THE PUBLIC IMAGE of Germany’s flagship businesses has taken a bit of a hit lately.
Last week, the country’s biggest bank, Deutsche Bank, suffered a devastating blow as shares dropped to a record 30-year low of just over €10. That means shares have declined by about 50% so far this year.
The plunge was largely because of an unprecedented $14 billion fine the US Department of Justice dished out to the bank for selling toxic subprime mortgages 10 years ago, which it blamed for contributing to the 2008 financial crash.
Coupled with the recent Volkswagen emissions scandal, the EU’s largest economy is losing its reputation as the bloc’s goody two-shoes member state.
As the Deutsche Bank saga unfolds, here are the key things you need to know about how Germany’s biggest lender could drag the global financial system into chaos.
Whopper fine
Deutsche Bank’s $14 billion penalty, leaked to The Wall Street Journal, was surprisingly steep, especially in comparison to the other banks the US Department of Justice has investigated so far: each has agreed to pay somewhere between $2 billion and $5 billion.
Pundits thought Deutsche would end up settling for a similar figure. In fact, on the day of the 15 September leak, the company issued a statement saying it expected to bring the number down to a figure similar to the other banks.
“Deutsche Bank has no intent to settle these potential civil claims anywhere near the number cited. The negotiations are only just beginning,” it said in a statement.
The bank’s shares have yo-yoed as talks continue behind closed doors, with a German financial newspaper speculating this week that the bank would look to pay between $4 billion and $5 billion.
No-nonsense
Pundits reckon the negotiations will be tough. Now that the whopper $14 billion figure has entered the public domain, US officials will want to flex their muscles: the Department of Justice doesn’t want to be considered weak if it settles for a fine that is too lenient.
The appointment of antitrust lawyer Bill Baer as assistant attorney general at the department probably won’t work in Deutsche’s favour either – Baer is known for a no-nonsense approach to dealing with big banks.
Bloomberg reports that the bank only has a breathing space of around $6.1 billion set aside for ligation – and the bank is also dealing with accusations of manipulating foreign exchange rates and dodgy trading in Russia.
Based on a note from JPMorgan, anything above that sum would leave Deutsche no room to settle its other legal issues without raising extra capital.
Political instability
Deutsche’s serious wobbles come at a turbulent time for chancellor Angela Merkel, whose Christian Democratic Union party recently took a hammering in the country’s regional elections.
The gains made by right-wing, anti-refugee party Alternative für Deutschland (AfD), especially in Berlin, have put Merkel in a tricky spot ahead of next year’s general election.
In the midst of such political instability, Merkel is unlikely to bail out Deutsche. Eurasia Group said injecting public money into the bank ahead of the crucial 2017 election would feed voters to AfD.
It would “kill Merkel politically”, Eurasia analysts said.
That said, Deutsche Bank’s chief executive, John Cryan, has repeatedly denied the company is even looking for aid from Berlin.
Lehman Brothers II?
So what do Deutsche’s woes mean for us? Some pundits have warned about a possible “contagion” effect.
As Germany’s biggest lender, the bank has $2 trillion on its books, just over half the size of the German economy. If the top bank in the EU’s largest economy toppled, it would obviously have a knock-on effect throughout the global markets – but how devastating could that be?
In June, the International Monetary Fund (IMF) identified Deutsche as the single biggest risk to the global banking system, and a number of commentators have warned that Deutsche could be the next Lehman Brothers – a sentiment that sends shivers down the spine of anyone who is still recovering from the 2008 crisis.
Bankers and investors, however, have been quick to dismiss such a chilling notion.
Outdated model
The IMF’s markets and capital markets director, Peter Dattels, said that Deutsche needs to revise its outdated business model.
Regulations introduced after the global financial crisis made its investment bank safer but less profitable. Coupled with ultra-low interest rates, the bank is having a hard time generating revenue.
The final word for now from German and European authorities is that they are monitoring the situation. The IMF is keeping its mouth shut for time being too, as nobody wants to “trigger any further market disruptions with specific criticisms”, according to Reuters.
Apart from the risk of a knock-on effect if the bank fails, Ireland could stand to lose jobs in the short-term.
The bank currently employs more than 100,000 people around the world, 650 in Ireland.
Last month, Deutsche announced that it plans to open a data centre here with the potential to create 165 new jobs in data and technology.
But bank CEO Cryan announced a 9% cut to its global workforce when he was appointed to his current role last year – and he’s starting with the lender’s home market, where 1,000 jobs are reportedly on the line as the bank struggles to turn around its fortunes.
Written by Conor McMahon and posted on Fora.ie
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