Is the bank on the brink of a collapse, or will it save itself?
Scandals seem to be the tipping point for corporations’ collapse. Deutsche bank, the second largest bank in terms of assets and investments, being charged a $14 billion dollar fine by the Department of Justice for manipulating residential mortgage-backed securities sale, is fighting internal mishandling and weak markets. The bank announces to fight the penalty fine. The bank, which is feared to be thrown in a downward spiral holds 2 trillion EUR of assets, but a larger problem lies in its hefty exposure to derivatives valued at 55 trillion EUR, even larger than Germany’s GDP.
Economists are wary of the bank handling the issue on its own, as the anticipated losses are assumed to go beyond what is available for a bail-out, sure to tank Germany’s GDP. Defending failing bank and its reputation is commonplace, as seen in the case of Lehman Brothers who were hesitant to accept the situation, but Deutsche bank’s CEO Cryan is verbal about being confused of what must be done at all, if there exists a valid solution. However, considering the combined consequences of its supposed fall, it is inevitable that there is a plan under preparation for reversing its likelihood of bankruptcy. If not, its failure and subsequent dragging impacts on other banks in the EU may even establish a friction between Germany and the EU. Next year elections are a hindrance for the bank, assuming citizens will not vote for a bank bailout government, which seems to have become a global trend where too-big-to-fail banks assume their invincibility and conduct carelessly before they realise the presence of a termite within. Governments will be forced to reconsider banking policies, especially those that encourage them to act reckless and irresponsible. Bankruptcy policy requires radical amendment where tax payers’ money is dissociated from the bailout package, and substitutive restructuring exercise and laws are introduced.
Difficult as it seems, efforts are made to suppress the mounting bankruptcy risk, or to prolong its stability. The bank managed to divest its insurance business, Abbey Life, to Phoenix group for $1.2 billion, giving some relief by pocketing tier one capital. Even then, apparent cracks continue to hurt its stock valuation that are trading at a value less than 10% of its 2007 peak, a reflection of the speeding avalanche. Internal mismanagement, poor investment decisions, and huge exposure to government bonds trading at their lowest, counts among major reasons for its dismal condition, not to leave the ongoing Libor scandal that was the start button.
Merkel recently hinted that the bank may have to go on its own, if at all there arises a bailout situation. With elections next year, it seems even more difficult for the bank to get government support. Owing to its deep interconnections with other banks, it is most likely to pull down others as well in case of bankruptcy. That said, if the bankruptcy affects the US economy hard, Germany may have some medicine for the ailing bank to sustain good bilateral relations. Selling non-core subsidiaries is being aggressively executed to continue the much needed cash inflow. Precisely, the bank’s internal efforts, government support, and market situations will seem to be decisive in its survival or extinction.