Nothing is too big to fail

Deutsche Bank is the world’s largest investment bank and it employs over 67 000 people. And yet it is in danger of bankruptcy or even worse. Many financial experts have compared the bank to the infamous Lehman Brothers. There is a reason for that is that Deutsche Bank like Lehman Brothers could start another financial crisis if it were to fall, based on its major importance for the global economy. International Monetary Fund (IMF) has named it the most dangerous bank in the world.

deutsche-bank-stock

The main reason for the importance of Deutsche Bank is its position in the derivatives market. Deutsche bank is estimated to have a 10-12% control of the market. This means that if it were to fall all the other banks that have traded with Deutsche Bank could also be in serious danger of falling due to the dominoeffect. Finnish financial expert Timo Ritakallio estimates that the value of derivation contracts of the German bank is 46 000 000 000 000$ which is ten times more than the GDP of Germany!

deutsche-bank-credit-risk

How could it come to this? How could the central bank of the biggest country in Europe be on the brink of collapse? Well one of the main reasons for the current state of the bank is its actions before the Financial crisis of 2008 specifically concerning housing bubble of United States. United States Department of Justice has sanctioned Deutsche Bank to pay 14 billion dollars based on giving misleading information concerning bank’s derivatives. That is a major problem for the bank that has estimated net value of 15 billion. Since the announment Deutsche Bank’s shares have dropped sharply and credit risk is expected to rocket.

The troubles of Deutsche Bank have also affected the Finnish banks. Nordea, Ålandsbank, Osuuspankki and Evl have all invested their index funds to the German bank. Nordea’s investment alone affects almost 40 000 stock holders. Of course the risks of Finnish banks pale on comparison to those of larger international banks.

systematic-risk-among-gsibs

It is possible that without any help Deutsche Bank could fall but it is consired too important to lose and so European Union and IMF are expected to do anything to keep it afloat. There is however some light at the end of the tunnel. Recently (1.10) as a result of negotiations payment sanctioned by Us Department of Justice was lowered and Deutsche Bank’s stock rose a 14% on Wall Street.

Deutsche Bank is not out of the woods yet but maybe just maybe it has a change to save itself without IMF and others pumping hundreds of billions in it. It is pretty scary to think how much influence any single institution can have. The decisions of few people effect the lives of millions and their mistakes are usually paid by others.

 

Sources

  1. http://yle.fi/uutiset/3-9172862
  2. http://yle.fi/uutiset/3-9199872
  3. http://www.kauppalehti.fi/uutiset/naissa-rahastoissa-deutsche-riskia-yli-60-000-sijoittajan-rahat-vaarassa/TLxJmjvS
  4. http://www.kauppalehti.fi/uutiset/deutsche-bankille-huikea-nousu-wall-streetilla/ANbwn8CX
  5. http://www.taloussanomat.fi/porssi/2016/09/28/maailman-vaarallisin-pankki-tata-ei-voi-paastaa-nurin/20169996/170
  6. http://www.bbc.com/news/business-36723034
  7. http://www.activistpost.com/2016/02/a-918-point-stock-market-crash-in-japan-and-deutsche-bank-denies-that-it-is-about-to-collapse.html
  8. http://www.zerohedge.com/news/2016-02-03/it-time-panic-about-deutsche-bank
  9. http://www.bloomberg.com/news/articles/2016-09-28/why-people-have-been-worrying-about-deutsche-bank-in-12-charts

 

Advertisements
This entry was posted in Latest news in Accounting and Finance, Uncategorized. Bookmark the permalink.

2 Responses to Nothing is too big to fail

  1. This was a excellent article. I didn’t know that Deutsche Bank could have so big effect on world economy.

  2. misuliina says:

    Very interesting topic. Well done! Systemic risk picture makes my thoughts go high.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s