Deutsche Bank challenges – Is the fault only of the banks?

Deutsche bank is grappling under a series of crisis, mostly of its own doing and the one that has affected the most is the recent fallout with US Justice department (DOJ), which is on the verge of slapping a multi-billion dollar fine on the German bank for its active role in selling derivatives and other toxic mortgage products in Wall street that led to financial crisis of 2008. The stock price bank shares of Deutsche have already taken a beating this year and is reeling under stress with their value being halved on the stock market.

Deutsche Bank share price
Deutsche bank is also on the verge of being imposed a heavy penalty for having committed gross irregularities related to money laundering cases in Russia between 2011 and 2016. Investigations led by the Russian authorities revealed wrongful practices committed by the bank. It was learnt that Russian customers who bought securities in Roubles were being bought back simultaneously by the London office of Deutsche. This sort of trading commonly known as mirror trades is speculated to be a money laundering exercise and is a gross violation of US sanctions which is against trading in Russia. This is one of the many troubles which have plagued the bank in the past and has not only tarnished its image but has dug a big hole into the profits of the bank. The Monte Paschi incident where former managers of Deutsche Bank have been charged for colluding to falsify accounts and manipulate the market is another problem hanging on their head.

A statement issued by its CEO, John Cryan, boasting of the bank’s strong fundamental capital position and talks of asset sales and capital raising efforts did sound similar to Lehman’s plea in 2008. But, this time, it could be different and they could survive. The lessons of what happened in 2008 will ensure that unlike Lehman, who were too proud and rejected rescue capital not liking the price, would make Deutsche not follow the same logic.

 

They would do good to issue as much capital as is needed to shore up the strength of the bank even if it is at the expense of existing shareholders. The stance taken by the Government in Germany is strong and have spelt out clearly that they are not in favour of any bailout to save the banks from going bust. In the case of Italy, where its Prime minister Mr. Matteo Renzi in the past had tried to bail out its banking system by allowing infusion of taxpayer funds into the system, the Germans had expressed their displeasure very clearly on the issue. It advocated strong action in punishing banks who were guilty in displaying reckless pursuits, no matter what the outcome.  


Deutsche Bank has been trying to sell assets to boost its capital position. It sold Abbey Life insurance which will raise its Tier 1 capital ratio only by 0.1%. Currently, their Total assets to Tier 1 capital ratio stands at 3.5 which is higher than the minimum required by European regulators but is the lowest in the world today Therefore the banks need to raise capital or reduce risk is imminent.

Moreover, there are indications for further negotiations pertaining to the amount of penalty being reduced by DOJ. This recent news has brought up necessary confidence and temporarily lifted the bank’s stock prices.

If not managed properly and if the bank meets with the same fate as Lehman Bros met, a collapse of Deutsche’s size shall ultimately affect every facet of the global market financially and shall have a catastrophic effect on the overall stock, bond and derivative markets worldwide .

But should we lay the fault ONLY at the Banks and their executives?

Passing on the entire blame to bankers may not be all correct. Regulators who have full insight into these banks and are seen by the general public to be the ultimate guardians to their live savings should be also held accountable when such failures happen.

Here’s an interesting read A Russian Tragedy: How Deutsche Bank’s “Wiz” Kid Fell to Earth

Bank regulators role is to set up risk management guidelines and ensure complete compliance to it by entities who are licensed by them. This gives us depositors confidence to entrust our savings with the banks. The same confidence we have when we are driving or walking on the road. It is time global bank regulators stepped up and ensured that this confidence is not eroded any further.

Singapore’s regulator the Monetary Authority of Singapore (MAS) has recently shut down operations of two Swiss private bank branches. Falcon Private Bank and BSI Bank in relations poor compliance records with a specific focus on their role about 1MDB. That was the first time in 32 years Singapore had shut down banks.

The other area where the global regulators are slowly coming around is the poor capital adequacy measures that were used historically. The traditional capital regime, first introduced by the Basel committee in 1988 and revised several times since takes differing risks into account. In that method, cash gets zero weighting and requires no financing with equity, while the riskiest securities require 1-for-1 equity funding according to Bloomberg.

This system that was in place before the financial crisis, exacerbated by the repeal of The Glass-Steagall Act, proved to be inadequate as firms like Lehman Brothers and Bear Stearns that appeared to present excellent ratios to the regulators, eventually failed.

The problem was that regulators allowed the banks to use their own definitions of risk. Little that they realised the conflict ( my views on Conflict of Interest in banks) they created since Risk Management and the traders both reported to the CEO who had a stronger alignment with its shareholders rather than the depositors. Securities tied to subprime mortgages that eventually defaulted were treated like cash because the bank’s internal policy had assessed them as essentially risk-free.

Isn’t it is like a driver on the road deciding how much of alcohol can he drink and even then be allowed to legally drive?

The new capital adequacy regulations are tougher and are not liked by the banks since it treats cash and the riskiest bonds as if they were the same. This waking up by the global regulators is good, and hopefully, they can save the system and not let the financial crisis raise its ugly head and end up punishing the savers once again and maybe banks should strictly follow their code of business conduct & ethics as DB writes in it’s 2014 statement of values “We will do what is right – not just what is allowed. “

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