In late June, the international monetary Fund (IMF) said that Deutsche Bank still has not recovered from the effects of the global financial crisis of 2008, the most serious source of risk for the global financial system. While the Federal reserve system (FRS) announced that the U.S. branch of the Bank failed the stress test of the Department due to poor risk management and financial planning. The entire test took place in 33 of the Bank: failed, only Deutsche Bank and the Spanish Santander.
Against the background of these news, shares of Deutsche Bank fell to a 30-year low, to €of 12.37 apiece, as Western experts talked about the fact that Germany’s largest Bank may repeat the fate of us investment Bank Lehman Brothers, whose bankruptcy in September 2008 started a global financial crisis.
The Domino principle
The financial sector in Germany plays a key role in the global economy. The German asset management market, according to the IMF, the third largest in the European Union, whereas the sovereign bond market — a safe haven for investment and a global reference value of fixed income instruments. There are two of the 30 global systemically important banks (according to the financial stability Board) — Deutsche Bank AG and Allianz SE, one of the largest exchanges for trading derivatives financial instruments of Eurex Clearing AG, as well as many small banks and insurance companies.
As explained by the IMF in its report in the country, Deutsche Bank is closely linked with other publicly traded banks and insurance companies and thus could be a source of financial contagion. The investment banking division of Deutsche Bank — one of the largest in the world: it can be matched with units of American Bank of America Merrill Lynch, JP Morgan Chase, Citigroup and Goldman Sachs.
The aggravation of the situation in the banking system of Germany is likely to cause a chain reaction and the banking crisis in the world. The damage in the German banking system will be less than for the world, is afraid of the IMF. “Germany, France, USA and the UK represent the greatest risks on the external side the results which are measured in percentage loss of capital in other banking systems because of the Bank shocks in these countries”, — the report says the Bank.
The beginning of the end
In 2009, CEO of Deutsche Bank Joseph Ackermann argued that the Bank has enough money to survive the crisis. But in 2012 some of his former colleagues said that in fact the Bank had hidden €12 billion of losses from derivative transactions: the Bank has lowered the rating on derivatives on assets with the highest rating, purchased with borrowed funds. If this position, the nominal volume of which amounted to about $130 billion, was reflected on the balance sheet correctly, the performance of its capital in the crisis period would be reduced to critical levels and he would have to ask for help from the state. Traders deliberately did not conduct the revaluation of contracts in accordance with market prices, thus avoiding the carrying of losses from the unprecedented turmoil in the credit markets in 2007-2009. Otherwise, the losses for the entire portfolio could reach $12 billion.
First bankruptcy Deutsche Bank began in 2013, when the Bank recognized that it needs additional capital. In 2013, he raised $3 billion through the issuance of shares to shareholders of the Bank. Co-Director of Deutsche Bank, anshu Jain claimed that this is enough and “hunger marches is over”, but in April 2014, the Bank raised another €1.5 billion, and a month later unexpectedly for the market — announced the sale of the shares in total €8 billion, with a 30% discount to fair value.
In March 2015 the results of the stress tests showed that Bank again you need capital. During the crisis, the Bank earned a little money, but mainly due to the manipulation of the LIBOR, and in April 2015 he was fined $2.5 billion because Of this scandal, Jane and his colleague jürgen Fitschen retired. At the same time, the international rating Agency S&P downgraded the credit rating of Deutsche Bank from A to BBB+, it was just three notches above “junk”.
In early June, 2016 Deutsche Bank were once again at the center of the scandal over manipulation of LIBOR interest rates: in the United States, two former traders were charged, whereas the British Management on financial regulation and supervision reported that in the case where at least 29 employees of the Bank worked in London, Frankfurt, Tokyo and new York.
At the end of last year Deutsche Bank for the first time since 2008, a net loss of €6.8 billion Loss was caused by the reduction in the value of investment units and units of services to individuals and high trial costs (in 2015 he spent on legal costs of €5.2 billion is a large amount). Revenue was $33.5 billion that Deutsche Bank a little bit.
