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14th Aug 2022

German bank woes prompt fear of EU crisis

  • Frankfurt skyline, with Deutsche Bank twin towers on the right (Photo: barnyz)

Germany has denied reports that it was preparing to rescue its biggest lender, Deutsche Bank, amid concern of a new systemic crisis in Europe.

“The German government is not preparing a rescue plan and there's no reason for such speculation”, Martin Jaeger, a German finance ministry spokesman, said on Wednesday (28 September).

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  • Lehman collapse in 2008 prompted global banking crisis (Photo: sachab)

Christine Lagarde, the head of the International Monetary Fund (IMF), also tried to reassure markets, telling US broadcaster CNBC: “I don’t see that particular institution as ... [being] at a stage where state intervention is absolutely called for at the moment.”

The bank’s CEO, John Cryan, told German newspaper Bild one day earlier that “at no point did I ask the [German] chancellor for support” and that a rescue was “out of the question”.

Their comments came amid reports to the contrary in German media.

German newspaper Die Zeit said on Wednesday that Berlin had prepared a rescue package which involved either state guarantees for Deutsche Bank losses or taking a 25 percent stake.

The head of the European Central Bank (ECB), Mario Draghi, also gave weight to the speculation.

Reacting to accusations that low interest rates had reduced lenders’ incomes and undermined Deutsche Bank, he told German MPs on Wednesday: “If a bank represents a systemic threat for the eurozone, this cannot be because of low interest rates - it has to do with other reasons”.

Deutsche Bank's problems arise from its high level of debt and from US fines over allegations that it mis-sold mortgage bonds.

The US has demanded $14 billion (€12.5bn), but analysts said that if the German lender paid more than $4 billion it could become unstable.

It also faces other potential fines - over allegations that it manipulated exchange rates, that it helped Russia to evade sanctions, and over alleged money laundering.

Lehman 2.0?

The bank employs 100,000 people and has assets worth €1.4 trillion - half the size of the German economy.

Its ill health means that its shares are worth just €14.5 billion in total - a 30-year low - however.

Its so-called Tier 1 Ratio - the ratio of its best assets to its liabilities - is also far below that of major European lenders.

The IMF described it in June as “the most important net contributor to systemic risks” in the global financial sector because its fall could cause the same domino effects as that of the Lehman Brothers bank in 2008.

Norman Lamont, the former UK chancellor, told British newspaper The Times on Wednesday that: “The biggest threat to Europe is a banking crisis ... Italian banks are in a very serious situation. I think German banks are probably in a very serious situation too.”

Tidjane Thiam, the CEO of Credit Suisse, told the Bloomberg news agency that EU banks were in a “very fragile situation” and that several large lenders were “not really investable”.

But Axel Weber, the chairman of Swiss bank UBS and the former head of the German central bank, played down the concerns.

“The system is much more stable now. I think we are very far in how solid banks are now, from where were in 2007 and 2008,” he told Bloomberg.

Political risk

If the German state was to intervene, under new EU rules, it would first have to let private bondholders take a hit of at least 8 percent of the bank's liabilities.

Meanwhile, the fact that chancellor Angela Merkel is heading into elections next year has heightened the political stakes.

Hans Michelbach, a senior MP in her CDU party, said on Wednesday that it would be “unimaginable” to use taxpayers’ money to pay US fines because there would be a “public outcry.”

Sahra Wagenknecht, an MP from the far-left Die Linke party, said Deutsche Bank was "a ticking time bomb in the lap of the taxpayer".

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