Inquiring minds may be interested in a cornucopia of relevant numbers on Deutsche Bank including market cap, leverage, capitalization, deposits, liquidity, derivatives multiple ways, and systemic risk.
Systemic risk numbers are from Nobel Laureate Robert Engle.
Deutsche Bank by the Numbers
- Systemic Risk: $100 billion (see explanation and chart below)
- Notional derivatives: €42 trillion, an amount about the size of the German economy
- Market value of Derivatives: €18 billion
- Equity: €67 billion
- Assets: €1.6 trillion
- Leverage Ratio: 25-1
- Level 3 assets: (Illiquid potentially mark-to fantasy assets) €32 billion
- Outstanding Fines: €12.47 billion ($14 billion)
- Ready liquidity: €220 billion
- Investment bank employees: (Risk takers – M.R.Ts in EU regulatory circles) 1,871
- MRT salaries: €2 billion
- Market Cap: €16.2 billion
All numbers except market cap from Deutsche Bank’s Appetite for Risk Throws Off Its Balance.
Here are some interesting snips, interspersed with my comments in brackets.
More than eight years after the collapse of Lehman Brothers sent shock waves around the world, the fear is whether Deutsche Bank and its highly leveraged balance sheet of 1.6 trillion euros might teeter and set off another bout of financial contagion.
Those worries calmed down somewhat late last week as Deutsche Bank’s shares rose after reports that the bank may be close to cutting a deal with the United States Justice Department regarding the fine it must pay for selling toxic mortgages during the financial crisis. [Those are unsubstantiated rumors. Recent reports suggest there is no settlement in progress.]
There has also been a growing realization that Deutsche Bank, even with its thin cushion of cash, is in much better financial shape than Lehman Brothers was. In a letter to employees on Friday, Deutsche’s chief executive, John Cryan, highlighted the “strong fundamentals” of the bank. [BS by Cryan hardly constitutes a growing realization of anything. Shares had a one day bounce based on a rumor that as of now appears false.]
It has €220 billion, or $247 billion, in ready liquidity, compared with $45 billion for Lehman in 2007, and the bank can also tap central banks in the United States and in Europe for a financial lifeline if need be. [Won’t that be fun?]
“What makes Deutsche Bank systemic is their sheer size combined with the leverage that is required to stay in the flow and be an intermediary,” said Anthony J. Perrotta Jr., an expert in the structure of financial markets at TABB Group, a consulting firm. “But as capital becomes more scarce, this becomes a fragile equation.”
Deutsche Bank has €67 billion ($75 billion) in equity that supports assets of €1.6 trillion ($1.8 trillion), which mean it is levered at a ratio of 25 to 1.
By comparison, JPMorgan has $224 billion in cash backing $2.4 trillion in assets, which produces a far healthier ratio of 9 to 1.
Making Deutsche Bank’s ratio more troubling is that many of these assets are of the most illiquid variety, called Level 3 securities, for which establishing a price is guesswork and finding a buyer near impossible.
Stuart Graham, a banking analyst with Autonomous Research in London, says that Deutsche Bank has more high-paid risk takers than any other bank — including JPMorgan, Goldman Sachs and Credit Suisse.
Most analysts believe that Deutsche Bank needs to raise an extra €5 billion to €7 billion from investors in order to calm concerns about its financial health, especially in light of the fact that the Justice Department may require the firm to pay a penalty of at least this amount. [€7 billion will not do squat. Where did they dream up that number? Add €7 billion to equity and you have €74 billion in equity vs. €1.6 trillion in assets of which €32 billion are level-3 assets likely marked to fantasy. Anyway, another €7 billion would bring the leverage ratio down to a bit under 23-1.]
$100 Billion Undercapitalized?
Robert Engle, an economist at New York University who was awarded the Nobel Prize for his work on volatility and capital markets, has designed a model that ranks financial institutions in terms of their systemic risk.
The barometer takes into consideration leverage, the bank’s stock price and its equity base, and as such it represents a real-time measure of the dangers a bank poses to the financial system at a given moment in time.
