Collapse Of Deutsche Bank Would Be Catastrophic For Global Financial System 2020– Here’s Why - financialanalysis


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Saturday, December 21, 2019

Collapse Of Deutsche Bank Would Be Catastrophic For Global Financial System 2020– Here’s Why


Collapse Of Deutsche Bank Would Be Catastrophic For Global Financial System – Here’s Why

.. …The global financial system simply cannot afford for Deutsche Bank to fail, and right now it is literally melting down right in front of our eyes…[Indeed,] many now believe that the end is near for Deutsche Bank. Here’s why.

…On July 7 the beleaguered German giant announced that it is laying off 18,000 employees—roughly one-fifth of its global workforce—and pursuing a vast restructuring plan that most notably includes shutting down its global equities trading business…These moves may delay Deutsche Bank’s inexorable march into oblivion, but not by much and, as Deutsche Bank collapses, it could take a whole lot of others down with it at the same time.

·         According to Wall Street On Parade, the bank had 49 trillion dollars in exposure to derivatives as of the end of last year…putting it in the same league as the… U.S. juggernauts JPMorgan Chase, Citigroup and Goldman Sachs, which logged in at $48 trillion, $47 trillion and $42 trillion, respectively.

·         The actual credit risk to Deutsche Bank is much, much lower than the notional value of its derivatives contracts, but we are still talking about an obscene amount of exposure and this is especially true when we consider the state of Deutsche Bank’s balance sheet.

o    According to, as of the end of last year, the bank had total assets of $1.541T and total liabilities of $1.469T. That’s not much in the way of equity…and things have deteriorated rapidly since that time.  In fact, it is being reported that $1T a day is being pulled out of the bank at this point.

…The global derivatives market played a starring role during the last financial crisis, and it will play a starring role in the next one too…

·         The…failure of Deutsche Bank could quickly become a major crisis for the entire global financial system…as some of the largest “too big to fail banks” in the United States, such as JPMorgan Chase, Citigroup, Goldman Sachs, Morgan Stanley and Bank of America, as well as other mega banks in Europe, are “heavily interconnected financially” to Deutsche Bank.

·         In fact, the IMF concluded that Deutsche Bank posed a greater threat to global financial stability than any other bank as a result of these interconnections (and that was when its market capitalization was tens of billions of dollars larger than it is today).

It appears that the next “Lehman Brothers moment” may be playing out right in front of our eyes. Now more than ever, keep a close eye on Deutsche Bank, because it appears that they could be the first really big domino to fall.

Deutsche Bank Collapse Could Crash Global Financial Markets

German financial services giant Deutsche Bank AG is one of the largest and most important economic institutions in the world. Mainly due to self-imposed scandals, the bank is now having to take drastic measures to stay afloat. Investors everywhere should note that if such a critical piece of the too-big-to-fail banking system falters, it could trigger another global financial crisis.

Deutsche Bank Struggles to Survive

Deutsche Bank AG, the largest banking services group in Germany with well over a trillion dollars worth of assets, has been a major source of concern for international investors, economists and policy makers for more than a couple of years now. In fact, the International Monetary Fund called the bank in 2016 “the most important net contributor to systemic risks” to the global financial system. That same year, various financial publications around the world also started warning that Deutsche might be the “next Lehman Brothers,” referring to the investment bank whose collapse is considered to be a major part of starting the 2008 global financial crisis.
Now the German bank appears to be struggling again, with some commentators fearing it will not be able to survive. Just this month it was announced that Deutsche will undergo a major reorganization in order to stop the bleeding. As was widely reported, the restructuring process of the company will include downsizing about a fifth of its employees around the world, approximately 18,000-20,000 people. Additionally it was revealed that Deutsche will cut its investment in information technology by over a billion dollars per year, a move that will hinder it from catching up with competitors or being able to face new challengers in the fintech domain. Moreover, there are also reports in the market that some institutional investment funds are pulling out their assets from the bank, which might signal a lack of trust in the success of the reorganization efforts.

