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Sunday, 22 October 2017

Deutsche Bank; not a 2008 moment. Yet

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IFR editor-at-large KEITH MULLIN says it’s no surprise counterparties are getting out of the way of trouble, however remote it may be

THE INCREASINGLY PANICKED and fast-moving state of affairs at Deutsche Bank is eerily reminiscent of that calamitous fourth quarter of 2008. But to be sure, it isn’t the same. Even though the situation in the past week has felt a little disorderly at times, calling a Lehman moment would, I think, be foolhardy. As would suggesting the world financial system is about to fall into the abyss as it did in the aftermath of the Lehman Brothers collapse, taking the world economy with it.

I was in Frankfurt on Thursday. Talking to bankers on the ground, it’s clear anxiety levels around the outcomes of both situations are clearly up, but we’re not at Code Red.

Why do I say this is not a Lehman moment? For a start, banks – including Deutsche Bank – have significantly bigger actual and latent capital buffers, as well as liquidity reserves (€215bn in DB’s case). Second, while levels of interbank trading entanglements are clearly an issue, as are Deutsche Bank’s gargantuan derivatives positions, the level of systemic embeddedness has reduced; there’s more transparency and a better handle on operational risk management so it doesn’t feel as precarious on a relative basis as it did in 2008. And of course central banks stand by to inject support into any disorder.

But with counterparties withdrawing excess cash balances and collateral from DB’s derivatives clearing platform as a precaution; people (clearly with an axe) warning others to steer clear of the embattled bank; higher short stock positions and wider CDS levels; DB stock falling below €10 on Friday morning; four-year wides on the EUR/USD basis swap indicating broad market concerns; talk that the German government is prepping a rescue plan; even a (slightly bizarre?) suggestion from an adviser to President Erdogan that Turkey should acquire the bank, you get the impression that depending on the turn of events calamity isn’t that far away.

The problem is: this isn’t really about facts. At the most basic level, it’s about counterparties getting out of the way of trouble to avoid being caught out in the event of that calamity, or counterparties dealing with alternative providers as a risk mitigation matter no matter how remote they might believe a DB collapse might be. At another level, it’s a game of seeing how far market renegades can force distress in the quest for short-term trading profits.

At another, it’s an attempt to try to smoke out the parameters of any public support that might be in the works. As I wrote a few days back, public support for the bank if it’s needed will undoubtedly come in some form or other following 2017 federal elections. I just don’t see any form of resolution being considered or engaged without formal German government backing or involvement.

IN THE MEANTIME, nothing CEO John Cryan can say will be likely to change much. His message to employees on Friday, confirming that hedge fund clients have reduced some activities with the bank, will probably fall on deaf ears. Talking of eerie reminiscences, Cryan made dark accusations in his Friday communqiué of forces in the markets trying to damage the trust he says is the foundation of banking. That sounds similar in nature (if not in intensity) to the comments made almost eight years to the day by Lehman CEO Dick Fuld, who blamed naked short-sellers for the firm’s demise, displaying if you recall smouldering and withering hatred towards them.

A succession of talking heads on TV commented that the situation at Deutsche Bank isn’t as grave as the market actions suggest. Alas, that’s not the point. The ship of rationality has long since set sail. In such situations who’d want to stand in the way of the charging elephant if the only likely outcome is you get flattened?

BREAKING NEWS AROUND Deutsche Bank certainly took the spotlight away from fellow German lender Commerzbank, whose stock was also hammered in sympathy with DB and on the back of its own 2020 restructuring plan (Commerzbank 4.0) that was pushed out before it could get supervisory board sign-off.

The organisational re-cut into two core divisions (Private and Small Business Customers and a merger of the Mittelstandsbank and Corporate & Markets into a new Corporate Clients unit); digitisation; efficiency gains; reduction in earnings volatility and regulatory risk; and a re-allocation of capital towards PSBC all sounds reasonable enough.

Ditto exiting exotic structured rates, scaling back flow credit and bond trading, scaling up trade financing and internationalising the end-to-end core sector skillset in corporate banking across automotive and transport, chemicals and pharmaceuticals, engineering, energy and infrastructure, consumer and retail.

The 9,600 gross job cuts (7,300 net) came as a bit of a shock, and it’s hard to take predictions about future revenues and costs with anything more than pinch of salt. The 6% net return on tangible equity target for 2020 may be underwhelming, but as much as anything else speaks to the rate environment banks are operating in. In the circumstances, cutting the dividend kind of goes with the territory.

I’ve got a pretty good idea of some of the individuals who are set to be given more responsibilities in the new expanded Corporate Clients segment, but probably best to wait until after the investor day on October 4 to comment.

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