Following up on Deutsche Bank as Ground Zero?, I’d like to focus on the deteriorating credit metrics at Germany’s largest bank. To be absolutely honest, an educatied consumer is the at odds with the bank’s other stakeholders in this situation. Educated consumers, particularly those seeking safe, secure bank accounts and lending faciilities should be moving out of Deutshe bank right now. DB is far from safe and secure, particularly in relation to other destiniations. Remember, bank bail-ins are EU law now. European regulatory authorities can force these failing institutions to cancel or severely dilute shareholder equity or to cancel, write-down or convert unsecured liabilities to equity. Such regulatory action is referred to as a “bail-in.” Bank depositors (checking, savings, demand accounts) are investors as well, in the form of unsecured creditors.
Most depositors still don’t realize this (despite Icelandic bank depositors getting smashed). Depositors are the largest, one of the cheapest, and currently the most stable form of bank financing.
Most depositors, when they realize they actually are investors, should head to safer pastures. This will leave a gaping whole in Deustche Bank where 312 euros once stood. Let’s recent how I described The Anatomy Of A European Bank Run: Look At The Banking Situation BEFORE The Run Occurs:
… Below is a chart excerpted from our most recent work showing the asset/liability funding mismatch of a bank detailed within the report. The actual name of the bank is not at issue here. What is at issue is what situation this bank has found itself in and why it is in said situation after both Lehman and Bear Stearns collapsed from the EXACT SAME PROBLEM!
… The problem then is the same as the European problem now, leveraging up to buy assets that have dropped precipitously in value and then lying about it until you cannot lie anymore. You see, the lies work on everybody but your counterparties – who actually want to see cash!
… The modern central banking system has proven resilient enough to fortify banks against depositor runs, as was recently exemplified in the recent depositor runs on UK, Irish, Portuguese and Greek banks – most of which received relatively little fanfare. Where the risk truly lies in today’s fiat/fractional reserve banking system is the run on counterparties. Today’s global fractional reserve bank get’s more financing from institutional counterparties than any other source save its short term depositors. In cases of the perception of extreme risk, these counterparties are prone to pull funding are request overcollateralization for said funding. This is what precipitated the collapse of Bear Stearns and Lehman Brothers, the pulling of liquidity by skittish counterparties, and the excessive capital/collateralization calls by other counterparties. Keep in mind that as some counterparties and/or depositors pull liquidity, covenants are tripped that often demand additional capital/collateral/ liquidity be put up by the remaining counterparties, thus daisy-chaining into a modern day run on the bank!
The research and knowledge subscription module “European Bank Contagion Assessment, Forensic Analysis & Valuation” contains a full report of a very large European Deustche Bank counterparty that faces a full 27% downside from current levels. It appears as if no one suspects a clue. It also contains much, much more (including at least 3 to 5 suspect banks). We can break this apart a la, if requested.
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