Costly Scandals and Billions in Fines

Before we ponder how the situation might unfold, let’s review how Deutsche Bank got to its current state. Over the last few years it has been involved in a number of scandals such as facilitating money laundering which cost the bank a fortune in legal expenses, reputational damage and massive fines. Its stock is now trading at a 30-year low, having lost over 70% in value since 2007. The bank also suffered frequent changes at the top because of this, replacing CEOs and other top executives at an alarming rate for a company of its kind in its industry. In November 2018, its headquarters were even raided by law enforcement officers and representatives of the German tax authority.
The myriad of legal troubles it’s faced have cost Deutsche Bank an incredible amount of money in the last few yearsFor example, in April 2015 it had to agree to pay a combined $2.5 billion in fines to American and British authorities for its involvement in the Libor scandal, where several banks were accused of colluding to fix interest rates widely used around the worldAnd in January 2017, Deutsche reached a $7.2 billion settlement with the U.S. Justice Department over its sale and pooling of toxic mortgage securities. In total, Deutsche Bank has paid more than $13 billion for litigation since 2012.

What Happens When Too-Big-to-Fail Fails?

So what will happen if Deutsche Bank does not succeed with its reorganization efforts and can no longer survive on its own? If it was operating in an economy governed by real free market principles, the bank would just go out of business the same way other companies do all the time. However, it is more than possible that politicians and bureaucrats will feel a need to intervene to prevent that from happening.
Bodies such as the German government and the European Central Bank (ECB) can say that the failure of the largest commercial banking institution in the economic heart of Europe would have disastrous ramifications for the continent and the world as a lack of investor trust will send an economic shockwave from Germany outward. For this reason they may claim to have no choice but to rescue Deutsche Bank with other people’s money. This can be done by several ways, including forcing other banks to buy out Deutsche (there were attempts to merge it with Commerzbank AG in the past), printing more fiat money and giving it away to Deutsche or even outright nationalizing the bank.
Whatever the case may be, it will have lasting implications on the global economy. Besides the knock-on effect on other financial institutions, a collapse of Deutsche Bank, as well as a rescue of it with European citizens’ money, could create serious political fallback. As we have seen with the last global crisis financial, disillusioned voters might feel that those in power are sacrificing their savings in order to help rich bankers from too-big-to-fail institutions, fueling a drift to populism in extreme right and left parties, further destabilizing the established order.

Deutsche Sells $50 Billion Debt Portfolio To Goldman In "Bad Bank" Wind-Down

So far, Deutsche Bank's efforts to offload troubled assets included in its 'bad bank' have been successful. The troubled German lender has already unloaded some assets to rivals including Goldman Sachs and BNP Paribas, and now Goldman is reportedly coming back for more.
Now, Goldman's coming back for what Bloomberg described as a "$50 billion book of assets." According to BBG, the assets are "tied to emerging market debt," and were housed in DB's 'wind-down' unit (or the 'bad bank', as it's otherwise known, which was initially set up over the summer).
It's difficult to tell whether the sale involved part of the derivatives portfolio since BBG doesn't include any information about the nature of the assets being sold.
But even though DB managed to offload some of its most troubled assets, the unit still managed to book a €1 billion loss for Q3 (and there will undoubtedly be more losses as more assets are sold).
Still, investors reacted positively to the news since the toxic assets are a major obstacle to DB's return to profitability. DB shares jumped 2% in European trade, cutting their YTD loss to 3.6%.
The asset sales are part of a broader turnaround effort announced by CEO Christian Sewing over the summer. To help reduce overhead, the bank has already begun cutting some 18,000 jobs around the world, contributing to some of the industry's worst job losses since the financial crisis.
As the above graphic shows, when it comes to the bad bank, Sewing has promised to cut the leverage exposure, a critical risk metric used by regulators, to 119 billion euros ($131 billion) at the end of the year (from 177 billion euros as of the end of Q3). The portfolio sales are an important part of this plan.
It's difficult to say how much this latest sale, or the earlier sales, will contribute to Sewing's goal since notional value is different from the market value included on a balance sheet. When the unit was first set up, it was said to house €74 billion in risk-weighted assets, and there have reportedly been discussions about adding more, according to CNBC.
What do you think about the current state of Deutsche Bank and the likelihood of its possible collapse to crash the global financial markets again? Share your thoughts in the comments section below.

1 comment:

  1. Let it blow up. You've been talking about this shit for years now. Lets do it.