Deutsche Bank is in trouble — and that’s bad news for everyone. Yes, even you.
Bank is Germany’s biggest bank, with more than 100,000 employees around
the world and operations in more than 70 countries. Its assets total
about $1.7 trillion. One worrying sign of the bank’s distress is that
its stock is trading now at about $14 a share, roughly half the peak
(almost $29) in the past year and much lower than the historical high
point of about $160 in 2007.
months, rumors about Deutsche Bank have circulated in European
financial markets and political circles. How weak is it? Would it need
to be rescued by the German government?
At best, Deutsche Bank’s failure would be a blow to confidence and squeeze credit availability in Germany and elsewhere.
At worst, Deutsche’s failure would cause a global recession.
bank is edging close to suffering a general crisis of confidence, which
could see investors pull their business from the bank and even
depositors wanting their money out.
It’s doubtful however that Deutsche Bank would be allowed to
collapse. In a financial crisis, it would probably be rescued by the
German government or the European Central Bank.
could happen. The stock market’s valuation of Deutsche Bank is far less
than the company’s valuation. The stock market puts a price tag of
around $15 billion on Deutsche Bank. This figure represents simple
arithmetic: the number of shares multiplied by the stock’s price. By
contrast, the company says its net worth is more than four times that at
difference between the market’s estimate and the bank’s is that the
market thinks the company is too optimistic about future revenue, costs
and losses. For example, the U.S. Justice Department is seeking a $14
billion fine from Deutsche Bank, reflecting allegedly abusive lending
practices during the housing boom. Deutsche Bank has already created a
reserve of $7 billion to pay the fine. But if the Justice Department
insists on the $14 billion, the reserve would be too small by half.
Deutsche Bank’s accounting, and after tapping the reserve, this would
still leave the bank with a sizable net worth of around $60 billion, far
above the market’s evaluation. The market’s much lower figure,
presumably, reflects losses on loans and other securities that haven’t
been recognized. No one knows whether these losses exist or how much
if large losses do emerge, they could trigger another European banking
crisis. The reason: Deutsche Bank isn’t the only major bank with a huge
gap between its market value and the bank’s own estimates.
strength of Europe’s banks is worth watching and worrying about. If the
worst fears come to pass, a banking crisis would weaken an
already-anemic European economy.