China capital curbs reflect buyer’s remorse over market reforms

Last year the reformist head of China’s central bank convinced his Communist party bosses to give market forces a bigger say in setting the renminbi’s daily “reference rate” against the US dollar. In return, Zhou Xiaochuan assured his more conservative party colleagues that the redback would finally secure coveted recognition as an official reserve currency […]

Continue Reading

Capital Markets

Mnuchin expected to be Trump’s Treasury secretary

Donald Trump has chosen Steven Mnuchin as his Treasury secretary, US media outlets reported on Tuesday, positioning the former Goldman Sachs banker to be the latest Wall Street veteran to receive a top administration post. Mr Mnuchin chairs both Dune Capital Management and Dune Entertainment Partners and has been a longtime business associate of Mr […]

Continue Reading


Financial system more vulnerable after Trump victory, says BoE

The US election outcome has “reinforced existing vulnerabilities” in the financial system, the Bank of England has warned, adding that the outlook for financial stability in the UK remains challenging. The BoE said on Wednesday that vulnerabilities that were already considered “elevated” have worsened since its last report on financial stability in July, in the […]

Continue Reading


China stock market unfazed by falling renminbi

China’s renminbi slump has companies and individuals alike scrambling to move capital overseas, but it has not damped the enthusiasm of China’s equity investors. The Shanghai Composite, which tracks stocks on the mainland’s biggest exchange, has been gradually rising since May. That is the opposite of what happened in August 2015 after China’s surprise renminbi […]

Continue Reading


Hard-hit online lender CAN Capital makes executive changes

The biggest online lender to small businesses in the US has pulled down the shutters and put its top managers on a leave of absence, in the latest blow to an industry grappling with mounting fears over credit quality. Atlanta-based CAN Capital said on Tuesday that it had replaced a trio of senior executives, after […]

Continue Reading

Categorized | Banks, Equities

Systemic fears over Deutsche do not add up

Posted on September 30, 2016

Dark clouds hovering over Deutsche Bank towers...epa05001594 (FILE) A file photo dated 20 May 2015 showing dark clouds hovering over the headquarters of German banking and financial services corporation Deutsche Bank in Frankfurt, Germany. Deutsche Bank, Germany's largest bank, said 29 October 2015 that it will cut about 9,000 jobs, four days after it announced a restructuring. The reorganization of the bank's leadership was announced Sunday by chief executive John Cryan, who said the aim was 'to create a bank that's better-controlled, more cost-efficient and more strongly focused.' The bank has been dogged by a host of problems in recent months, ranging from shake-ups in management to major anticipated losses. It also was fined 2.5 billion dollars in April for its role in manipulating the benchmark Libor interest rate, which banks charge one another for loans. Deutsche Bank is also preparing to sell its Postbank subsidiary, which will mean a loss of a further 15,000 positions. EPA/ARNE DEDERT©EPA

There can be little doubt Angela Merkel would bail out the Germany’s biggest bank if necessary

Is Deutsche Bank a systemic risk? The answer seems blindingly obvious.

On Thursday, after another brutal day for Germany’s biggest bank, which saw its shares tumble 6.7 per cent, US financial stocks lost almost 2 per cent. In London and New York, market sentiment verged on panic. Comparisons were made with the collapse of Lehman Brothers in 2008.

    The International Monetary Fund had pointed at Deutsche back in July, describing it as the world’s most systemically risky bank. In an unusual analysis that looked at the influence of banks’ share price volatility on each other, it found that movements in Deutsche’s share price carried over to rivals more than was true for any other big bank. It is a second-hand measure, but it could be seen as a proxy for the intricacy of the bank’s counterparty relationships and the fallout that could be expected in a disaster scenario.

    The market has spent the past two weeks betting that the time for that scenario has come. On Friday September 16, it emerged via a leaked report in the Wall Street Journal that the US Department of Justice was seeking $14bn to settle accusations the bank mis-sold mortgage securities. Deutsche’s shares have been falling ever since. But on Friday, after falling again in the morning — losing 20 per cent in a fortnight — they regained 6.5 per cent in the afternoon on rumours of a much smaller $5bn settlement.

    And yet the systemic contagion theory does not stack up. Until the past couple of days, the shares of most other big banks had been largely unaffected, shrugging off the Deutsche settlement issue — and the attendant pressure on capital — as an idiosyncratic risk.

    When modest tumbles did come at Barclays and Credit Suisse, traders said it reflected hedge funds trying to replicate the short selling wins made with Deutsche stock, rather than a market fright about counterparty risk between Deutsche and the rest of the banking sector.

    This is a long way from the kind of contagious virus that spread a full-blown crisis in September 2008 — for two reasons.

    First, more robust regulatory defences have been put in place during the past eight years. Capital levels are three or four times what they were, liquid asset reserves are vast — €215bn in Deutsche’s case — and monitoring has been stepped up. Deutsche, along with 50 other European banks, went through a region-wide stress test over the summer. It emerged in 42nd place, relatively weak, but still better than some had feared.

    Second, this is Germany’s biggest bank, with a brand that hammers home the connection with its domestic market. Whatever a politically pressured Angela Merkel might have to say in public, there can be little doubt that if it became necessary, the German chancellor would bail out the country’s biggest bank — albeit within the limitations of European law and its requirement that market conditions are respected and bondholders bear some burden, too.

    That could translate into losses for holders of Deutsche’s contingent convertible bonds, its senior bonds, and its equity (though there is widespread, and justified, scepticism that any policymaker would have the chutzpah to “bail in” investors aggressively for fear of exacerbating market panic.)

    Either way, the situation would be Deutsche specific. Contagion across the sector would be illogical, since counterparties should be safe.

    All of that said, there is another kind of contamination that has been gradually spreading across much of the banking sector, especially in Europe. The root cause is not Deutsche Bank, or any other commercial entity, but central banks such as the ECB. Their zero interest rate policies have added to all the other pressures on banks and left them unable to generate anything like the level of profitability that equity investors would like.

    Whatever happens with Deutsche’s DoJ settlement, expect depressed share prices to persist at Germany’s biggest bank — and across much of the sector — for a good while yet.