Deutsche Bank

[RandBlade]

Deutsche Bank, described as "the world's most dangerous bank" by the IMF seems to be in critical danger. After years of weak banking crises across the Eurozone from Greece, Italy, Ireland, Portugal, Spain, Cyprus and more is now reaching Germany's most important and the Eurozone's most important bank. Not helped by a record $14 billion fine by the Americans which may be a coincidence but looks rather suspiciously like Americans enacting revenge on the EU's record fine on Apple.

Deutsche is surely the mother of all "too big to fail" banks and the idea that Germany will stick with its line of not bailing out the bank if it became necessary seems completely implausible. It is hard to see the German economy or the Eurozone surviving Deutsche facing the same fate as Lehman Brothers. It is equally hard to see how Merkel could survive needing to bail out Deutsche either. If Deutsche goes under then it could make 2008 look like an easy time.

[wiggin]

I don't have much to say about this topic in general (obviously they will bail them out if necessary, who knows if it will be necessary), but I do disagree with your argumentation re: the Apple fine. These are fundamentally different parts of the US government (Treasury and Justice) and the fines are in line with fines against other large (American) banks involved in the MBS crisis, including Bank of America and JP Morgan.

[RandBlade]

As far as I'm aware Bank of America was fined about $1.25 billion (although that's still in the courts) which while a considerable sum is a small fraction of the $14 billion fine for Deutsche. I appreciate the fine for JP Morgan is more in line but this number is still bigger than JP Morgan's fine and it was my understanding that Deutsche had a smaller role in the scandal than JP did so should have expected if it was consistent a smaller fine not a bigger one.

[wiggin]

BoA has had a large number of different settlements with the federal government. You are referencing an entirely different case. The financial fraud case relating to MBSs and CDOs resulted in a record $16.65 billion settlement with the feds in August 2014. A year earlier, JP Morgan paid $13 billion in the MBS cases. Goldman Sachs and Citigroup managed with smaller fines of $5 and $7 billion, IIRC, but they are still quite high (the initial fines for each of them were $15 and $12 billion, though, so right in line with the DB fine). It's possible that DB will be able to negotiate the number down a bit, like GS and Citi managed, but it is not at all clear to me that they will - AIUI DB was heavily involved in repackaging and mis-selling CDOs.

My point, however, is that the fine is by no means unusual for this crisis, especially as an opening gambit by the DoJ. I think there is no reason to speculate that the fine has any connection to the entirely unrelated (and far less justified) attack on Apple's legal (albeit slimy) gaming of international tax systems.

edit: I think there is a useful lesson to be learned here for both Deutsche and other zombie banks in Europe (I'm looking at you, RBS). The US intervened in the financial sector very rapidly following the collapse of Lehman - rapidly bailing out the major players in the system, freeing up massive amounts of liquidity, and forcing the banks to go through painful restructuring and capital raising. As a result, US banks are quite safe by most metrics - they have much higher tier 1 capital ratios and better leverage ratios than most of their European peers. There are a lot of reasons for this - US banks tend to be funded primarily by deposits rather than flighty money markets etc., have a much larger integrated market to rely on, and have diverse revenue streams (e.g. investment banking, FICCs, etc.). They also aren't tied to sclerotic local economies. They rapidly rebuilt capital ratios and exited from US bailout programs (at a profit to the US taxpayer), tried to settle most of their outstanding legal issues in an expeditious manner, and are much healthier as a result.

This isn't to suggest that US banks are by any stretch of the imagination good companies. We've seen from the latest Wells Fargo shenanigans and all sorts of iffy behavior in recent years (ranging from sanctions evasion to fraud to inside trading to manipulating markets and reference rates), and US banks are just as complicit as European banks. But in terms of overall financial health, American banks are much stabler and well-capitalized. This has important policy ramifications.

[RandBlade]

That makes sense about the fines and yes I 100% agree that the US has dealt with its banking sector infinitely better than Europe has (including RBS).

[Timbuk2]

The US intervened in the financial sector very rapidly following the collapse of Lehman - rapidly bailing out the major players in the system, freeing up massive amounts of liquidity, and forcing the banks to go through painful restructuring and capital raising. As a result, US banks are quite safe by most metrics - they have much higher tier 1 capital ratios and better leverage ratios than most of their European peers.

US banks are subject to the same Basel III Tier 1 Capital requirements as European banks are. Yes the US interpretation/implementation of the Basel Accords is slightly tougher than that for most European based banks, and indeed ease of liquidity of the CR as you rightly point out, but the CR is so much higher than pre-2008 for all banks in Europe or the US that I wouldn't put much weight behind saying that European banks are much more at risk of failure or less stable than those in the US.

