Tuesday

19th Jun 2018

Analysis

Deutsche Bank crisis tests EU regulation

  • Deutsche Bank "is literally too big too fail." (Photo: Reuters)

EU finance ministers have tried to alleviate concerns about Deutsche Bank, whose fragility is putting to test the mechanisms put in place by the EU to avoid banks collapsing.

Slovakia's Peter Kazimir, who chaired a ministers meeting in Luxembourg on Tuesday (11 October), said that the situation was not discussed.

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"There is no particular threat, neither on this bank, nor on other European banks," French minister Michel Sapin told journalists before the meeting.

The largest German bank has lost almost half of its value since the start of the year, and is now borrowing at a higher rate than other European banks.

It is facing a record $14 billion fine in the US, announced in September for misselling mortgage bonds.

Last week, CEO John Cryan failed to reach a deal with US authorities to reduce the amount, prompting a 3 percent fall in its share price on Monday.

Dutch finance minister and Eurogroup president Jeroen Dijsselbloem said last week that the fine was too high. He said on Monday that it was causing "uneasy unrest" on the markets, but that it was "up to the US authorities and Deutsche Bank to solve the problem".

"Deutsche Bank is in a much better situation than Lehman Brothers in 2008," an EU source said, referring to the US bank whose collapse trigger a global financial crisis.

The source added that the EU and markets should not be so worried.

"I am quite amazed by the market reaction," an EU source said. "There might be a need to reduce the size of some activities [of Deutsche Bank], but there is nothing to worry about."

Since 2008, the whole European banking system is better equipped to deal with risk, pointed out economist Nicolas Veron from the Bruegel think-tank.

EU banks are now closely regulated and under supervision by the European Central Bank (ECB).

In particular, each bank has to apply mandatory capital requirements. In the EU, they amount in average to 14 percent of their risk-weighted assets.

"Deutsche Bank's crisis actually shows how important these capital requirements are to absorb financial shocks and preserve stability," Veron said.

But EU countries do not want to go further.

At their meeting on Tuesday, finance ministers discussed the so-called Basel III international requirements on capital ratio standard. They said they would oppose any "significant increase" in the capital requirements, arguing that it would hamper EU banks' ability to lend money, and therefore harm growth.

Stress tests

The situation at Deutsche Bank also sheds light on the so-called stress tests intended to identify specific weaknesses in EU banks.

In July, Deutsche Bank performed only moderately in the tests, which simulate different crisis scenarios.

But on Monday, the Financial Times revealed that the bank received special treatment.
 
It was allowed to include the sale of its assets in China's Hua Xia bank, though the transaction was not completed until after the test. It could thus include almost €4 billion on it balance sheet to improve the its performance to the test.

But for Karel Lannoo, from the Centre on European Policy Studies, the point of stress tests is not only to disclose numbers, but also to allow the supervisor to know in advance the banks' internal weaknesses.

"After the stress test, the regulator may ask each bank to perform some structural reforms, but this is not public," he told EUobserver.

"Therefore, we don't know whether Deutsche Bank was required to implement some specific measures. It's a pity, because investors would be reassured if they hear that the supervisor took action."

Deutsche Bank "is huge and narrowly connected to other systemic financial institutions," pointed out Christophe Nijdam, secretary general of Finance Watch, an NGO calling for more regulation.

The bank's total assets amount to €1.6 trillion compared with Lehman Brothers' $690 billion (€624.25 billion).

Deutsche Bank "is literally too big too fail", Nijdam said.

Separation of activities

He added that markets' febrility over the solidity of the bank suggests that the system put in place since 2008 may not be enough.
 
He called for a separation of the banks' deposit and trading activities as a way to reduce their size, and to limit some of the risks.

The European Commission proposed legislation to do that in 2014, but the proposal has been stuck for more than a year in the European Parliament, where left-wing and right-wing groups are divided on how automatic the separation should be.

Nijdam is also in favour of additional measures – for example a better liquidity ratio, to assure that the bank has enough cash to meet its short-terms obligations.

EU rules now say that banks should be "bailed-in" first, meaning that shareholders would take the first losses. The system, which has not been tried, could prove insufficient.

The German government has said it would not bail out Deutsche Bank if it were fail.

Nijdam said he doubted whether the government would be able to hold that position, given the importance of the bank for the German and European economy.

"We're having problems to apply this principle to small Italian banks, how can we apply it to a financial giant such as Deutsche Bank?" he said.

Deutsche Bank under fire in the US

Two separate reports by the US central bank and the Senate have criticised Deutsche Bank for having internal irregularities and for helping investment funds to avoid taxes.

Fresh corruption scandal engulfs Deutsche Bank

After being fined for rate-fixing and convicted for deceiving customers, Deutsche Bank finds itself embroiled in a new scandal: hiring the offspring of Chinese politicians in return for contracts.

Greek bailout exit takes shape

At a meeting next week, eurozone finance ministers and the IMF are expected to agree on new cash, debt relief measures, and a monitoring mechanism to ensure that Greece can live without international aid for the first time since 2010.

Opinion

Eurozone needs institutional reform

Both the examples of Greece and Italy test the limits of a system with inherent weaknesses that feeds internal gaps, strengthens deficits and debts in the European South, and surpluses in the European North respectively.

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South Korean businesses including Hyundai and Samsung are already scoping investment opportunities. Will North Korea become a 'new Vietnam' opportunity - or more like Myanmar, where slow Brussels policy-making meant EU exporters lost out.

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