Global regulators use it as well to complement their own internal models.
As of now, Deutsche Bank is ranked at the top among European banks in terms of risk, requiring close to €100 billion in fresh cash to ensure that it could survive a sustained sell-off in the markets.
German Economy Minister Blasts Deutsche Bank
On Sunday, Sigmar Gabriel, the German Economy Minister Accused Deutsche Bank of Making Speculation its Business.
“I did not know if I should laugh or cry that the bank that made speculation a business model is now saying it is a victim of speculators,” Gabriel told reporters.
Systemic Risk
“There is just a lot of risk for Deutsche Bank right now,” Mr. Engle said. “We have been worried about European banks for quite a while.”
Systemic risk chart from NYU economic Robert Engle.
Don’t worry, the total “Predicted System Capital Shortfall” on Friday, September 30, 2016 is only US$1,197,485 million.
Mike “Mish” Shedlock
Total assets end Q2 2016 is actually € 1 800 bn. If you add contingent liabilities of € 200 bn we end up at € 2 000 bn.
Would love to know what the collateral requirement will be when new rules are applied to derivatives portfolio. In addition collateral is required for central bank borrowing.
Lack of collateral destroyed Dexia in 2011.
Photo of people in front of an ATM in Frankfurter Allgemeine newspaper yesterday (faz.net). A few more photoes like that and “Helga und Helmut” will start questioning the “deposit guarantee” of € 100 000.
Mish, German businesses are rallying round issuing support. Nationality of bank considered important.
http://www.theglobeandmail.com/report-on-business/international-business/european-business/corporate-germany-rallies-behind-deutsche-bank/article32204866/
Wait till they get bailed in
I hadn’t thought of that. Doh!
It’s a financial hand grenade which had it’s pin pulled years ago by Bernanke. As long as Yellen can maintain a grasp of it, things are fine.
…but putting that darned pin back in place is the hard part.
One should also note that the assets increased from € 1 629 at year end 2015 to € 1 803 at June 30th 2016. More than € 100 bn of the increase is explained by increase in derivatives.
Reports from DB contain very little information on derivatives despite the fact that derivatives is the single biggest item on the balance sheet.
I never really worry about the derivatives.
Setting aside they generally net out to manageable amount … the issue is who decides whether a derivative is triggered. The ISDA is umpire here. And who makes up the ISDA? The banks, of course. One of the directors is from DB, naturally. I just don’t see the banks doing anything to upset the apple cart (and bringing down DB would no doubt set in motion some sort of cascade).
http://www2.isda.org/about-isda/board-of-directors/
We saw how derivative triggers worked out in Greece, did we not? People ended up with a 90% haircut yet no trigger. With zero percent interest rates, will a complete loss still be considered as a non trigger for derivatives….I mean after all, owning zero is better than paying interest on your deposits, right?
There are two issues with derivatives. Number one is the valuation. Is the net positive for DB really € 18 bn. Most of the derivatives are level 2, i.e. illiquid. Secondly in theory they net out to a manageable amount. But as Yogi Berra said; In theory, practice and theory is the same, but in practice they are not.
So once counterparts fail, what is the real value then?
Off-topic, but by year end the Japanese Gov could be major shareholder in 55 Japanese businesses. What does that tell us about the future of capitalism in Japan and how the once private sector will be a tool of state?
Now Japan and EU will be moving closer together. Think on that.
What implications? Japan with a stagnant EU. Can they dig each other out of a hole?
http://c8.alamy.com/comp/ERCB5F/epa04773483-european-council-president-donald-tusk-ll-european-commission-ERCB5F.jpg
“Off-topic, but by year end the Japanese Gov could be major shareholder in 55 Japanese businesses.”
Just what part of printing money to buy stocks do you have a problem with? /sarc
Back door communism…the government ends up owning everything for which we pay rent.
Time for DB to pass a snap Stress test.
Capitalism is inherently toxic and corrupt
I wish we had capitalism as this would have self corrected long ago.
What we have is big government croney capitalism.
Better known as fascism.
