Just a few short days after Germany’s premier financial publication Handelsblatt dared to utter the “n”-word, when it said that in the aftermath of last week’s striking $14 billion DOJ settlement proposal, “some have even raised the possibility of a government bailout of Germany’s largest bank, which would be a defining event and a symbolic blow to the image of Europe’s largest economy”, German lawmakers are finally starting to get nervous.
According to Bloomberg, Deutsche Bank’s suddenly troubling finances, impacted by the bank’s low profitability courtesy of the ECB’s NIRP policy as well as mounting legal costs courtesy of years of legal violations, “are raising concern among German politicians.” At a closed session of Social Democratic finance lawmakers on Tuesday, Deutsche Bank’s woes came up alongside a debate over Basel financial rules. Participants discussed the U.S. fine and the financial reserves at Deutsche Bank’s disposal if it had to cover the full amount.
While the participants in the meeting did not reach any conclusions on the likely outcome, the discussion signals that the risks facing Deutsche Bank have the attention of Germany’s political establishment. Which means it’s almost serious enough where the politicians, in the parlance of Jean-Claude Juncker, “have to lie” or in this case redirect attention, ideally abroad: the German Finance Ministry last week called on the U.S. to ensure a “fair outcome” for Deutsche Bank, citing cases against other banks where the government settled for reduced fines.
Actually lying also works: on February 9 German Finance Minister Wolfgang Schaeuble told Bloomberg Television that he has “no concerns about Deutsche Bank.” That has probably changed.
The solvency problems facing Germany’s biggest bank have been widely documented: it is already ranked among the worst-capitalized lenders in European stress tests before U.S. authorities demanded $14 billion as an RMBS settlement, more than twice the €5.5 billion the bank has set aside for litigation and almost 80% of the bank’s market cap. Also, as we pointed out first in 2013, and as Matteo Renzi takes every chance to remind Germany, Deutsche Bank has a gargantuan €42 trillion in gross notional derivatives on its balance sheet. Just this week, the Italian PM told Bundesbank chief Jens Weidmann not to worry so much about Italy’s massive debt load but instead to solve the problems of German banks which had “hundreds and hundreds and hundreds of billions of euros of derivatives” on their books.”
But what may be most troubling is not what German politicians are talking about behind closed door, but what they are not talking about in public. Bloomberg notes that Merkel’s government is now maintaining a public silence on Deutsche Bank’s woes. Then again, what is there to say: if DB is indeed approaching the cliff, any discussion of the bank would only lead to more concerns about the bank’s viability. There was some discussion of DB, however, during a September 16 meeting of Germany’s Financial Stability Committee, a group of German finance officials and regulators, whose members concluded that the fine demanded by the U.S. government would probably be lowered, Handelsblatt newspaper reported. In other words, hope is once again a strategy. Sadly, when it comes to banks with multi-trillion balance sheets, this may not be the best approach.
And just to make sure that German politicians have even more to talk about, earlier today the Brussels-based Single Resolution Board, the resolution authority for 142 banks (including Deutsche Bank) warned that EU bank may need rescue funds equaling twice their ECB capital. As Bloomberg reported today, requiring banks to have at least that same amount as the minimum capital requirement set by the ECB in loss-absorbing liabilities will ensure that they can recapitalize themselves quickly after restructuring, SRB head Elke Koenig said.
The European Banking Authority said in July that the region’s banks may need as much as 470 billion euros ($524 billion) in additional MREL-eligible funding under conditions similar to those cited by Koenig. The EBA sample consisted of 114 banks representing 70 percent of the EU’s banking assets, including lenders not overseen by the SRB.
And the bulk of these funds will have to be procured by Europe’s largest bank: Deutsche Bank.