German Politicians Are Getting Nervous About Deutsche Bank, by Tyler Durden

In the over-leveraged and interconnected global financial system, if German politicians are getting nervous about systemically important Deutsche Bank, the rest of us should be nervous about everything else. It may only take problems at one big bank to bring the whole thing down. From Tyler Durden at zerohedge.com:

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.

To continue reading: German Politicians Are Getting Nervous About Deutsche Bank

3 responses to “German Politicians Are Getting Nervous About Deutsche Bank, by Tyler Durden

  1. So I wonder if the US banks are going down the DBank road? Derivative exposure is below.

    Citigroup

    Total Assets: $1,808,356,000,000 (more than 1.8 trillion dollars)

    Total Exposure To Derivatives: $53,042,993,000,000 (more than 53 trillion dollars)

    JPMorgan Chase

    Total Assets: $2,417,121,000,000 (about 2.4 trillion dollars)

    Total Exposure To Derivatives: $51,352,846,000,000 (more than 51 trillion dollars)

    Goldman Sachs

    Total Assets: $880,607,000,000 (less than a trillion dollars)

    Total Exposure To Derivatives: $51,148,095,000,000 (more than 51 trillion dollars)

    Bank Of America

    Total Assets: $2,154,342,000,000 (a little bit more than 2.1 trillion dollars)

    Total Exposure To Derivatives: $45,243,755,000,000 (more than 45 trillion dollars)

    Morgan Stanley

    Total Assets: $834,113,000,000 (less than a trillion dollars)

    Total Exposure To Derivatives: $31,054,323,000,000 (more than 31 trillion dollars)

    Wells Fargo

    Total Assets: $1,751,265,000,000 (more than 1.7 trillion dollars)

    Total Exposure To Derivatives: $6,074,262,000,000 (more than 6 trillion dollars)

    http://theeconomiccollapseblog.com/archives/financial-armageddon-approaches-u-s-banks-have-247-trillion-dollars-of-exposure-to-derivatives

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    • The interesting, and ultimately frightening, thing about banks’ derivative exposures is that while banks would say that the numbers you cite are gross notational exposures, and exposures, when netted out, are far less on a net basis, when things blow up and one counterparty in the whole chain goes belly up, all those net exposures become gross exposures. Considering that there are perhaps 10-15 major bank participants in the derivatives market, it really would only take one going bankrupt for the whole thing to unravel. Obviously gross derivative exposures are many times in excess of either banks’ capital or assets.

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  2. Thank you for the clarification. I found this from Mish Shedlock from a commenter. I now have a few terms to look up.

    “What is worse, all the big banks have less than perfect reporting systems. They fail to fully net the internal corporate relationships and thus DB can be long and short to itself and record both sides of the internal trade as ‘Gross Notional Assets’. Do this a few hundred thousand times, and not get around to tearing up the matching contracts and Gross Notional Assets balloon to the moon. Why would they want to let this happen. Partially it was because Banks didn’t care about Gross Notional Assets before the Great Financial Crisis, and partially it was because idiots in the ‘C’ suite liked to talk about how ‘big’ they are.

    DB needs to get its netting under control, they need to do tearups of back-to-back contracts that don’t get netting benefit, and most importantly they need to get costs under control.”

    https://mishtalk.com/2016/09/24/merkel-says-no-aid-for-deutsche-bank-depositor-bail-in-coming-up/

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