Deutsche Bank looking shaky
Fears are it could collapse and endanger wider financial system in rest of world
FRANKFURT — Germany’s biggest bank is looking shaky and some investors fear it could collapse and endanger the wider financial system.
Some even wonder whether it might become the next Lehman Brothers, the U.S. bank whose failure heralded the worst of the global financial crisis in 2008.
Experts warn against drawing such quick conclusions. Deutsche Bank’s shares are down 51 per cent so far this year and it’s negotiating a multibillion fine in the U.S. that it could have trouble paying.
But it’s exactly because it is so big and important that it is unlikely to be allowed to simply fail, the way U.S. did with Lehman.
Its recent turmoil was triggered by a demand by U.S. authorities that Deutsche Bank pay $14 billion to settle an investigation in mortgage-backed securities, the investments that turned out to be duds and helped trigger the global financial crisis. That sum is about the same as Deutsche Bank’s entire market value as of Friday.
It’s unlikely the bank would pay the full amount — industry peer Goldman Sachs paid $5 billion in a similar investigation. But the fact that it could get hit with a big bill increased the possibility that it may have to tap investors to raise the cash. That would dilute shareholders’ stakes and send shares down even further.
Deutsche Bank also has more fundamental problems. It is loaded with risky financial trades called derivatives and has struggled for years to turn its business around, particularly its investment banking unit. Before the financial crisis of 2007-2008, it earned much of its money from investment banking. New regulations have pushed banks to hold larger financial buffers and reduce their risky investments. That has made investment banking less profitable. And compliance with all the rules has imposed costs as well.
Its profit margins have been squeezed by record low benchmark interest rates. Low rates reduce the difference at which a bank can borrow money and lend it out.
The International Monetary Fund said in June that Deutsche Bank was the biggest source of systemic risk among the globe’s big financial institutions.
It’s too soon to tell if it will need a bailout. One of the things that unnerved investors this week is that the German government has refused to say it would rescue the bank, if needed. But that’s likely because there’s a general election next year in Germany and politicians don’t want to be seen promising taxpayer money to save a bank after spending billions during the financial crisis.
If push comes to shove, experts say, the German government would be under pressure to step in to help. Deutsche Bank is the country’s biggest financial group and has links to many other banks. As such, it is considered systemically important — its failure could conceivably endanger the stability of the European or even global financial system.