Deutsche Bank is a global banking giant employing around 100,000 people in over 70 countries. It was once seen as Europe’s strongest financial institution. In recent years, like a lot of investment banks, it has been plagued by scandals. Deutsche is said to be in the firing line of the US Department of Justice with the Wall Street Journal reporting the Department has asked the bank to pay a massive $US14bn fine to resolve a probe into mortgage securities amid allegations of “mis-selling”.
The bank’s share price has been in freefall for over a year and this week the price of Deutsche Bank shares fell to their lowest level since the 1980s, taking Deutsche’s market capitalisation to around $US16bn, barely larger than the mooted fine and less than Australia’s Macquarie Group. By way of comparison, Commonwealth Bank has a market capitalisation of $126bn ($US95bn).
In January 2016 there was a run on Deutsche shares and its hybrid securities as investors fretted about the bank’s weak capital position. There were underlying issues of poor profitability, inadequate capital, high costs and lack of a coherent strategy. The bank responded by buying back some company bonds in a show of strength designed to ward off an accusation that it was running short of capital. The mooted $US14bn fine has seen it come under intense pressure once again as its share price is once again hammered.
While the European banking system has been in crisis mode since the GFC the focus has been on countries like Spain, Portugal and Greece. Recently the spotlight has been on Italian banks that are said to need at least €40bn of capital. The collapse of a German bank would be unthinkable given the dominance of Germany over the Eurozone banking system but if the bank does require a bail-out and Angela Merkel refuses to rescue it, contagion could be rapid.
Germany’s Die Zeit newspaper has reported this week that financial authorities in Germany are working on a rescue plan in case the Deutsche cannot pay its fine but this has been denied by Deutsche. The German finance ministry has also denied this saying, “This report is false. The federal government is preparing no rescue plans. There is no reason for such speculation. The bank has said that clearly.”
Nonetheless, the next few months are increasingly important for not only the Eurozone but for the global banking system.