Deutsche Bank is again in trouble less than a decade after the financial crisis hit the global economy. There are speculations amongst investors whether German Government would come to the rescue of one of the largest financial firms. What hurts is that the predicament could have been avoided easily. The bank is not battling any sovereign-debt crisis or market meltdown. The reason for distress is the threat by U.S. Justice Department to fine $14 billion for transgressions that are a decade old. The amount is double of what the bank had set aside for covering the legal costs. The stock prices have reached record lows over concerns about capital adequacy. The German government is adamant that it would not offer any kind of financial safety net.
This episode brings into light the failure of Europe to learn important lessons learnt during the financial crisis that previously hit the economy. The largest banks need to have an equity capital that has plenty of loss-absorbing capacity. So even after receiving a blow, the balance sheets of banks remain strong. Instead of building equity capital buffers, the European banks have offered hundreds of billions of euros in the form of share repurchases and dividends to the shareholders. 5 billion euros have been paid out in the form of dividends from 2009 through 2015 by Deutsche Bank. This is a major chunk of equity raised by the bank. It currently stands amongst the thinly capitalized banks in the continent.
There is a need for the European Central Bank to drive recapitalization as it oversees all the major financial firms. There is a need to perform stress tests that reveal the actual scale of the requirements of the bank. This helps identifying which banks should be provided funds and which should be allowed to fail. Equity can be raised through private investors if the authorities can inspire the confidence in the market. For coping up with the faltering economy, the euro region requires banks that are better-capitalized. Click for further information on scenarios impacting Deutsche Bank.
Deutsche Bank’s model is doomed to fail, even officials are admitting it
International Monetary Fund officials are trying to resolve the crisis that has hit Deutsche Bank. Confidence has been expressed in European and German authorities by IMF who is working to bring about stability in the financial institution. The deputy director of IMF’s capital markets has stated that Deutsche Bank needs to revise its outdated business model that has been eating away its profits in an era where the interest rates have fallen negative.
There is a need for the bank to convince investors that its business model has the potential to propel forwards and address all the risks associated with operations. He as well stated that the European and German authorities are monitoring the situation and working together for ensuring resilience in the financial system.
There has been a recovery in the share price of the bank amid reports that it may negotiate the fine amount with the US. Several banks in Europe are choking with debt that hit during financial crisis. The stability report released by IMF recommended that the policymakers and regulators of Europe need to reinforce insolvency systems. Weaker banks have to be merged into stronger ones. The costs have to be reduced and banks need to be permitted to foreclose on loans that are non-performing quickly.
Adoption of measures in addition to regulatory changes can propel the confidence without having to increase the capital requirements massively. This can boost the profitability of European banks by $40 billion on an annual basis. This can as well boost the shares of the banks. Follow the link for further insight into the measures suggested by IMF.