Go Google the definition. It has nothing to do with swastikas or Germans.
“Notional derivatives: €42 trillion, an amount about the size of the German economy”
Do you even proofread this crap before you post?
Yeesh!
You are off on German GDP by an order of magnitude.
DWS Scudder is part of the DB wealth management system, where they offer mutual funds here in the US. Can this entity be negatively affected by DB’s problems? Overall is it seperated from DB so that DB can’t tap into DWS to gain capital? Thanks.
Cut & past…Cut & paste…Cut & paste……
Next item!
Was, rinse, repeat….
Smart money should buy the stock. They will be bailed out no matter what and the stock price will rise. The system learned from Lehman not to let a major institution faul because all sink with them.
Lehman was just a symptom of the underlying disease — too many mispriced (overpriced) MBS assets. You might recall that Bumbling Bernanke assured the world that Bear Stearns was a one off event (and according to Bernanke: so was FNMA, Countrywide, Indy Bank, Merrill Lynch and others). MBS debt priced (overpriced) by central planners was the problem.
Europe’s problem is mispriced (overpriced by Draghi decrees) sovereign debt. That is why the Greek contagion has been “solved once and for all” (according to the fool running the ECB). That is why Italian bank after Italian bank is failing. That is why the French banks are all in trouble. That is why Santander (Spain) is in trouble. That is why Credit Suisse and UBS are in trouble. And yes, that is why Deutche is in trouble. RBS is already a ward of the UK taxpayer, but it is in trouble too.
Mispriced sovereign debt is going to destroy G7 economies (not just Europe).
Dear Mish,
42 trillion is about TEN times the size of the German economy and about half the size of the global economy.
The 1.8 Trillion in assets
I still don’t understand why Mish and others get so excited about the opinions of a “Nobel” prize winner. Obama got the nobel peace prize for having a pulse. Two of the directors of Long Term Capital Management (the hedge fund that blew up in the late 90s) were nobel “winners”. And lets not forget the socialist Krugman got a boobie prize too. Claiming that so-and-so is a nobel prize winner just makes Mish (and others) look like sniveling false hero worshipers.
As for Deutche Bank’s finances, the numbers Mish gives says exactly what any **ANALYST** has known for months. DB is in OK shape (not great). It has way too many risk takers and needs to scale down its trading operations. Its traditional business of lending to businesses is seriously hurting because the central planners at the ECB are stealing from savers to prop up the EU corpse.
The big bad scary numbers about derivatives is the same meaningless number that the scare mongers have screamed about. It is gross notional amount — it is not netted like the big US banks. DB isn’t reporting their net exposure. The derivative market value is *POSITIVE* EUR18 billion, which is all very well (since its positive) but doesn’t tell us anything about their risk exposures (plural). It doesn’t tell us DB’s interest rate exposure, stock market exposure, or even their counterparty risks.
Even the level 3 number (assuming it is accurate, which is doubtful) doesn’t really add to our understanding. “Illiquid assets” are defined by the same regulators who think Greek government bonds are money good. Some of the “risk free” garbage (like Greece and Spain and Italy and France) should be marked as illiquid. Some of the stuff labeled level 3 / illiquid is really a swap with JPM (or with the Fed) — and is much less risky than the PIIGS debt.
DB has too many risk takers (solved by layoffs and tiny bonuses); and it isn’t making the standard carry spread on their loans (solved by Germany cutting off credit support to Draghi — with Merkel’s acquiescence or after she is booted).
Finally, if this bail in / bailout hysteria comes to pass — one would be brain dead to think the ECB would be solvent. The whole EU is systemic risk. Italy is bankrupt, backing French debt. France is bankrupt, backing Spanish debt. Spain is bankrupt, backing Italian debt. Its a circle jerk. Any one of them goes, they all go.
The only way to “save” the member economies is to dissolve the EU and stop pretending sovereign debt is risk free (because it isn’t). If the ECB continues to recklessly “borrow” (its really theft) from Europe’s savers, no European financial is safe
Sovereign debt is lower risk than the debt of all entities subordinate to the sovereign. As long as the sovereign will tax, come what may, before defaulting. Most often these days, that tax will take place via debasement/monetization, but that’s really an implementation detail.
