21-11-18 10:35:00,
Whenever we see markets tanking as they have been for the past few days with the Dow down almost 1,000 points (3.7 percent) since Friday’s close, we think counterparty risk may be spooking traders and investors. We suspect, and we could be wrong, there is a growing concern over Deutsche Bank’s (DB) stock making new all-time lows.
We see a lot of hits on our blog today on our past posts about Deutsche Bank.
Biggest Globally Systemically-Important Bank (GSIB)
Deutsche Bank, which has been labeled by the IMF as the biggest contributor to global systemic risk, hit a new all-time low in Frankfurt this morning, closing at around €8.17, down over 91 percent from its pre-GFC high and almost 50 percent year-to-date. The latest hit comes from its involvement with Danske Bank, who is wrapped up in a money laundering scandal in Estonia.
Whenever a GSIB stock is making a new low, it’s time to sit up, stand up and listen.
No Lehman
Deutsche is no Lehman Brothers. The Germans will never let its flagship fail and neither would world policymakers.
The bank is not dependent on wholesale funding from the markets and finances itself mainly through a large deposit base. The DB chart below illustrates its 77 percent deposit-to-loan ratio.
Also see the IMF chart on the bank’s horrendous return-on-equity, which many believe is the reason why the stock is tanking and not over balance sheet concerns.
Nevertheless, DB has, the last time we looked, the world’s largest derivatives book, and as the stock goes lower the risk of spooking its counterparties moves higher. The German government and EU regulators must be cognizant of these risks, not dilly-dally, and show firm resolve to the markets
The lower the stock goes the higher the probability the German government will be called upon for a capital injection. Deutsche Bank will not be allowed to fail as the world will end as we know it.
German Sovereign CDS
DB’s credit default swaps have risen from 120.7 bps in September to 155.7 bps,