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Deutsche Bank Continues to Worry

Tuesday, October 4, 2016 6:29
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Less than 10 years after world banks barely survived a banking crisis, Duetsche Bank is once again causing investors and governments across the world to panic. 

Shares of the German bank were down to their thirty-year low before making somewhat of a rebound. The run on bank shares began when U.S. prosecutors announced they would be seeking nearly $14 billion in damages from the already belittled bank. 

The bank has trillions of dollars in derivitives and other debt and has been deemed by most European governments as too big to fail. Still, the comparison to Lehman Brother’s and other financial institutions that crumbled during the financial crisis in 2008 are too close for comfort. Investors are pulling out of the banking and finance sector and putting their money in safer bets. 

Luckily, there are some stark contrasts between Deutsch Bank today and other banks in 2008. The first is quality of assets. One, if not the largest reason banks failed in 2008 was the quality of their assets. Banks had been making terrible loans with little to no collateral and they had been doing it on a massive scale. When those loans finally started to fail and investors realized how bad their books were, they became worthless overnight. 

However, Deutsche Bank today doesn’t seem to face asset concerns. This can be shown by the fact that once the U.S. announced it would be seeking closer to $5 billion in damages instead of $14 billion, shares rebounded sharply. What this tells us is that investors, and the market, aren’t worried about the assets of the bank as much as the fact that they will have to raise capital to pay off the U.S. prosecution and that will likely dillute shareholder value.

The second reason not to worry is that the European Union put a lot of stops in place after the financial crisis to help banks that may be on the verge of collapse. Because the only worrisome bank currently is Deutsche, they can access that help and ensure survival. 

Investors need not fear just yet, but keeping an eye on Deutsche Bank would be well advised. If thinks start to go south it could very well trigger a global banking crisis that matches that of 2008. Investors would be advised to check with their broker and make careful investing decisions when it comes to the financial sector. 

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