Deutsche Bank has fallen under the microscope arguably more than any other Western financial institution in recent years, not least due to concerns about their financial stability, despite Chief Executive Officer John Cryan stating in February that the bank is “rock solid.”
Deutsche Bank’s $75 trillion derivatives book which is 20 times greater than Germany’s GDP, and 5 times greater than the entire economic output of the Eurozone has caused alarm bells to ring in many quarters. The bank is currently in the process of fundamentally changing its group and leadership structure. It is also looking to reduce the complexity of the Bank’s management structure, enabling it to better meet client demands and requirements of supervisory authorities. This is no doubt fuelled by BaFin’s, the German financial regulator, long-term investigation of Deutsche Bank.
Recently, Cryan railed on the ECB saying that, “monetary policy is now running counter to the aims of strengthening the economy and making the European banking system safer.”
In August 2016, US Federal Reserve published stress tests designed to identify those banks that lack sufficient capital to withstand another financial crisis. Deutsche Bank demonstrated the biggest capital shortfall compared to all the 51 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.
In May, Deutsche announced that they expected further large legal costs this year to deal with a raft of scandals that have hurt profits and dogged its reputation, but they believed they were coming closer to ending their litigation nightmare.
With that in mind it was announced yesterday that the Justice Department has suggested that Deutsche Bank needed to pay $14 billion to settle investigations related to mortgage securities. Unsurprisingly, Deutsche said in a statement that it “has no intent to settle these potential civil claims anywhere near the number cited.” The bank was keen to stress that negotiations had only just started and that it expects the conclusion of such discussions to be “similar to those of peer banks which have settled at materially lower amounts.”
Deutsche had previously thought that a settlement of between $2 and $3 billion would be a fair reflection of their culpability. The Justice Department has declined to make any comment in response to this assertion. Unsurprisingly, shares in Deutsche Bank have fallen 8.5% today to 12 euros.
Whilst there is no doubt that Deutsche Bank is in a perilous state, not least in terms of their announcement of record losses of 6.8 billion euros for 2015 in January, their derivatives exposure, claims they are over leveraged 40x and dogged by litigation, it does appear that Deutsche is coming in for heavy-handed treatment unlike any other Western bank. What is absolutely clear is that there are many other such banks who are equally in such a perilous state and yet we do not appear to see the same degree of scrutiny by regulators or critique by the mainstream media. Furthermore, it would seem that US regulators are particularly harsh in their treatment of Deutsche Bank.
There are no doubt many who will say that Deutsche has brought this upon itself, but it is the apparent lack of even handedness which gives this author cause for concern. Are we witnessing another upcoming Lehman event, when they were made a sacrificial lamb in 2008, only this time in 2016 it will be Deutsche Bank?
This would seem incredulous given that the banks are all “lashed” together and if Deutsche Bank was to collapse it would logically cause another 2008 crisis, only magnified many more times, given the crass ineptitude and dereliction of duty for the last 8 years in dealing with the previous crisis.
However, if we truly are on the precipice of another crisis, only much worse than the previous one, history has shown that the banking cabal are prepared to sacrifice one institution for their “greater good”. The problem this time is that it seems highly unlikely that they will be able to prevent the total meltdown that nearly occurred in 2008. Crucially their arrogance and ignorance will ensure that they will truly believe there is another way out of yet another crisis. They may find that China will have something to say about this, particularly given their apparent connections to Deutsche Bank.
The next few weeks could potentially provide us with definite answers to these questions.