What’s going on with Deutsche Bank? The German government, usually against any form of interventionism, is pushing toward a merger between this banking behemoth and the country’s second largest bank, Commerzbank, according to Focus economic magazine. The Ministry of Finance is looking at acquiring a stake in the capital of Deutsche Bank in order to connect both banks by exchanging shares – the State is already the major shareholder of Commerzbank, with 15% of its capital. The goal would be for Europe’s first economy to have at least one banking institution capable of sustaining its international businesses (Bloomberg). Does it all mean the situation is this serious? Businesses from one of the planet’s largest exporting countries could lose access to the international financial markets?
Deutsche Bank isn’t going well – its shares have lost 50% of their value since the start of the year – but Commerzbank isn’t faring any better, since its shares have lost 46% over the same period. The collapse of Deutsche Bank’s shares since the peak of May 2007 (105 euro) is staggering: -90%!
Germany’s first bank’s woes have lasted for a long time, worrying even the European Central Bank, as we had noted last April. Deutsche Bank is perpetually “in restructuration” without reaching any satisfying profitability; it is at the center of many litigations that have already cost it over $18 billion in fines since the 2008 financial crisis (Libor and Euribor manipulations, sub-primes, foreign exchange markets etc.), and on top of it all, it is the bank most exposed to derivatives in the world, with an estimated amount of $64 trillion, the equivalent of 16 times Germany’s GDP...
And if that weren’t enough, Deutsche Bank just got implicated in one of the greatest money laundering scandals in history, that of the Danish bank Danske Bank, for a staggering amount of €180 billion. The fraud was going through its Estonian branch, but Deutsche Bank was managing 80% of the flow from the Danish bank for its clients in Russia... There should be more to come, and it could cost the Frankfurt bank an awful lot of money.
Its leverage is of 28 (1 euro in cash for 28 in liability), an insane ratio that could spell trouble if markets turn, but sadly this is the norm for Europe. French banks are also playing with fire – and they bear the cost with loss of value, as we’ve shown.
So... what’s up with Deutsche Bank? Well, it’s suffering from the same illness as the other European banks, that is, essentially a much too high level of leverage, to which one must add some specifics such as a record amount of derivatives, above average manipulations and money laundering. This is why the German government wants it to merge, thus thinking it will make it stronger, even though the 2008 crisis has shown that “too big to fail” logic does not solve the problems and, worse, it puts the managing team off the hook. What is actually needed is a dismantling, because otherwise the pockets of rich Germany may not be deep enough... And beyond that, this highly systemic bank could cause the whole of the European banking sector to tremble, like a Lehman Brothers scenario, but a worse one.
Reproduction, in whole or in part, is authorized as long as it includes a link back to the original source.
Philippe Herlin Finance Researcher / Member of the Goldbroker.com Editorial Team
Philippe Herlin is a researcher in finance and a doctor in economics of the Conservatoire National des Arts et Métiers in Paris. A proponent of extreme-risk thinkers like Benoît Mandelbrot and Nassim Taleb, and of the Austrian School of Economics, he will be bringing his own views on the actual crisis, the Eurozone, the public debts and the banking system. Having written a book on gold that has become a reference (L’or, un placement d’avenir, Eyrolles 2012), he wishes to see gold play a growing role in our economies, all the way to its full re-monetization.