Is Deutsche Bank steaming towards an iceberg? In June 2016, the IMF said that Deutsche Bank appears to be the most important net contributor to systemic risk in the global banking system. In June/July, Deutsche Bank's US unit failed the Federal Reserve's stress test. DB's European unit narrowly passed the ECB's stress test. But in a Sept 16 report, a Credit Suisse analyst says that Deutsche Bank's common equity tier 1 ratio, a measure of a bank's financial strength, was below the ECB's minimum requirements. In August 2016, Deutsche Bank was removed from Europe's STOXX Europe 50 index. Deutsche Bank's market value has fallen 65% from nearly fifty billion to sixteen billion today. It hit new lows today. The always helpful US government has just assessed a fifteen billion fine on Deutsche Bank for alleged irregularities during the housing bubble collapse in 2008. DB has a $5 billion litigation reserve and is trying to negotiate the fine down to $5 billion. The bank's net revenue has fallen 21% in the first half of the year. And today news came out that a couple of big hedge funds are pulling their money out of Deutsche Bank. While a relatively small sum in the big picture, that news has everyone spooked. http://www.cnbc.com/2016/09/29/the-deutsche-bank-crisis-how-we-got-here-and-where-we-are.html Personally, I would have expected to see this from a Greek or Italian bank, but Germany's vaunted Deutsche Bank? Unthinkable. And unfortunately, it's against European tradition to bail out struggling banks in American 2008 style. Angela Merkel's government is making noises like there will be no bailouts and Deutsche Bank is on its own. So... if Deutsche Bank fails, what will the effects be on the European and world banking systems? Will there be a domino effect and a new financial crisis?
There are 3 senarios: 1) Credit lines and deposits dry up as panic spreads and the bank fails which causes a global banking crisis. I think this is very unlikely. I think Europeans are smarter than that. 2) Deutsche Bank raises capital by selling assets, and it has begun to do so. It may need to sell equity to private investors or the government. This isn't 2008, capital markets still function. I think this is the most likely solution. 3) Everyone could prognosticate and global markets would languish under the worry of a possible systemic financial crisis until the crisis is resolved. The only reasonable option is option number 2. No reasonable government would let a systemically important bank like Deutsche Bank fail, and Merkel is nothing if not responsible. Additionally, the US fine will likely be negotiated downward. How much Deutsche Bank will ultimately be required to pay remains unknown. But I think it is safe to say, it will be significantly less that the current amount. The US government has no interest in causing another global financial crisis either. "IMF Managing Director Christine Lagarde told CNBC on Wednesday that she doesn't see Deutsche Bank "at a stage where state intervention is absolutely called for at the moment." http://www.cnbc.com/2016/09/29/the-deutsche-bank-crisis-how-we-got-here-and-where-we-are.html This isn't new, this isn't something we don't know how to fix. This is an easily fixable problem. This isn't 2008. Unlike American banks, European banks have never fully recapitalized.
I agree with almost all that Joepistole has to say, specifically [1] that the fine will be negotiated down and [2] that steps will be taken to do whatever is needed to rescue the Bank, despite anything Merkel has suggested to the contrary and despite EU rules. However, one should bear in mind the German goverment's extraordinary announcement in August that Germans should prepare to stockpile several days supplies of food and water in case of an unspecified crisis. I think the Germans are prepared to shut their banks for one or more days in order to precipitate sufficient alarm among their EU partners to enable them to overcome any opposition to whatever rescue and reconstruction plans they consider necessary. One should never forget that Germany is no longer a self-governing country. Yazata did not mention the dire rumours surrounding Deutsche Bank's derivatives book. The trouble here, of course, is that one simply does not know whether or not they are true.
Well let's hope it doesn't come to that. I don't think there is a relationship between Deutsche Bank and the August announcement you referenced. At least, I hope that's not the case. Stocking up supplies for an unspecified crisis has been a long standing policy of the Mormon church and given the recent social unrest and terrorist attacks in Europe the recommendation makes sense. It makes sense for everyone for that matter. On a good note, I think Mario Draghi is a very good and competent ECB president. I don't think the importance of Deutsche Bank is lost on him. Unlike his predecessors, I'm sure the man is fully capable. I'm sure there will be more rumors and rumors of rumors. That's why this needs to be cleaned up as soon as possible.
