Eight years after the implosion of Lehman Brothers, a huge bank is once again causing jitters in world markets. Late last week, Germany’s Deutsche Bank was hit by reports that hedge funds had withdrawn money they had deposited as collateral for derivatives transactions. “That recalled the exodus by hedge funds from Lehman Brothers shortly before its collapse,” says Randall Forsyth in Barron’s. Their evident loss of confidence in Lehman sent the bank’s shares plunging even further. Similarly, Deutsche’s shares hit their lowest level since the 1980s this week, spurring talk of a bailout, which was dismissed.
We learnt in 2008 never to believe the worst until it is officially denied, so the German government’s insistence that Deutsche could and would sort itself out has done little to reassure investors. The immediate cause of the latest share-price slide was fear of a $14bn fine for allegedly mis-selling mortgages in the US. Hope that the sum could be reduced has given the stock some respite.
Deutsche Bank is certainly too big to fail.
Its derivatives book is worth $60trn, as Michael Lewitt of Credit Strategist notes. This represents the total value of its positions; some will constitute short positions that counteract long bets. Still, Deutsche’s net exposures “are sufficiently large to blow up the financial system”, Lewitt told Barron’s. But there is scant risk of an “acute funding crisis”, reckons the Financial Times. Its capital position is stronger than in 2008 and “well above the regulatory minimum. It also has an ample cushion of liquidity.” And it would have to lose €21bn from US fines and other divisions in order for the capital ratio to drop to 7%, says Paul Davies in The Wall Street Journal – at which level it would be automatically topped up because some junior bonds would then be converted into equity.
Deutsche “is not dead”, says Lex in the FT, “but it is not rising from its sick bed either”. Beyond the US litigation problem, it’s struggling to make money in an era of negative interest rates; its costs are high; and most analysts think its turnaround plan is inadequate. Chronic problems can eventually become acute if the share price falls so low that a rights issue to bolster equity becomes impossible, undermining confidence and starving the institution of cash in a classic catch-22.
If need be, the German government is likely to bail it out, possibly through a face-saving enforced merger with Commerzbank. But this episode is a stark reminder, says Jeremy Warner in The Sunday Telegraph, that European banks, even eight years after the crisis, remain “utterly broken”.