What is hiding behind the “wreck” of the Deutsche Bank

Jeffrey Smith
As you may have already heard, the Deutsche Bank – the largest bank of Germany and a symbol of the global financial…
system – is in a difficult position.
The U.S. government intends to impose a fine of $ 14 billion, approximately, for the sale of distressed securitised mortgage loans before the outbreak of the financial crisis.
In addition, Deutsche and other european banks have to deal with negative interest rates, which squeeze profits.
Overall, there are fears that the bank might have to help from the German government, or otherwise, will go bankrupt. Until now, German Chancellor Angela Merkel has said that there will be no rescue of the Deutsche Bank.
Behold four reasons why the crisis of the Deutsche Bank concerns us all:
1. Deutsche is interconnected with the global financial system
What makes a bank risk to the entire financial system is the degree to which it is interconnected with other institutions, i.e. the ability to cause chain reactions in case of bankruptcy. On the basis of this criterion, Deutsche is extremely important. And so I think it is unlikely that the German government let it collapse.
2. Deutsche has a huge portfolio of derivatives
Deutsche has the largest portfolio of derivatives, i.e. financial contracts based on the value of other assets – in the world. The value of the had touched the 75 trillion dollars, i.e. approximately 20 times the German GDP, but decreased to 46 trillion dollars at the end of the previous year. This amount is equivalent to 12% of the total value of derivatives worldwide, according to the Bank for International Settlements.
3. Deutsche Bank is not adequately capitalised
The European Central Bank requires from the Deutsche to have enough capital to cover a possible loss, which amounts to 10,25% of its assets. And this percentage will have increased to 12.5% until 2019. Until now, the prediction of the Deutsche was fined 3.3 billion dollars.
And most analysts say that any final settlement will exceed $ 4 billion that could force it to gather more capital, and this is the reason why the share price drops at this time. However, the German law restricts the amount of new shares they can issue in one year to 50% of the total.
With the current levels, this means that any increase in capital may not exceed € 8 billion.
4. The prospects of Deutsche are not encouraging
And american banks have faced some of the problems currently facing the Deutsche. But he was lucky because the US economy has rebounded, allowing them to resume lending with a satisfactory profit margin.
At the same time, they derived a satisfactory income from the stock market and the bond market. Deutsche, on the contrary, struggles to find her own path to recovery. But not limited to, revenue from the department of global markets decreased by 28% in the first half of the year.
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