Deutsche Bank Highest Capital Shortfall in Europe

Deutsche Bank had the highest capital shortfall, 19 billion euros ($21 billion), in a study of 51 European banks according to recently published U.S. Federal Reserve stress test methods. It was clear that under these tests European banks lack sufficient capital to withstand another financial crisis.

From the results of these tests it showed amongst the 51 European banks a total capital shortfall of 123 billion euros, was identified with the largest gaps at Deutsche Bank (19 billion euros), Societe Generale (13 billion euros) and BNP Paribas (10 billion euros). However when placed in context to their respective market capitalisations values, Societe Generale (26 billion euros), BNP Paribas (55 billion euros) and Deutsche Bank (under 17 billion euros), Deutsche Bank demonstrated the biggest capital shortfall amongst all banks under investigation.

Deutsche Bank disagreed with this assessment stating, “there is an official EBA stress test that checked the capital backing against very tough and adverse conditions and this showed there was no acute capital need at Deutsche Bank.” However Deutsche Bank demonstrated a weaker reading in the EBA test than most of its peers and critics cited that the EBA tests had no pass or fail mark and they did not remove concerns over capital.

As if to add insult to injury, Martin Hellwig, director of the Max Planck Institute for Research on Collective Goods, said stress tests carried out by the European Central Bank revealed the Deutsche Bank would be left in a precarious position in the event of another financial crisis, and warned that Germany’s biggest bank is teetering on the edge of crisis and the only way to protect it against future shocks is to nationalise it. Hellwig continued saying whilst it would probably not go bust in a fresh downturn, he predicted the bank which is crucial to the German economy would face serious equity problems, putting it short: for a long and serious crisis there simply wouldn’t be enough money.

Other critics might provide a far harsher assessment of Deutsche Bank and this author would be included in that category. It would suggest that the deficiencies in their capital reserves probably relate to their derivatives book. By implication this would suggest that other major banks are in exactly the same position given how all these banks are inextricably linked together by such instruments. However the subject of accounting standards is another gigantic hornets nest which we will leave for another time.




Be the first to comment

Leave a Reply

Your email address will not be published.