No crisis at Deutsche Bank, really, I swear.
When Stuart Lewis, Chief Risk Officer at Deutsche bank, was asked in an interview, published in the Frankfurter Allgemeine on Sunday, if his institution is “the most dangerous bank in the world” – a reference to the IMF’s call that among globally systemically important banks, “Deutsche Bank appears to be the most important net contributor to systemic risks” – he replied:
“No, not at all. Only one IMF report has recently muddled up the situation: We are not dangerous. We are very relevant. Deutsche Bank is interwoven with the entire financial sector. We are one of the largest universal banks in the world. But to make it clear: Our house is stable. The balance sheet is healthy.”
Could he say that “in good conscience?”
“Absolutely. Look at how we have capitalized the bank since the Financial Crisis. We have taken €115 billion in risks off the balance sheet and have €220 billion of liquidity. Concern for us is unfounded.”
Alas, the European Banking Authority released the stress test results on Friday. Deutsche Bank didn’t fail in part because there was no way to fail. No bank could fail, not even Italy’s Banca Monte dei Paschi di Siena which is in full collapse-and-bailout mode at this moment. Mercifully, no bank could fail the test by design. But the Tier 1 capital ratio after in the “adverse scenario” made it possible to rank the banks. At Deutsche Bank, that ratio dropped to 7.8%, making it the 10th riskiest bank among all European banks in the stress test.
Commerzbank, the second largest German bank, which was already bailed out by the government during the Financial Crisis, and which is still partially owned by the government due to this bailout, was the 8th riskiest bank, ahead of Societe Generale in 9th place and behind Barclays in 7th place. Then came Irish, Italian, and Spanish banks. In third place was the Austrian cooperative banking group Raiffeisen-Landesbanken. In second place, Allied Irish Banks. And of course, the winner, Monte dei Paschi.
In June, a US unit of Deutsche Bank, Deutsche Bank Trust Corp, had failed the Fed’s stress test for the second time. The Fed lamented its “material unresolved supervisory issues that critically undermine its capital planning process.”
So Deutsche Bank, unlike Monte dei Paschi, isn’t collapsing at the moment. But investors are not entirely convinced. Its shares closed at €12.00 on Friday and are barely up from their multi-decade low of €11.38 on July 7. But there’s no reason to worry about a taxpayer bailout.
“The good news is: the taxpayer does not have to step in; according to the new regulations for banks, bondholders will get hit first.”
That would be good news for taxpayers. But even as Lewis said it, Italian and European politicians and bureaucrats were creating exceptions for the Italian banks in order to spare regular Italians huge losses. They’d been hoodwinked into buying junior bank bonds because they offered higher yields than savings accounts. These folks own about €300 billion of these misbegotten bonds, which, under the new banking regulations cited by Lewis, should get bailed in. But no way. It might trigger an Italian revolt against the euro and the EU.
So somebody else is going to bail out these banks. Lewis’ colleague, Deutsche Bank chief economist David Folkerts-Landau, already called for a €150 billion bailout of European banks, funded by taxpayers. So Lewis might want to check with him at their next lunch.
And besides, Lewis said, the stress test result, which landed the bank in the 10th worse position, was “a good result.” Better than in 2014, “even though the test was much harder.”
So there’s nothing to worry about. “The quality of our balance sheet is great, and we did really well even with the risk of default on loans,” he said. The reason why Deutsche Bank did so badly compared to other European banks was “mainly due to the operational risks….”
Ah yes, the never-ending stream of legal problems. After years of settling cases and paying fines and penalties, the bank still faces 7,000 lawsuits and regulatory actions, including on the front burner, a US investigation into its mis-selling of mortgage-backed securities, and a joint US-UK investigation into $10 billion of suspicious trades involving Deutsche Bank’s Russian entity. New cases pop up faster than it can settle the old ones. Lewis explained:
“These are the non-balance sheet risks that could result in particular from the conduct of employees or inadequate controls. The testers extrapolate from the past into the future. And it happens to be a fact that the legal cases since 2012 have cost us more than €12 billion. We’re still suffering from that. We have currently reserved another €5.5 billion for it. That’s the reason why others do better in the stress test.”
Wisely, Deutsche Bank’s elephantine exposure to derivatives didn’t even come up. It’s better to silence the topic to death than to cause a panic with it.
In this negative interest rate environment, it’s difficult for banks to make money. “All banks are struggling with that,” he said. “It’s hard to survive for long with low interest rates. But Deutsche Bank traditionally gets a higher proportion of its income from fees, so we have an advantage,” he said, even as the collapse of investment banking fees is precisely what had hammered Deutsche Bank’s earnings over the past few quarters.
He refused to forecast how long the low interest-rate phase would continue but said, “All I know is that low interest rates hurt the banks, without stimulating the economy.”
Bond bull Gundlach just made a U-turn and went “maximum negative” on Treasuries. Read… “Stock Markets Should be Down Massively,” but Investors “Hypnotized that Nothing Can Go Wrong”