Deutsche Bank’s transatlantic influence is falling in more ways than one — last week proved the German lender cannot even infect US banking stocks any more. Europe’s banks felt every blow almost as painfully as Deutsche, falling sharply during a torrid few days on the European stock market.
On Friday morning, three of the region’s biggest — Credit Suisse
and BNP Paribas
— lost more than 4 per cent of their market value as investors’ concerns about Deutsche spilled over into the sector. All of them then rebounded on rumours that the German bank was close to settling with US enforcers over mortgage securities allegations. On Monday, the German exchange was closed for a holiday, but Deutsche’s US depository receipts fell a little, as did some of the European banks.
But Wall Street enjoyed much more stable trading. Here’s why.
The US banks are in decent shape
Eight years on from the financial crisis, the US banking industry has record capital, record amounts of liquidity and each year undergoes a pretty severe stress test. After the most recent round of tests, in June, two banks — both European — had their capital-return plans rejected, while Morgan Stanley
was given a conditional clearance, and told to fix flaws by the end of the year.
Since the first run of stress tests in 2009, the big US banks have added more than $700bn in common equity tier one capital between them. Their aggregate capital ratio now stands at 12.2 per cent of risk-weighted assets, up from 5.5 per cent then. Twenty of the eurozone’s biggest banks have a similar average CET1 ratio — about 12.2 per cent — but there is great variation among banks and countries. Deutsche’s, for example, was just 10.8 per cent at the end of June, while the Netherland’s ABN Amro had a CET1 ratio of 16.2 per cent.
In the US, there is more uniformity. Every big bank is now ahead of the minimum capital levels required by 2019 under the Basel III standards, notes Jason Goldberg, an analyst at Barclays.
“The [US] banking system is multiples safer than it was pre-crisis,” he says.
Litigation worries are (largely) behind them
Investors in Deutsche Bank
are wondering how much the US Department of Justice will wring out of the bank after a probe into its sales of mortgage-backed securities. Several other European banks — including Barclays and Credit Suisse — are still awaiting fines for that same issue, so a big number for Deutsche has direct implications for them.
However, for the US banks the mortgage fine issues and big crisis-era litigation are mostly in the rear-view mirror. Bank of America
’s legacy assets and servicing division, for example, which was formed in the wake of the crisis to accommodate the bank’s toxic mortgage-related assets and non-core businesses, had litigation expenses of $800m last year — about one-eighth the yearly average between 2011 and 2014.
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The chief executive made Wells Fargo the biggest bank but now faces scandal, writes Gary Silverman
New risks are always cropping up, of course. Wells Fargo
has been under fire for its fake-accounts scandal, with senators last week appealing to the Securities and Exchange Commission to investigate whether the bank should have alerted investors to its sacking of more than 5000 people over five years, and whether it should have done a better job of protecting whistleblowers. Other regulators including the Federal Reserve are “piling on”, says Kevin Barker, an analyst at Piper Jaffray, saying they will be studying other banks’ sales practices.
But for the US industry as a whole, the chances of further big hits appear to be receding. Every quarter, Goldman Sachs
takes a guess at how much it could lose in litigation proceedings above its total reserves for litigation (which it does not disclose). In the second quarter this year, its maximum “reasonably possible aggregate loss” was $2bn — down from $5.9bn a year earlier.
Regulators have a strong grip
The regulatory landscape is clear in the US: the Fed is in charge. Over the past six years the central bank has deprived the big banks of much of their operational freedom by twiddling the dials on its annual stress test to ensure, if they want to remain in certain lines of business, it is going to cost them through higher capital charges.
What is more, the direction and scale of the dial twiddling tends to change each year, forcing the banks to err on the side of caution in their requests to return capital through dividends and buybacks. That is a deliberate strategy to keep lenders guessing, on the part of Daniel Tarullo, the Fed’s lead banking supervisor.
“The banks are likely to be in the star chamber for a few more years, where we think they will never be quite certain what exactly the inquisitor wants,” says Chris Kotowski, analyst at Oppenheimer.
Last week Mr Tarullo tightened the screws further, saying the eight US banks considered most critical to the financial system — Bank of America, Bank of New York Mellon
, Citigroup, Goldman Sachs, JPMorgan Chase, Morgan Stanley, State Street
and Wells Fargo — would have to build even bigger capital buffers against losses, perhaps from next year.
The banks, and some lawmakers, have bridled against this, arguing that the Fed has been aloof and impervious to reason. Congresswoman Ann Wagner, a Republican from Missouri, last week asked Janet Yellen, the Fed chair, if the central bank would stop to consider the costs of its policies, as well as the benefits. “Shouldn’t the Fed at least attempt to understand the cumulative effects its rules are having on the economy?” she asked.
Ms Yellen replied: “Well, we are carefully monitoring how our regulations are working and, by and large, my conclusion is that we have a safer and sounder banking system.”
That’s a “no” then.
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Despite all the talk in recent years about ensuring big banks can collapse without state assistance, many on Wall Street see it differently. If push really comes to shove, they say, the German government will stand behind Deutsche. The Basel Committee on Banking Supervision has judged Deutsche the third most systemically important bank on Earth, they note — level with Barclays, BNP Paribas and Citigroup. Would Berlin really walk away?
“They will blink at the eleventh hour, so if you’re Goldman, say, dealing with Deutsche, why would you stop?” says one London-based analyst. “If you have a repo line with Deutsche, you don’t feel like you’ll lose money.”
A New York luxury real estate developer, and big client of the bank, put it slightly differently. “Deutsche Bank — you know what that stands for? That stands for The Bank of Germany. I don’t believe The Bank of Germany is ever going out of business.”
Additional reporting by Laura Noonan in Dublin