Deutsche Bank stocks in Frankfurt are still under pressure. The banks stock price dropped this year already 52%. The latest trigger appeared to be a report in German magazine ‘Focus’ over the weekend that the German government has ruled out state assistance for the troubled bank.
The banking industry faces difficulties due to lower margins as a result of record low interest rates and the cost of new regulations. Furthermore, the big financial institutions like Deutsche Bank finally pay their price over its role in the global financial crisis.
It is not the first time this year that Deutsche Bank draws negative attention to itself. Deutsche Bank derivatives traders conspired to move the benchmarks in a direction that would benefit them financially, at the expense of the bank’s clients and trading partners. An investigation by the U.S. Justice Department concluded: “Deutsche Bank secretly conspired with its competitors to rig the benchmark interest rates at the heart of the global financial system, and the bank’s misconduct not only harmed its unsuspecting counterparties, it undermined the integrity and the competitiveness of financial markets everywhere.”
The banks’ employees manipulated the London Interbank Offered Rate, or Libor, the Euro Interbank Offered Rate, or Euribor, and the Euroyen Tokyo Interbank Offered Rate, or Tibor. Those obscure benchmarks are used to determine interest rates on trillions of dollars in financial products around the world, from home loans to complex derivatives.
Alltogether with a 14 billion USD claim to settle for selling mortgage-backed securities over the years, investors in the banks stock get nervous. The question is, where does this downfall end.
German government support
A spokesperson of John Cryan, chairman of Deutsche Bank, said that the bank has not applied for financial Government support or liquidity assistance and also has not requested for support and advice in the dispute with the U.S. Justice Department.
Since the European Union reacts vigorously to stop countries giving local companies an unfair advantage through state aid, it is unlikely that Deutsche Bank gets a preferred position. When the banks need to recapitalize, EU law requires the bank to first convert some of its debt into shares, according to people familiar with the matter. This bail in situation would create severe problems worldwide and might even create a domino effect similar as seen with U.S. based lender Lehman Brothers.
What happens when Deutsche Bank fails?
The tentacles of Deutsche Bank are widely spread. With assets valued at 1.6 trillion Euro in September 2016 , the bank is one of the global players in the financial markets. It doesn’t come as a surprise that many smaller banks use platforms and services that belong to Deutsche bank.
The bank often acts as a correspondent bank for financial institutions that need to execute international payment transactions on behalf of its clients. On example of such a bank is Cyprus and Tanzania based FBME Bank. The bank used branches of Deutsche Bank in New York, Frankfurt and London to transfer funds around the world. This same bank is currently shut down by the authorities under suspicion of offering a platform that can facilitate money laundering.
Once Deutsche Bank fails, it is inevitable that other banks, insurers and financial institutions follow. In the example of the above mentioned bank under resolution by a domestic central bank, funds at the correspondent accounts are at risk. A situation with far-reaching consequences.