At the time of writing, markets in Europe are seeing sharp falls over fears related to German banks. How big a threat is this?
It is rarely one thing that sparks a crisis. Alas, more than one thing is going wrong in Germany’s banking sector. Together, they have led to fears of a major crisis that could hit the global economy hard, but how bad is it?
This week Deutsche Bank sold its Abbey Life insurance business for €1.09bn, ‘phew’ said the markets, panicking over what, in theory, is a $14 billion fine that Deutsche Bank must pay to the US government. But then, the hedge funds moved in, or rather they moved out, reducing their exposure to the bank, causing its shares fall to an all-time low.
Meanwhile, Commerzbank, the second biggest lender in Germany, announced it is to cut its dividends to zero, for the first time ever, as well as yield the axe on almost 10,000 jobs.
Back in June, the IMF said that Deutsche Banks was the riskiest globally significant bank. It has no less than two trillion dollars’ worth of assets, rather a lot for a bank worth less than $18 billion. Rather a lot for a bank that recently made a loss, which itself spooked the markets.
No wonder the markets are anxious.
Jennifer McKeown, Senior European Economist at Capital Economics said: "56% of Deutsche Bank’s shares are held in Germany and households in particular will already have been affected by the drop in their value. There is a risk of knock-on effects on other banks, which could prompt a tightening of credit conditions and decline in lending that would hit credit-reliant small and medium-sized firms especially hard. And if Deutsche Bank were unable to raise enough capital, were refused a state bail-out and had to bail in investors, the effects on the German economy and banking system would be worse still.”
This all seems alarming.
But Ms McKeown also said: “There are some reassuring factors. The global financial system is now much better capitalised and able to withstand shocks than it was in 2008. And in any case, Deutsche Bank seems unlikely to collapse. Compared to Lehman Brothers, it has a lot of liquid assets. . . Its assets are also better-diversified, both by sector and country, leaving it at less risk of future losses.
“Even if the worst came to worst, it seems likely that the German Government would provide a bailout. Having initially ruled out state aid, reports today suggest that the Government is now preparing a contingency rescue plan. It might get around EU rules preventing bail-outs by declaring “exceptional circumstances” or by encouraging a merger with Commerzbank, which is partly state-owned. And the German Government could easily afford a bail-out without raising concerns about its own finances.”
The woes at Deutsche Bank are serious, of that there is no doubt, but there seems little reason to think that this is in the same league, in terms of systemic risk, as the collapse of Lehman Brothers in 2009.
What may create havoc, however, would be for the Deutsche Bank crisis to peak at around the same time as a Chinese banking crisis erupts, and that would be nasty.