Deutsche Bank, the 11th largest bank in the world, plunged to fresh all time lows on speculation whether the German government would or wouldn’t provide state aid to the bank (if needed), forcing the bank to state it does not need the funds at the same time as the government urged markets that “you can’t compare” Deutsche Bank and that “other” bank, Lehman Brothers, although looking at the chart, one may beg to differ.
However, while DB stock closed at session lows, over 7% lower on the day, with its market cap of $16 billion now rapidly approaching the $14 billion litigation settlement demanded by the DOJ, the bad news did not stop there.
In a report issued by Citigroup titled “Capital, Litigation & AT1 Coupon Risks”, bank analyst Andrew Coombs says that Deutsche reported an end-June CET1 ratio of 11.2% pro-forma for the HXB stake sale, but still only targets c11% by end-2016 as further litigation charges are assumed, with management expecting to resolve four of the five major outstanding litigation cases this year. To this Citi says that it “struggles” to see how Deutsche Bank can reach the fully-loaded SREP requirement of 12.25% in the medium-term.
Meantime, one of the largest derivatives books in the world is imploding. Deutsche Bank has over $61 TRILLION in derivatives on its books. It has lost nearly a quarter of its value in the last three weeks.
DB is not alone here. Across the board, we’re getting signs of an impending banking crisis in Europe. Credit Suisse (CS) is trading BELOW its 2012 banking crisis lows.
So is Barclays (BCS)
The EU banking system is $46 TRILLION in size. This is THREE TIMES larger than the US banking system, which nearly imploded the markets in 2008.
And the EU banking system as a whole is leveraged at 26 to 1. Lehman Brothers was leveraged only slightly higher than this at 30 to 1.
Indeed, we believe the global markets are on the verge of another Crisis, triggered by a crisis of faith in Central Banks.
2008 was Round 1 triggered by Wall Street banks. This next round, Round 2, will be even worse as faith in Central Banks collapses
If Deutsche Bank went down, and the German Government didn’t step in with a rescue, that would be a huge blow to Europe’s largest economy – and the global financial system. No one really knows where the losses would end up, or what the knock-on impact would be. It would almost certainly land a fatal blow to the Italian banking system, and the French and Spanish banks would be next. Even worse, the euro-zone economy, with France and Italy already back at zero growth, and still struggling with the impact of Brexit, is hardly in any shape to withstand a shock of that magnitude.
What we do know is that if some €42 trillion in derivatives – some three times more than the GDP of the European Union – were to suddenly lose their counterparty, the systemic damage would be unprecedented.
