We have long covered the potential for a "too big to fail institution" carrying a large book of derivatives to cause havoc in the global financial system. Now we clearly have a visible candidate to keep an eye on. This article shows how much trouble Deutsche Bank is in. Below are a few quotes from the article and then an added comment.
"It’s been almost 10 years in the making, but the fate of one of Europe’s most important financial institutions appears to be sealed.
After a hard-hitting sequence of scandals, poor decisions, and unfortunate events, Frankfurt-based Deutsche Bank shares are now down -48% on the year to $12.60, which is a record-setting low.
Even more stunning is the long-term view of the German institution’s downward spiral.
With a modest $15.8 billion in market capitalization, shares of the 147-year-old company now trade for a paltry 8% of its peak price in May 2007."
. . . .
"It’s ironic, because in 2009, the company’s CEO Josef Ackermann boldly proclaimed that Deutsche Bank had plenty of capital, and that it was weathering the crisis better than its competitors.
It turned out, however, that the bank was actually hiding $12 billion in losses to avoid a government bailout. Meanwhile, much of the money the bank did make during this turbulent time in the markets stemmed from the manipulation of Libor rates. Those “wins” were short-lived, since the eventual fine to end the Libor probe would be a record-setting $2.5 billion."
. . . . .
Deutsche Bank started the year by announcing a record-setting loss in 2015 of €6.8 billion.
Cryan went on an immediate PR binge, proclaiming that the bank was “rock solid”. German Finance Minister Wolfgang Schäuble even went out of his way to say he had “no concerns” about Deutsche Bank.
Translation: things are in full-on crisis mode.
In the following weeks, here’s what happened:
May 16, 2016: Berenberg Bank warns that DB’s woes may be “insurmountable”, noting that DB is more than 40x levered.
June 2, 2016: Two ex-DB employees are charged in ongoing U.S. Libor probe for rigging interest rates. Meanwhile, the UK’s Financial Conduct Authority says there are at least 29 DB employees involved in the scandal.
June 23, 2016: Brexit decision hits DB hard. The bank is the largest European bank in London and receives 19% of its revenues from the UK.
June 29, 2016: IMF issues statement that “DB appears to be the most important net contributor to systemic risks”.
June 30, 2016: Federal Reserve announces that DB fails Fed stress test in US, due to “poor risk management and financial planning”.
Doesn’t sound “rock solid”, does it?
Now the real question: what happens to Deutsche Bank’s derivative book, which has a notional value of €52 trillion, if the bank is insolvent?
My added comments: The most concerning part of all this is the very last sentence which I put in bold type. Obviously, the financial authorities cannot allow DB to fail and trigger defaults on that huge derivatives book (which exceeds the entire GDP of the whole EU). Jim Rickards has said that he expects DB to be bailed out for this very reason (too big to fail). Clearly, we need to keep a watchful eye on this situation along with banking issues across the EU in general. Added note: CNBC runs this article on DB. It says this about the derivatives book there: "Reports have also pointed to Deutsche Bank's global derivatives risk in the range of $75 trillion which is 20 times greater than the German gross domestic product (GDP)." The article we featured above mentioned a derivates book of 52 Trillion Euros while this CNBC article says $75 Trillion dollars. That's quite a big gap even converting Euros into dollars (exchange rate is about 1.1 right now). This just illustrates how no one really knows how big these derivatives exposures may be out in the system. --------------------------------------------------------------------------------------- Coming Monday - Former Chief of the SDR Operations Division at the IMF comments on recent IMF proposal to expand the use of the SDR. I think readers will find the quote he provided interesting and informative. Update: This article is now published - click here to read it. Update added note 7-19-16: Italian Banking situation coming to a head? Off topic additional note: My daughter (journalism student) did this article for our local paper related to the recent police shootings in Dallas.