In recent years, the Bank tried to restructure their operations. In October 2015, a new co-Director John Cryan launched a major restructuring which included staff reductions and reorganization of operations, but it has not yet yielded significant results. Evidence of this can be financial performance for the first quarter of 2016. The Bank completed its profit (€236 million), but it decreased compared to the previous year by 58%.
In the footsteps of Lehman Brothers
According to The Street in 2008, when Lehman Brothers filed for bankruptcy, he had assets of $639 billion and debt of $619 billion.
In may, Berenberg Bank said that the debt burden of Deutsche Bank (the ratio of debt to equity) was 40:1. According to Berenberg Bank analyst James Chappell, it’s too much.
The problem of stabilization of balance Deutsche Bank may be insoluble, he fears. “It’s hard to understand how Bank solve the problem with illiquid debt and lower profits without attracting additional capital,” said Chappell. The situation for Deutsche Bank compounded the ECB’s policy of low interest rates which negatively affects the earnings of German Bank.
From the beginning of quotation Deutsche Bank have fallen by 50% amid fears of investors about a possible shortage of liquidity. Capitalization of the Bank on 15 July was a mere €18 billion in equity capital has been estimated at $60 billion, whereas the nominal volume of derivatives — $72,8 trillion, which is more than 20 times Germany’s GDP in 2015 ($3.4 trillion). As pointed out by The Street, alone on the Deutsche Bank accounts for 13% of the total volume of derivatives, which in 2015 was €550 trillion. This does not mean that Deutsche Bank will face a default on trillions of dollars because most of the contracts takes place at the expense of the contractors, says The Street. But in the case of bankruptcy of a counterparty could start a chain reaction. “We have already witnessed how it can take over the world” — recalled the publication of the 2008 crisis.
Compare Deutsche Bank from Lehman Brothers — a slight exaggeration, although the German Bank as a major international player, could trigger a chain reaction, says chief economist at Alfa Bank Natalia Orlova. “With Deutsche Bank, the situation is slightly different: since 2008, the regulators are very strongly toughened their positions. Introduced a new settings for Bank statements. Now is not the state of the financial markets — the amount of financial leverage, the size of interbank liabilities less [than it was during the Lehman Brothers bankruptcy]”.
Managing Director of Arbat Capital Alexander Orlov agree that the probability of bankruptcy of Deutsche Bank is low, but if it happens, the consequences can be much more serious than in 2008: “it Will be a catastrophic effect.” “The question is, how likely is that. Less likely than Lehman Brothers, at least not yet. Capital requirements the Bank is still performing. The fact that he twice failed the stress test, the fed, have not says that the problem Bank: European stress tests it usually goes away. In addition, there are the options of recapitalization that will substantially dilute the share capital and to create a panic — an analogue of what happened in the US in 2008-2009. Nervousness, of course, but while he still has a margin of safety”, — he explained .
According to Orlov, the main problem the Deutsche Bank is a big leverage. “Around $1.7 trillion of assets financed with just $700 billion of deposits, all the main — a huge amount of derivatives and the various inter — Bank obligations,” – said the expert.
Brexit could adversely affect the Bank’s performance. Deutsche Bank — the largest European Bank in the city in 2015 from work in the UK Bank received almost 20% of revenue. As reported by Bloomberg, in may the General Director Deutsche Bank John Cryan reported the intention to move business from London. As noted by The Street, moving the business employs 8 thousand employees, is a difficult task, and she would later hit the balance.
Brexit may have a negative impact on the sale of assets of the third level of the Deutsche Bank (represented by complex derivatives and credits pertaining to transactions private equity), whose volume at the end of March amounted to €31 billion according to the newspaper Financial Times, this is significantly lower than in December 2008 (€88 billion), and, according to insiders, the Bank has shown “great caution” in assessing the assets of a third level last year.
The assets of the third level is difficult to assess at market price and harder to sell. According to the analyst of French financial institution Exane Amit Gel, which results Financial Times, after the referendum to sell them will be even harder.