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Thursday, 25 August 2016 15:01

How Deutsche Bank Can Destroy Europe Featured

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How can Deutsche Bank destroy the EU? Capital fight and extreme, involuntary deleveraging. DB is closing nearly 200 German bank branches. Not a big deal, right? German bank's depositor base is 111% of German GDP. A run on German banks is literally a run on the German economy - the largest economy in Europe...

fredgraph 1

...not to mention a major (the major) funding source for DB's massive derivative positions.  

Current news events don't portend a positive outcome for Germany's largest bank either. Bloomberg reports: NordLB Boosts Shipping Provisions Five-Fold, Warns of High Loss

Norddeutsche Landesbank boosted provisions for bad loans nearly fivefold to 1 billion euros ($1.1 billion), as Germany’s biggest shipping lender prepares for its first full-year loss since 2009.

NordLB, controlled by the state of Lower Saxony, posted a loss of 406 million euros in the first half as it battles a prolonged slump in maritime markets, including eight years of crisis in the container segment. That compares with a profit of 290 million euros in the same period last year.

“The shipping crisis, which further intensified in the first half of the year, has necessitated impairments that were higher than planned,” Chief Executive Officer Gunter Dunkel said in a statement. The bank lowered its outlook for the year, now anticipating a “significant” loss. It had projected a “negative result” in the spring.

... NordLB’s pessimistic view highlights risks at other German banks, which hold roughly one-quarter of the about 400 billion euros in global shipping loans. Under pressure to unwind sour legacy maritime assets, banks including HSH Nordbank AG and Commerzbank AG are also trying to shrink their loan books.

 What does this have to do with Deutsche Bank? A lot! Because everybody wants to sell these assets that aren't considered very desirable, and all at the same time, we've made a bad situation worse - precisely when DB can't afford it.DB mass selling bad shiping loans

Then there's the issue of DB's somewhat questionable assumptions and characteristics in its financial reporting. Deutsche Bank addendums are quoted as saying:

"The credit risk on the securities purchased under resale agreements and securities borrowed designated under the fair value option is mitigated by the holding of collateral. The valuation of these instruments takes into account the credit enhancement in the form of the collateral received. As such there is no material movement during the year or cumulatively due to movements in counterparty credit risk on these instruments."

What???!!! So, the value of collateral doesn't move now? On planet Earth, not only does the value of collateral move, it tends to move in the exact same direction as the value of the loan, borrowing or underlying, often at an exaggerated pace in the beginning (it's markets are the first to know of turmoil). Reference my podcast interview with Max Keiser at the 2:40 marker. Want some more? Read this page from our EU banking report a couple of quarters ago...

For those who don't believe me, I made this call in early 2008 - twice. Once for Bear Stearns (Is this the Breaking of the Bear?) and once for Lehman Brothers (Is Lehman really a lemming in disguise? Thursday, February 21st, 2008 | Web chatter on Lehman Brothers Sunday, March 16th, 2008). Was I right? Of course, that was then and this is now, so the banks are better prepared, right? Of course. The graphic below was taken from our Banco Popular report (click here for more info), not from 8 years ago, but from a quarter ago - yes, 2016! Hey, there's more...

Banco Popular Research teaser3

Now, just imagine that Italy's Banco Popular is the entity that DB used to hedge it's exposure, and Banco Popular (obviously) can't pay up on every(any?)thing. DB's gross exposure become's DB's net exposure as DB's notion value and market value converge near instantaneously if (or when) market shoots off in one direction (you can likely guess what direction that would be for stakeholders, and this time around that includes depositors and bondholders, not just shareholders).

What does this all mean?  Well, we went through this in explicit detail and have identified no less than 6 (and we're still actively looking) financial institutions that may have passed the EBA stress tests, but have miserably failed our examination - and that's without adding in the bank contagion factor!

To partake in this knowledge, join Veritaseum University and purchase the interactive research asset called "European Bank Contagion Assessment, Forensic Analysis & Valuation".

Read 3445 times Last modified on Friday, 26 August 2016 15:03

2 comments

  • Comment Link Reggie Middleton Friday, 26 August 2016 15:30 posted by Reggie Middleton

    There is no such thing as "Too big to fail!". That was a term that was coined by those special interests that didn't want to see banks fail. The reality is, banks have been failing for thousands of years, yet each and every day, the sun has risen in the morning and set in the evening.
    That being said, I doubt very seriously if the German government will allow DB to fail (if they did, you would see banks stateside take a very big hit). Expect tax payer bail-ins as well as "some" bondholder losses.
    The damage to Germany's, and the EU's economy will be quite consequential, and it would mark the opportunity for other regions and entities (ie. Asia) to climb up the food chain. The only problem is that when DB sneezes, Asia will catch the flu as well.

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  • Comment Link Masiah Middleton Friday, 26 August 2016 15:20 posted by Masiah Middleton

    Do you this this will cause deutsche bank to collapse or is it as some say "too big to fail"?

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