By now most people know that Germany’s once gargantuan Deutsche Bank is trading at all time lows. Over the weekend Angela Merkel said the German government saw no grounds to bail it out although I’m sure if it comes to it Germany will be under so much international pressure to save it because of the systemic risks that a failure would pose to global financial markets. Europe’s fashionable bail-in concept means the ultimate victims are those that have lent to it – whether individual depositors or wholesale lenders. Is it any wonder Italian PM Renzi is ignoring the EU rules and likely to bail out the world’s oldest bank?
Deutsche’s most recent funding blurb says the following:
“Diversification of our funding profile in terms of investor types, regions, products and instruments is an important element of our liquidity risk management framework. Our most stable funding sources come from capital markets and equity, retail, and transaction banking clients. Other customer deposits and secured funding and shorts are additional sources of funding. Unsecured wholesale funding represents unsecured wholesale liabilities sourced primarily by our Treasury Pool division. Given the relatively short-term nature of these liabilities, they are primarily used to fund cash and liquid trading assets…
…Credit markets in 2015 were affected by continued political uncertainties in the euro zone, the ongoing low interest rate environment as well as the implementation in a number of jurisdictions, including Germany, of measures intended to reduce the levels of implicit sovereign support for banks, with a consequential impact on bank senior ratings. Our 5 year CDS traded within a range of 61 to 110 bps [trading at 247bps today], peaking in July. Since then, the spread has slightly declined and as of year-end was trading at the higher end of the range for the year…
…In 2016, our base case funding plan is up to € 35 billion which we plan to cover by accessing the above sources, without being overly dependent on any one source. We also plan to raise a portion of this funding in U.S. dollar and may enter into cross currency swaps to manage any residual requirements. We have total capital markets maturities, excluding legally exercisable calls of approximately € 22.4 billion in 2016.”
Naturally it presents an interesting question. If you are lending to DB how much faith do you put in the government to bail it out? Even if you weight the chances as high on a “too big to fail” argument (which is becoming somewhat hard to justify on grounds of market cap) premiums have to go up to compensate which at the ridiculous rates we are at has a far greater relative impact on profitability. I’m not sure how much of the € 22.4 billion in 2016 has been funded already but I’m sure those with money due in 2017 will have to take a longer look.
But we shouldn’t worry. Deutsche’s CEO is on record as saying “funding is not on the agenda”. I always love the way banks talk about their risks. Who could forget former Goldman Sachs CEO and Treasury Secretary Hank Paulson in March 2008 before GFC:
“We’ve got strong financial institutions . . . Our markets are the envy of the world. They’re resilient, they’re…innovative, they’re flexible.”
Of course banks always push the denial line when in trouble. They have no choice. No doubt the internal emails at DB have a”message” to staff – where what is written doesn’t resemble anything like the reality faced everyday by the minions. That is the folly of working in an investment bank – the internal politics get ever nastier until there are no more lifeboat passes left and no life jackets to give.
Throw in a good Trump performance tonight and global markets will be even more skittish – then again it might be they are finally waking up to the reality of the disaster central banks have put the world into.