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Keeping an eye on Deutsche Bank's woes

SINGAPORE - During the global financial crisis eight years ago, regional stock markets went on a roller-coaster ride each time news cropped up of a big financial institution getting into trouble.

Some of them, such as Washington Mutual and Wachovia in the United States, were not even names we were familiar with.

As such, I watch what some describe as the slow motion crash of Deutsche Bank, Germany's biggest lender, this year with fascination.

Although it is not as familiar a name as some foreign lenders such as CitiBank, HSBC or Standard Chartered Bank, it has deep roots in the region with involvement in various types of banking businesses - from corporate lending to investment banking.

Earlier this week, Deutsche Bank's share price dropped to just a tad above €10 (S$15.30), its lowest levels in more than two decades, extending a fall which had seen its share price halving so far this year.

This reduces its current market capitalisation to only about US$16.4 billion (S$22.3 billion), making it worth less than any of our three local banks. That is despite the fact that it has assets of US$1.8 trillion - a sum bigger than most countries' GDP.

The extensive counterparty transactions which it has with other lenders also makes it a systemically important institution - one whose problems can potentially have a snowball effect on the global financial system.

 

That Deutsche Bank is in trouble does not come as a surprise, given various reports about litigation costs and civil money penalties for a range of alleged offences such as money laundering in its Russian operations, price manipulation in foreign exchange and precious metal trading.

But what surprises me is the almost total indifference with which traders are reacting to its fall from grace, unlike during the global financial crisis when the troubles of even obscure US lenders sent Asian markets into a tailspin.

What triggered the calamitous drop in Deutsche Bank's share price was the US Department of Justice's proposed US$14 billion fine which it wants the bank to pay for mis-selling American mortgage-backed securities prior to the 2008 financial crisis.

The fine is just a tad below Deutsche Bank's current market capitalisation.

Such a large penalty will be disastrous for the bank even though it has insisted that it has "no intention" of paying anything close to that amount to settle the case.

And getting the German government to bail it out looks unlikely for now, with the German Chancellor Angela Merkel already ruling out state aid for Deutsche Bank, ostensibly to comply with European Union rules about bank bailouts.

In any case, it would have been a politically unwise move, as it may be misconstrued as using German taxpayers' money to pay the US for Deutsche Bank's past misbehaviour.

Nor is it advisable from the European standpoint as well, given Germany's tough stance on enforcing euro-zone rules which say that depositors - ordinary people - will have to shoulder some of the losses when a lender is in trouble, as the bad debts mount in Italian banks.

For Germany to take one position on its own bank and another for everyone's else in the eurozone will surely put more pressure on the single currency euro and fuel fresh questions about the unity of the eurozone.

Yet, investors are assuming - rightly or wrongly - that major banks are, as the saying goes, too big to fail. You don't really have to worry about how solid they are because when the crunch comes, the state will always ride to the rescue.

For us, the crux of the issue is how all this will affect us.

Any renewed pressure on the euro will, of course, cause a fresh bout of convulsions on the world's stock markets. And regulators, zealous though they may be in wanting to punish the bank for its past misbehaviour, may not want to push matters too far.

Then there is the prospect that Deutsche Bank may have to scale back its banking activities in the region - and companies will have to find other lenders to take up the slack.

This is a task made more difficult, given the likelihood of more loans turning sour going forward because of problems encountered in sectors such as oil and gas.

Conspiracy theorists have also pointed out that news of Deutsche Bank's US$14 billion fine came close in the wake of a European Commission ruling that Apple owed Ireland a little over US$14 billion in taxes.

The fact that the two companies should be hit, at about the same time, by such huge penalties - both sums are almost identical - may be coincidental. But the penalties also highlight the frostiness in trans-Atlantic regulatory relationships - and the danger this poses to financial markets.

Sure, this week's televised debates between presidential nominees Donald Trump and Hilary Clinton make for great entertainment, and traders spend much of their time trying to figure out how stock markets will react if either one of them is elected.

But the US sub-prime crisis eight years ago had shown that a financial catastrophe of global proportions may be triggered by something a lot more mundane in nature.

So it may be worthwhile to keep an eye on events unfolding in large, dull but systemically important institutions such as Deutsche Bank.