Deutsche bank has been under intense pressure lately after being hit with a $14 billion fine imposed by the United States as punishment for mis-selling subprime mortgage products. This on top of the fact that they are still struggling to recover from the $2.5 billion fine to the US and UK for manipulating the Libor interbank borrowing rate, the losses brought about by years of legal battles and their restructuring attempts as well as 21% net revenue fall in the first half of this year.
The bank´s shares have plummeted to record breaking 30-year low and the stock has managed to wipe out more than half of its market value. The hedge funds have started to pull out and confidence in the bank is faltering day by day. These are tough times for the bank.
Why should a single bank worry the world?
The global market waits nervously as Deutsche bank scrambles to get itself out of this mess. This is a major concern for the global market because Deutsche bank is no regular bank. This institution is older than modern Germany itself and for decades it has been holding together Europe´s largest economy.
Further, it has deep connections to global financial institutions which feeds the fear of many analysts that this might result to a bigger bank crisis. In fact the International Monetary Fund (IMF) released a statement saying Deutsche bank is the riskiest financial institution in the world which can be a potential source of external shocks to the financial system.
The worst case scenario
Pulling of credit lines
It can be remembered that the crisis in 2008 was not brought about only by the Lehman brothers – it was a combination of failed regulatory oversight, irresponsible lending practices, financial systems forced to take the hit every time the economy stumbled, and negative interest rates. All these combined plus Lehman brothers unravelling the mortgage-debt bubble resulted to the great crisis.
During that time, the credits of the banks were cut off. If this happens to Deutsche bank, it will cause them to fall and as it falls it will take down several banks with it because banks lend money to each other.
This will cause a multi-day decline in the markets globally. On the other hand, it is very unlikely that this will happen because the Deutsche bank still has liquidity reserves of about €200 billion despite many speculations stating otherwise.
Furthermore, it is speculated that the German government will never allow Deutsche bank to fail although undeniably without any strong reassurance at the moment that the risk will be handled well, the stock markets globally can reasonably expect continuous pressure.
The best case scenario
A lowered negotiated fine, a cash call or Government Bail out
To date, Deutsche bank through its British CEO John Cryan, continue to attempt to negotiate a good settlement deal with the US, he has also sold off certain investments in order to beef up their cash reserve. In the event he fails in negotiating a fine the bank can afford, Deutsche bank needs to raise more money to meet demands and they can do this by resorting to their shareholders. It will be catastrophic for the shareholders but better for the financial system as a whole. As it continues to scramble to raise money today, it will pull down European financials and push US stocks down initially.
So in this scenario, either the shareholders bring in more money or the German government take a stake in the company in exchange for cash to bail it out. However, there are political issues attached to the German government stepping in as well considering that the Germans have been rather open and critical about bailouts of irresponsible financial institutions under ECB supervision.
Is it time for companies to prepare for a Deutsche bank-induced financial meltdown?
Many believe the German government would never allow Deutsche bank to fail because it just is too big to fail. Its failure will result in worldwide depression. However, until there is assurance that the big risk is off the table, companies should prepare for the worst.
More than ever it has become very important for all companies regardless of industry to have full transparency and control of an organization´s finances and to have a solid and dynamic business strategy that can quickly adapt to any unforeseen event.
To be able to do this – a suitable corporate performance management tool such as Performance Canvas Financials must be in place to allow for easy access of business critical information and to foster an efficient end to end financial process.
This way –If a financial crisis happens depending on how Deutsche bank performs (which hopefully will not), corporations are prepared to weather through the storm and if it doesn´t we all have a reason to celebrate and breathe a little easier.
DSPanel offers cutting edge technology platform for business analytics, planning, and visualization. DSPanel designs, builds, and operates with the end users in mind. Performance Canvas was created by DSPanel to answer the unarticulated needs of the market not addressed by previous available solutions. With Performance Canvas, information is transformed into valuable business insights for the business executives to utilize in their decision-making process. DSPanel currently has over 2500 organizations deploying their solutions.
