The Deutsche Bank crisis story and its future
For some time now, the once German banking giant “Deutsche Bank” has been on the news for the wrong reasons. Although the bank has managed to survive the fall of its stock prices so far, the challenges seem far from over. Many experts have speculated that the woes of the Deutsche Bank could resemble the same thing that happened in 2008 to Lehman Brothers.
Share value has been going down over some time, and the future of the bank remains uncertain. So, how did such a banking giant get itself here? While the biggest mistake the bank made was a trading error where it mis-sold its mortgages a couple of years ago, the problems go deeper than this.
With new banking regulations requiring banks to first accumulate enough profits to cushion themselves against investment risks, it means all the profits the Deutsche Bank will make will not go into trading and the like, but will instead get used to increase the size of their cushion. This means the bank will continue being in crisis for some time to come.
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Why Deutsche Bank Matters
With assets valued at £1.5 trillion, which is almost half the economy of Germany, it’s easy to see why the banking giant matters so much. Even long before the crisis began, the IMF had identified the bank as the biggest net contributor to the economy of the country. The bank has proved itself a key player in the market for derivates, which is a rather complicated financial market essential for a broad range of activities, like insuring against interest movements and taking critical bets on stock markets.
What happens if it collapses?
Depending on the assessment of IMF, if the bank were to collapse, it would be worse than the Lehman Brothers collapse. So it’s imperative that everything gets done to keep the bank on its feet. Although the bank has over €250 billion worth of assets it could sell to settle customer demands, investors are still wary of making any significant investments in the bank. The fall in the share prices does not make it any better for shareholders. Also, it’s unlikely that the German government would bail out on its flagship bank when it needs help the most.
What are the options?
The fear that shareholders have now is a cash recall on all holders. Market experts speculate that the bank could afford a DoJ settlement of close to €6 billion without having to raise extra money. Another option the bank has is to sell all its assets and management or parts of the bank, which could attract more profits than the core business investments. A good example is private wealth management.