The Deutsche Bank Crisis in Brief
Banking Stock Prices Reflect Global Concerns
compiled and written by Vince Lanci
Shares of DB are in free fall and taking the Banking Sector with it
DB and Santander convertibles are in the gutter. Commerzbank cut its dividend
Right Now- Bank Run
Deutsche Bank Hedge Fund clients are withdrawing excess cash, hedge funds are also cutting their exposure to DB as counterparty, and all clients that can are reducing their collateral exposure to the bank. Among the at least 10 hedge funds withdrawing cash and assets are Millennium Partners, Capula and Rokos funds as reported by Bloomberg.
Anyone with DB exposure is looking to convert their Euros to USD
Why the Run?
The issue is in no small part because the IMF correctly identified DB as “the most important net contributor to systemic risks in the global banking system.”
DB is Not Lehman. It is potentially worse. Deutsche Bank is not merely Germany’s biggest bank. DB is tied to the government informally and to most major German corporations formally. Its fate will be shared by all of Germany. And Germany’s fate will be shared by all of the EU.
Thus DB's importance to Germany and all of Europe is many times greater than that of an investment bank like Lehman was to the U.S. in 2008.
Santander is next in line after DB takes down Commerzbank
Systemic Risk Fans the Flames Faster
The reason for the run is a faltering confidence in DB’s balance sheet which is stated at $2 trillion while it maintains a derivative book exposure of over $47 trillion. And the fire is spreading across Europe.
Liquidity concerns are exploding as counterparties across Europe seek to hedge their exposure in the event of a default. Banks are looking to sell Euros for Dollars in a panic.
However, what the markets are pricing as a liquidity/solvency crisis, the politicians are calling a "profitability" crisis.
Deutsche Bank's troubles are not Europe's Lehman Brothers moment, Austria's finance minister said on Thursday, although he warned the region's lenders were facing a broader profitability crisis.
Yes, we agree. The banks are not making money. Brilliant!
Simply put, trust in the European Banking system is faltering and DB is ground zero for the crisis. And liquidity crises unchecked become solvency crises.
DB's Derivatives Book in Context
h/t @zerohedge
And this is an improvement.
What Was the Catalyst?
- The International Monetary Fund (IMF) issued a damning 63-page report on the German banking and insurance sector on June 30th with the key point buried on page 42: “Deutsche Bank appears to be the most important net contributor to systemic risks in the global banking system.”
- Then, the U.S. Federal Reserve said that the U.S. subsidiary of Deutsche Bank was one of two banks (the other was Santander) that failed an annual stress test
- The DOJ announced on September 14th it was seeking $14BB civil settlement with DB because of its role in the sub-prime scandals in 2008.
- The DOJ may be the largest, but it is only the most recent indictment in an onslaught of investigations, legal troubles, scandals and potential fines to hit DB since 2008
Questions to be answered in subsequent posts
- How did DB get to be so integral to the German economy?- TO RECOVER FROM WW2
- What changed in their operational approach? GREED
- How has ECB monetary policy contributed to the situation?- EASY MONEY LEADS TO MALINVESTMENT
- Can the EURO survive in its current form?- NO
- Why isn't Gold screaming higher now?- IRRATIONAL SALES. PEOPLE USED FURNITURE FOR FIREWOOD IN 1920's GERMANY
Feel free to ask questions in the comment section. We will attempt to answer them in future reports- SK
Good Luck
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