Deutsche Bank crisis threatens to disrupt global markets
Europe’s problems with some of its largest financial institutions could spill over into the rest of the global market.
Deutsche Bank shares fell on Friday, before cutting losses somewhat, following a report that a group of hedge funds were reducing their exposure to the giant financial institution
Earlier in the week, financial blogger Wolf Richter wrote that deep concerns about Deutsche Bank’s ability to raise enough liquidity to give the market confidence that it is on a solid footing is testament to a a larger problem that the ailing European banking sector must tackle. . Richter, the publisher of Financial Wolf Street blog site, says “the banking crisis [in Europe] has the potential to turn into a financial crisis.
He went on to say, “All it takes is for one of the big [banks] suddenly topple over. The flow of credit would freeze instantly. In an economic system which depends on credit, and whose cornerstone is credit, such an event is a financial crisis.
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Deutsche Bank shares fell more than 7% to a record low in Germany on Friday, after its US-listed DB shares,
sank 6.7% on Thursday. The moves highlighted a brutal week of losses for the Frankfurt-based bank. More recently, its Frankfurt-listed shares were down around 0.2%, while shares traded in the US were up sharply, with some investors rethinking the severity of the fine imposed by the Department of Justice .
The bank, led by CEO John Cryan, has seen its cost of borrowing steadily rise amid questions over its ability to pay a potential $ 14 billion fine from the US Department of Justice, according to a Wall Street Journal September 16 report.
Against this backdrop, Deutsche Bank’s hardest hit debt securities are its contingent convertible bonds, whose prices have plunged as concerns about its reduction in its cushion intensified. A âCoCoâ bond denominated in US dollars with a perpetual term trades around 70 cents on the dollar, writes Joseph Adinolfi of MarketWatch.
And it’s not just the fainting of Deutsche Bank.
A combination of factors continue to hamper European banks and the European economy:
1). The emergence of negative interest rates, as central banks use sweeping monetary policies to stimulate growth in Europe, has hampered the ability of euro area banks to make money, eroding profits between their banks. short term borrowing costs and what they can charge for long term loans. The German 10-year government bond TMBMKDE-10Y,
known as the bund, returned less than 0.15% on Wednesday. Bond yields fall as prices rise.
2). In addition, many banks were slow to restructure following the 2008-09 financial crisis that rocked global markets.
3). Italian banks are grappling with billions of sour loans and are seen as a possible threat to the eurozone economy.
4). And many other banks, namely Deutsche Bank, face significant fines from selling risky mortgage-backed securities, which could further tax their capital cushions.
In the following chart, Richter shows how Eurozone financial institutions have performed since reaching recent highs of 52 weeks.
The chart shows that German banks, shown in black with a red border, were among the worst declines. Germany’s second largest bank, Commerzbank AG CBK,
is down 44% from its high, while Deutsche Bank is down more than 60% from its 52-week high.
Prominent investor and DoubleLine Capital founder Jeff Gundlach on Thursday warned investors to stay away from Deutsche Bank.
Of course, not everyone is worried about the children’s problems in the European banking system.
Indeed, Cryan denied the information from Focus magazine, citing anonymous sources, who said he enlisted the help of German Chancellor Angela Merkel as he sought to settle the bank’s fines. In an interview on Wednesday in the German newspaper Bild, Cryan said the bank does not need state aid.
However, US markets have been rocked by recent fluctuations in Deutsche Bank stock prices over the past week, with the S&P 500 SPX index,
down and the Dow Jones Industrial Average DJIA,
nearly 200 points on Thursday, amid heightened concerns about the bank’s liquidity.
Read: How Deutsche Bank’s woes are stressing the US stock market