The Deutsche Bank panic - HATICE KARAHAN

The Deutsche Bank panic

The Deutsche Bank concerns that have been prevalent for some time now have recently been struck by an air of panic. While the bank's shares are depreciating with a rapid decrease, the CDSs reached the peak after February. To be honest, German giant Deutsche Bank (DB) has given way to a negative course that has become particularly prominent since the summer of 2015. There is no doubt that the European banks' struggle to survive in the weak growth and suffocating low/negative atmosphere is vigorously provided by the German bank, too. The DB, which has also been worn out by certain cases and legal expenses and recorded loss in its treasury in 2015, saw extremely weak figures in its current data this year as well.

The giant bank which staggered with these developments altogether shaken with the $14-billion blow it received from the U.S. Department of Justice last September. The DB, losing investors' confidence a little more following the penalty it was charged due to the mistakes it made on securities based on home loans before the 2008 crisis, spent the last week under high pressure. As this was the case, the fear in the markets increased, giving rise to the question, “What will happen now?"

The action to be taken by the bank – that is already being discussed with its not-so-strong financials – after the penalty appears as a priority issue in this context. The DB, making statements along the lines of, “I have no intention of paying such a sum," is most probably going to try and get out of the debt with a much lower amount and certainly going to be affected by a negativity – whose degree is currently unknown – from this development.

Systemic risk

In my August column titled, “Dünyanın Stresi" (The world's stress), I had stated that based on the European banking stress test results, Germany is also among the countries that stand out in a storm scenario. The DB is one of the most critical parts of this. In addition, the DB which has taken its nationality's name, is not the sole risk in the banking system.

Accordingly, there is hesitance regarding the related affects that may infect the national system.

On top of it all, the giant bank itself and Germany are not the only ones complaining about the Deutsche panic. The developments are also gradually surrounding the global markets. Hence, since the DB is one of the strongest actors of the German finance system in terms of connection to the outside world, it is one of the most important sources of the flow outside.

And as detected in the IMF's 2016 Financial System Stability Assessment Report, the DB holds the titles as the bank with the highest net contribution to the global systemic risk on the Globally Systemically Important Banks (GSIB) list. Hence, in the case Deutsche's life goes under risk, regional and global negative reflections, of which the dimensions will exceed the country, are feared.

Will it survive?

The German giant's reinforcing its systemic risk is closely dependent on the kind of capital power it will continue with. And in an environment in which the finance sector is not strong, a peak in the concern in question becomes unavoidable. In this context, while the outcome of the agreement to be reached with the U.S. will be of importance in the initial stage, the bank's activities in relation to capital increase will also be closely followed.

The state not taking action for now is clearly seen in the discourse or silence of various actors. This alternative will, as a requirement of expectation management on one side and the U.S.'s German-pressured “bail-in" rules on the other, be the last move expected. In addition, in this election-focused period, which is a tough time for German Chancellor Angela Merkel, I do not think this method will be approached until things get totally out of hand. Meanwhile, there is no doubt that a bank with such a high systemic risk is required to “survive" one way or another.

As a result, it has become better understood with the latest calamity, the DB, which still seems confident and is making statements such as “no need to be concerned," needs to take re-organization seriously. This story is actually like an advice that currently applies to the other European banks that are especially carrying a systemic risk.

While the most fundamental outcome from the German panic is that capitals need to be strengthened to tackle the bad days, it must be noted that the ties between the EU and U.S. economies are completely tense.


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