Deutsche Bank’s Impending Auf Wiedersehen Will Hurt Americans

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Deutsche is a German word, but the bank is very interconnected to American financial institutions.

Nothing says ‘Happy Father’s Day’ to the men and women who work at Deutsche Bank in the U.S. like finding out today that they or their loved ones might soon be out of a job. According to the Financial Times “Deutsche’s equity and rates trading businesses outside continental Europe will be severely shrunk or closed entirely as part of the revamp.”  Because Deutsche Bank is a significant derivatives and securities trader in the U.S., this shrinkage or closure will hurt U.S. residents employed by the perennially troubled German bank.  According to the FT, Deutsche Bank CEO Christian Sewing, “is likely to announce the changes with the bank’s half-year results in late-July.”

Christian Sewing, Chief Executive Officer of Deutsche Bank AG

Alex Kraus/Bloomberg

Who in the equity and rates businesses is going to be really productive between now and Sewing’s announcement? These news have brought me back memories of when I was working at BT.AlexBrown in 1997 and Deutsche Bank announced that it would buy BT. While the uncertainty hovered around us, no one got anything done other than polish our resumes and take long lunches with headhunters.

No one in the U.S. should have schadenfreude that Deutsche Bank is having even more problems than it has in the last decade. Deutsche is a German word, but the group is as American as apple pie, albeit not a tasty one. Deutsche Bank Group has eight material legal entities in the US, comprised of banks, investment advisory firms and broker-dealers, which, when combined make it larger than many US regional banks.

Not only might U.S. Detusche Bank employees be hurt, any financial institution that is a counterparty to Deutsche Bank should immediately figure out what will happen to existing lending, foreign exchange, and derivatives transactions that it has with the bank.  No time like the present for U.S. bank regulators to ask banks here whether they know what their credit and market risk exposures are to Detusche Bank.  At a minimum, regulators can ask banks:

  • In what legal entities do derivatives and repurchasing agreements(Repos) with Deutsche Bank reside?
  • How are transactions collateralized and where does the collateral reside?
  • What contracts are in-at-or-in the money?
  • How concentrated are banks in the U.S. to all of Deutsche Bank’s legal entities in the U.S. and abroad?
  • If Deutsche Bank closes equity and rates businesses, and perhaps others, how much might you lose?
  • How have you been measuring your credit risk with Deutsche Bank?

Back in 2016, I wrote an opinion piece recommending that all banks should measure their credit risk exposure to Deutsche Bank, because the globally systemically important bank was (and is) very interconnected with U.S. banks and other financial institutions (OFIs), often referred to as non-banks or shadow financial institutions. That same year, the International Monetary Fund emphasized that Deutsche Bank was a systemically important bank, meaning that if it fails, the repercussions will be felt widely and likely painfully.

What I find truly incredible is that Deutsche Bank has been allowed to operate in the U.S. as long as it has.  Deutsche Bank’s Board of Directors and senior executives have allowed the bank to be engulfed in numerous money laundering, weak controls, market manipulations, and fraud scandals. Deutsche Bank bankers’ greed has also blinded them from filing Suspicious Activity Reports (SARs).

An understatement of the year in the FT article was “Mr. Sewing needs to be decisive,” said one senior European policymaker. ‘The time for incremental change is over.’  Market signals such as Deutsche Bank’s stock price and credit spreads have been telling market participants for a long time that this bank is in trouble. The question is why have legislators and regulators have not moved faster to say auf wiedersehen to Deutsche Bank. As Christopher Whalen wrote recently, “Deutsche Bank, Germany’s largest bank, has had problems with capital and profitability going back decades. But Deutsche Banks’s problems are not unique. What is troubling and indeed significant for American policy makers, however, is the nearly complete failure of our friends in Europe to address their banking sector, either in terms of cleaning up bad assets or raising capital to enable the cleanup.”

Market signals have long been showing that Deutsche Bank is problem ridden.

Data Source: Investing.com, WolfStreet.com

On June 7, Fitch Ratings downgraded Deutsche Bank ’s (Deutsche Bank) Long-Term Issuer Default Rating (IDR) to ‘BBB’, Viability Rating (VR) to ‘bbb’ and Derivative Counterparty Rating (DCR) to ‘BBB+(dcr)’. Fitch has also affirmed the bank’s Short-Term IDR at ‘F2’.  The global ratings agency stated that “The Outlook on the Long-Term IDR is Evolving.”  The ratings report also stated that “Deutsche Bank missed its earnings expectations which were discussed at the 2018 strategic review and return on tangible equity (RoTE) target of 4% in 2019 will also be likely underperformed by the bank on soft revenues and other macro headwinds.”

At the very least U.S. legislators and regulators should order Deutsche Bank to provide full compensation and benefits for Deutsche Bank employees in the U.S. who will lose their job, if they have not taken part in Deutsche Bank’s recidivist rule breaching and law violations. My unsolicited advice to anyone working for Deutsche Bank now is to make sure that your resume has every detail of what you have worked on at Deutsche and any class that you have taken since college.  Losing one’s job as we approach recession is a brutal parting gift from Deutsche Bank.

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