manipulating the Libor international benchmark interest rates. Deutsche’s net profit fell by half from a year ago to €559 million, even though market volatility, the European Central Bank’s quantitative easing program and a booming trade in mergers and acquisitions drove revenues to €10.4 billion, close to an all-time high. Signaling that more pain is in store, Germany’s flagship bank raised contingent liabilities (legal costs that it deems possible but unlikely) by half to €3.2 billion euros, saying it was now able for the first time to estimate costs of certain risks. Specifically, co-CEO Jürgen Fitschen will stand trial on Tuesday in Munich over allegations that he and other former executives worked to precipitate the collapse of the Kirch media empire in order to cash in on advisory fees from restructuring the group. Fitschen has said publicly that he “neither lied nor deceived” in the Kirch case. Deutsche’s woes contrast with the improving fortunes of some of its biggest rivals. With most of their pre-crisis legacy issues resolved,, Goldman Sachs & Co GS and Morgan Stanley MS have both posted hefty gains in profits in the quarter. HSBC, for its part, faces many of the same capital-related issues as Deutsche, but its threat to relocate is also motivated by a U.K.-specific threat. The bank claimed on Friday that it was concerned by the risk of the U.K. leaving the E.U., which would damage its access to the E.U.’s single market. However, the real threat to HSBC’s profits is simpler and more brutal: the Labour Party, which is the bookmakers’ favorite to form the new government, has no intention of taking the U.K. out of the E.U., but has every intention of raising the levy on banks’ balance sheets that cost HSBC $1 billion last year.