Deutsche may live off German government injections

There are those who question whether the Bundesbank or the European Central Bank (ECB) will be able to save Deutsche if investors lose confidence in the bank. In such case, international organisations — the likes of the International Monetary Fund — would have to step in.

Gary Dugan, chief investment officer at Dubai’s Emirates NBD, said central banks would have “to rip up the rule book” if Deutsche goes under, creating contagion across an already-weak Europe.

Political problems

“The rule book these days is that there has to be bail in, which means depositors lose their money. The scale of the potential save required for Deutsche would be potentially — and I stress potentially — beyond the means of the ECB; it would require federal support.

Once you talk about federal support, then you’re into a political problem because if Germany were to decide it can’t do a bail in, it would have to do a bail out, and the Italians would turn around and say they’re going to bail out their banks instead of a bail in … It kind of wrecks the whole system,” he said.

After the 2008 banking crisis, regulators around the world implemented stricter capital requirements on banks to avoid taxpayer-funded bailouts. Deutsche Bank currently exceeds its capital requirements and is shrinking its balance sheet to comply with regulators.

Though Dugan said Deutsche is in no sense near that disaster point, it is one of the weakest links in Europe and that’s worrying, especially when there are already concerns on banks in Italy, Spain, and Portugal.

“I think the situation can still be solved, but it needs a really emphatic recapitalisation of Deutsche Bank. It needs to be such that we no longer need to talk about it … So far, the capital raising has been modest relative to the problem, and therefore, not been convincing and hence, there has been no recovery in the share price,” Dugan said.

Next Lehman Brothers

From a technical perspective, though, analyst Osama Al Ashry disagrees, and believes it is likely that Deutsche will be the next Lehman Brothers, the former financial services company whose bankruptcy in 2008 highlighted the risks banks presented to the economy.

“Why wouldn’t it repeat the Lehman scenario when it’s the riskiest bank in the world according to the IMF?! ... On the medium term, the bank’s share prices are headed for more declines that may break the €10 [Dh40.88] level this year, which confirms the probability of a crisis,” Al Ashry, a member of UK group, Society of Technical Analysts, said in a note.

In June, the US unit of Deutsche Bank failed the stress test put forward by the Federal Reserve. It was one of only two banks (the other being Santander Holdings) that did not pass the test, which was adopted by the US Fed after the 2008 financial crisis to measure banks’ ability to respond to a market crash.

Al Ashry said he didn’t expect Deutsche Bank’s cost-cutting strategy to be of much help as the bank goes through its worst year. This may well usher in the financial markets’ worst period considering the “significant threat on the world’s financial system” that Deutsche represents.

New financial crisis

Christopher Dembik, head of macro analysis at Saxo Bank, echoed a similar bearish tone, saying that “a new financial crisis will arise in the coming years.”

With a European Union already facing hurdles from the UK’s Brexit decision, slower growth, and refugees pouring into the continent — let alone the Italian banking crisis — the Union cannot afford to let Deutsche Bank go bankrupt. If the bank does go bankrupt, it would cause a crisis worse than that of 2008.

Dembik said that in a worst-case scenario, the German government could nationalise Deutsche, following the example of the UK with the Royal Bank of Scotland in the aftermath of the global financial crisis.

“Overall, the European banking system is stronger than in 2008 but there are still significant weak points, such as Deutsche Bank, that can cause a new crisis. Unfortunately, the German authorities do not seem willing to tackle the issue and prefer to draw the attention on the Italian banking sector,” Dembik said.

Fully operational

This means that, once again, European taxpayers may have to pay for the banks even though the EU’s banking union will become fully operational in 2018. The union, if it has to, might only be able to save three German regional banks but it won’t have enough to save Deutsche, meaning citizens will bear that brunt.

Sounds familiar? That’s because this is pretty much a play-by-play of the 2008-2009 financial crisis when taxpayers bore the brunt of the big banks’ losses — and it won’t just be German taxpayers who suffer if Deutsche goes bankrupt.

According to the IMF, France, the UK, and the US have “the highest degree of outward spillovers as measured by the average percentage of capital loss of other banking systems due to banking sector shock in the source country” (the source country being Germany in this case).