The above truism is a real impediment to growth, and a major misallocator of funds. As no matter how prudent an entity is wrt it’s finances, the absolute risk premium on it’s debt is effectively lower bounded by it’s sovereign host.
Aside from domicile shopping, there’s not much any non sovereign can do about it. Even in a Gold world, once the guillotines get busy disposing of “traitors against the nation” who “stash” “The people’s” wealth abroad, a prudent non sovereign entity’s debt, will be effectively subordinate to that of it’s profligate host’s.
Rubbish.
Please stop babbling what you read in an outdated text book.
No halfway intelligent person would believe Greek debt and German debt and US debt are all the same level of risk. Only you and that twit Draghi.
Not saying anything about relative riskiness of diverse sovereigns. But, assuming the Drachma was still in effect, the Drachma denominated debt of a Greek company subject to Greek taxation would, no matter how prudently the company was managed, still be lower bounded in riskiness by it’s profligate parent sovereign’s debt. The Euro does muddle things a bit, but it does so by muddling exactly what a sovereign is. The underlying problem remains the same.
And I’m all with you wrt the silliness of pretending all sovereign debt is “risk free,” Greece’s equal to Germany’s etc. That whole mess is very close to the heart of the problem I’m trying (obviously with limited success…) to highlight. What is needed, is a regime where sovereign bankruptcies can take place with minimal effect on entities “subordinate” to them. So, no “backed by the full taxing power”, and no “The US cannot default on dollar debt, since it can just print….”
The amount of bridges to nowhere and other nonsense capital is being wasted on, simply because of sleight of hand legislation and sovereign serving tradition, making even the silliest of sovereign backed projects “risk free”, is staggering. Misallocating funds on a downright ridiculous scale. I believe Mish wrote a post about how companies are concerned about locating in Illinois, due to concerns that the state’s debt and liabilities will force them to keep ramping up taxes in the future. The silliness underpinning the “risk free”ness of sovereign debt, is similar, on a massive, global, and even more incircumventable scale.
“I did not know if I should laugh or cry that the bank that made speculation a business model is now saying it is a victim of speculators,” Gabriel told reporters.
DB as a victim of itself.
Speculators shorted the stock market all the way up from the 2009 low. They failed for over 7 years. DB is the cause of the collapse of its own stock.
Wells Fargo stock didn’t dump recently because people shorted it. It dumped because of what WF did.
“For DECADES, financial assets were ROUGHLY EQUIVALENT in size to GLOBAL gross domestic product. But the RISE OF FINANCIALISATION, starting in the 1980s, led to a situation where, by the time of the 2008 crisis, these assets were MORE THAN 360 PERCENT of global GDP. This RATIO HAS ONLY INCREASED SINCE THEN as a result of the extraordinary monetary policies—the pumping of trillions of dollars into the financial system and ultra-low and even negative interest rates—adopted by the world’s major central banks.”
From “Deutsche Bank and the global financial crisis” http://www.wsws.org/en/articles/2016/10/01/pers-o01.html
With unresolved excessive debt issues from 8 years ago, how did anyone claim a recovery?
“Notional derivatives: €42 trillion, an amount about the size of the German economy.”
That is about the size of the world economy, Germany is rich, but not as rich
I view DB as the equivalent of GE Capital for German industry. Just like GE Calital provided vendor financing to GE’s customers world wide, DB provided vendor financing to German customers in Southern Europe. Now, just like GE Capital has been selling off assets and shrinking its operations and its balance sheet, this is being forced on DB. If anyone is wondering who is buying those assets in both cases the answer is CB’s. I predict the ECB will buy a bunch of impaired assets from DB at face value and DB will shrink their operations and balance sheet. The real problem is absent this source of vendor financing for Southern Europe demand there will collapse. Thus a major support for capital spending in Southern Europe is going away. Will the ECB step in here too? What will German voters think if they do?