Your point that US banks have a much higher Tier 1 CR than European banks is not true though.

HSBC; Europe's largest bank, along with J P Morgan in the US, are the only two banks globally to have a CR at 13.0%. The rest of the official list of Systemically Important Banks in the Europe and US (and indeed Asia, including the world's largest 2) are fairly equally distributed between 10.5% and 12.5%. (by Nov '15 figures)


ETA: Just checked HSBC's and JP Morgan's latest Pillar 3 disclosures. Tier 1 CR for both now stands at 13.9%

[wiggin]

You're right; I was imprecise in my wording. CET1 et al have gotten better at European banks of late; though the Fed is indeed rather stricter on big banks than I believe the new Basel III implementation in Europe is, they have decent CET1 ratios. IIRC they took longer to rebuild their CET1/T1 capital ratios than American banks but they are doing ok now.

However, the bigger divide has to do with the much cruder measure of capital, the leverage ratio. IIRC European big banks still lag far behind US banks on this measure. And while I don't love the leverage ratio because it is so crude, it is a lot harder to game because there's no risk-weighting (cf AAA-rated securities that flatter a balance sheet but might not really be AAA). In general, it is my understanding (based on admittedly limited expertise) that US banks are far more robust to substantial economic shocks at the moment, and developed this robustness faster in the wake of the financial crisis.

[RandBlade]

It helps that the US has had years of growth, unlike certain nations in Europe where banks may be barely off life support but there hasn't actually been a systemic shock in nearly a decade. It is eight years since the last recession, on a cyclical basis we are due another shock and I don't think certain banks are well equipped to face one if it arrives.

[wiggin]

It helps that the US has had years of growth, unlike certain nations in Europe where banks may be barely off life support but there hasn't actually been a systemic shock in nearly a decade. It is eight years since the last recession, on a cyclical basis we are due another shock and I don't think certain banks are well equipped to face one if it arrives.

Indeed, though the recovery in the US has been anemic, it has progressed fairly uninterrupted. Given the ructions in Europe during the euro crisis and associated double/triple dip recessions/indefinite stagnation that certainly makes improving financial stability challenging. This also has important policy implications far beyond the capitalization of banks directly.

There are also reasonable questions about the adverse scenarios used in stress testing - there are some substantial differences between the US and European models for how bad of a turndown banks should expect; this may flatter the stability of some European banks, though I understand that European regulators (EBA?) have been working on refining their stress testing to make it more realistic.

[GGT]

US banks are subject to the same Basel III Tier 1 Capital requirements as European banks are. Yes the US interpretation/implementation of the Basel Accords is slightly tougher than that for most European based banks, and indeed ease of liquidity of the CR as you rightly point out, but the CR is so much higher than pre-2008 for all banks in Europe or the US that I wouldn't put much weight behind saying that European banks are much more at risk of failure or less stable than those in the US.

Your point that US banks have a much higher Tier 1 CR than European banks is not true though.

HSBC; Europe's largest bank, along with J P Morgan in the US, are the only two banks globally to have a CR at 13.0%. The rest of the official list of Systemically Important Banks in the Europe and US (and indeed Asia, including the world's largest 2) are fairly equally distributed between 10.5% and 12.5%. (by Nov '15 figures)


ETA: Just checked HSBC's and JP Morgan's latest Pillar 3 disclosures. Tier 1 CR for both now stands at 13.9%

Bloomberg News had a chart showing that EU banks aren't as well 'capitalized' as US banks. I've also read that EU banks haven't been required to reduce their derivative risks like the US has (after the global financial crisis)....and that Deutsche Bank is heavy on derivatives (CDOs, MBSs, etc.)

I've also seen some news sources suggesting this is a Journalism problem more than a Banking problem. Leaked reports said the US DoJ would impose a $14.5 billion dollar fine....and according to German law, they had to "report" that? I'm a bit confused on Germany's reporting laws, but I presume US fines wouldn't be more than a bank could afford to pay, or force it into insolvency, especially if it's a SIFI.

Timbuk, since you're in the banking/financial sector......what do you think of this mess?

[ar81]

Let bank to file bankruptcy. It is called economic correction. Bankrutcy will bring intervention and that is a good thing. It is called capitalism. You break it, you buy it.

[Dreadnaught]

Looking back at this when the crisis seems to have been averted...is the US government just making up numbers? The US demands a fine that is equal to the entire market cap of the whole bank over some decade-old mortgage securities?

These faux-prosecutions arguing that Fannie and Freddy were sheep is ridiculous. They were the wolves among wolves. The sheep were the taxpayers.