A note on Deutsche Bank

Deutsche Bank, one of Europe’s behemoths, is in very deep trouble having lost 90% 0f its share price value since 2007, has been falling sharply all this last year (48% loss this year) and, with its $42 Trillion in Derivatives exposure was singled out by the IMF, as the bank which ,

“appears to be the most important net contributor to systemic risks…”

Of course Deutsche agues the standard ‘derivatives-aren’t-a-problem’ line, that this 42 trillion all nets out and their real exposure is a fraction of that vast figure. Which is fine as long as you think that in the event of Deutsche coming unstuck, 42 trillions-worth of derivatives contracts can be held in abeyance for the time it would take for all those contracts to be netted out.  As I’ve said before netting out is akin to getting a rowing boat full of people to all change places  without the boat overturning.

And now Deutsche has been threatened by the US DoJ with a $14 billion fine for its crimes for selling knowingly over-valued RMBS (Residential Mortgage Backed Securities) in the build up to the financial crash of 2007.

Deutsche cannot pay $14 billion without raising a great deal of cash. Deutsche has put aside $5.5 billion for paying fines. A mere 9 billion short. So could Deutsche go down? Financially yes it could. But politically, I doubt it. And it’s the tension between these two answers, between the parlous financial state and the huge political significance of Deutsche, that I find interesting.

Deutsche is Germany’s only G-SIB (Global Systemically Important Bank).   Deutsche is Germany’s financial flag carrier. It stands at the centre of Germany’s long held desire to have Frankfurt eclipse London as Europe’s financial centre. Although Germany also has Allianz as a G-SII (Global systemically Important Insurer), without Deutsche Bank Germany ceases to be a globally significant financial nation (G-SFN – OK I made that one up). Without Deutsche Germany would not sit at the top table of global finance. France would. France has three G-SIBs. The balance between France and Germany within Europe would shift. Maintaining that balance between France and Germany, at the heart of Europe, has been critical in European affairs since WWI.

Could Germany ever allow Deutsche Bank to go under?

Officially the global framework for G-SIFI resolution in bankruptcy has been laid down by the FSB and agreed by all. And interestingly, though they are touted as the result of new thinking since the financial crisis, they are not. I recently received an EU document marked ‘Secret’, entitled  “Overview of Financial Stability Resolution Issues” and dated Feb 2008 which describes pretty much what the FSB has now settled upon now. I mention this because almost every word in it was completely ignored once the crisis hit and each country viewed the immanent demise of their major, flag-carrying banks. Which leads me to wonder why I should believe it would be any different next time? I think this question is particularly critical to Germany because Deutsche is its only G-SIB. In the next massive implosion of debts, France could afford to let one of its G-SIBs go down and still have two seats at the top table. England could do the same.

How will G_SIBs  be wound down?

The not-so-new rules for how a G-SIB should be wound down begin by stating that,

Instead the dead parts will inflict losses first on share holders and then on bond holders in the time honoured order of unsecured first. And then those parts which are not completely dead and might be cut away to live again in a different body, are to be sold off by means of sale or merger.

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