Deutsche Bank’s Crisis Will Likely Lead To U.S. and Global Banking Crisis

IMG Auteur
Published : May 08th, 2019
1249 words - Reading time : 3 - 4 minutes
( 0 vote, 0/5 )
Print article
  Article Comments Comment this article Rating All Articles  
0
Send
0
comment
Our Newsletter...
Category : Market Analysis

by Christopher Whalen, via TheAmericanConservative.com

Americans generally think of Europe first as a wonderful place to visit. They rarely ponder the economic and financial ties between the United States and European Union, but in fact these ties are extensive and significant to the stability of both economies.

Deutsche Bank Share Collapse – From €116 in 2007 to €7 Today (Google)

One area of particular connection involves the large banks and companies that provide services on both sides of the Atlantic. It is this area of commercial finance that risks are actually growing to the United States—in large part due to political gridlock in Europe stemming from the 2008 financial crisis.

Credit market professionals have been aware of problems among the European banks for many years. Their lack of profitability, combined with high credit losses and a lack of transparency have created a minefield for global investors going back decades. Whereas the United States has a bankruptcy court system to protect investors, in Europe the process of resolving insolvency is an opaque muddle that leans heavily in favor of corporate debtors and their political sponsors.

When we talk about true mediocrity among European banks, one of the leading example are, surprisingly, German institutions. Germany, after all, has a reputation for being the economic leader of Europe and a global industrial power, thus the continued failures in the financial sector are truly remarkable.

The biggest example, Deutsche Bank, Germany’s largest bank, has had problems with capital and profitability going back decades.

But Deutsche Banks’s problems are not unique.

What is troubling and indeed significant for American policy makers, however, is the nearly complete failure of our friends in Europe to address their banking sector, either in terms of cleaning up bad assets or raising capital to enable the cleanup.

One of the political understandings that came out of the Basel III process (a regulatory regime first introduced in 2013 to promote stability in the international financial system) was that the United States would take a harder view on mortgage related exposures and particularly intangible assets like mortgage servicing rights. The Europeans, it is said by participants, agreed to take a tougher line on bad assets loitering inside banks and to particularly require banks to take a reserve against bad credits immediately.

Prior to 2018, when the president of the European Central Bank, Mario Draghi, directed EU banks to start recognizing bad credits, international accounting rules essentially allowed EU banks to ignore bad credits. Indeed, EU banks could pretend that loan payments were still being received. Loans that defaulted prior to 2018 were not included in the directive. Thus Europe has a decade of detritus sitting in the loan portfolios of many banks that is neither disclosed nor properly valued. Whereas in the United States banks must charge-off bad assets down to some expected recovery value, in Europe we extend and pretend.

Many observers were surprised several years ago when Chinese airline conglomerate HNA arrived on the scene as the new shareholder of Deutsche Bank, a significant global investment bank that provides a range of services in the United States. The German lender had been marketing an offering of new equity shares for years without luck, thus the arrival of the high-flying and highly-leveraged HNA was greeted with quiet gratitude in European capitals. No European politician wants to be caught dead talking about large banks in anything but the most responsible tones, thus nobody asked any questions about HNA or its owners.

Sadly the HNA equity investment in Deutsche Bank was financed with a lot of debt.When the Chinese firm started to literally implode two years ago due to massive debt payments on its $40 billion in obligations, it began to sell its shares in Deutsche Bank, creating the latest crisis for the chronically underperforming bank. Today HNA is being liquidated under the supervision of the Chinese government. And to this day, nobody among United States or European bank regulators really knows who owns the company that was briefly the largest shareholder of Deutsche Bank

The setback with HNA led to discussions of merging Deutsche Bank with Germany’s Commerbank, another poor performer among the country’s banking sector.

Again, German politicians led by Chancellor Angela Merkel refuse to even hint at public assistance for Deutsche Bank, but the mounting troubles with banks across Europe may force Merkel’s hand as it has in Italy.

Bank earnings in Europe are weak, notes veteran bank consultant Mayra Rodriguez Valladares. As she exlains in a recent Forbes column:

Unfortunately, many of European banks’ woes are of their own making. A host of regulatory and legal fines and ongoing money laundering investigations of several banks do not bode well for European earnings. According to a Moody’s Investors Services report: ‘European banks were fined over $16 billion from 2012 to 2018 related to money laundering and trade sanction breaches.’

Rodriguez Valladares notes that U.S. and EU banks are enormously intertwined, particularly in terms of funding and derivatives—two areas of keen interest to U.S. regulators. But the fact of the matter is that the EU banking system and the EU economy are still too weak to shoulder the burden of a general cleanup of bad credits in EU banks.

The economic reality and ugly politics are both too daunting for EU leaders to engage publicly on these issues. Indeed, German Finance Minister Olaf Scholtz, who is touted as a possible successor to Merkel, was attacked by opposition politicians because of the prospective job losses in a Deutsche-Commerzbank merger.

But sadly the union of two zombie banks was not to be. “Banking giant Deutsche Bank and its crosstown rival Commerzbank ended merger talks, leaving in tatters the German government’s hope to shore up both banks and create a banking powerhouse,” The Wall Street Journal reported on April 25.

So now the German government must try to identify another politically expedient way to hide the Deutsche Bank problem without resorting to an explicit state bailout. Not only is financial help for EU banks problematic politically, but the EU simply lacks the economic resources to clean up the broader asset quality problems affecting European banks.

The tendency of EU politicians to stick their heads in the sand when it comes to these issues represents a smoldering threat to global financial stability. Troubles affecting Deutsche Bank and other EU lenders could easily explode into financial contagion if markets decide to turn away from these banks à la Lehman Brothers. For American business leaders and political leaders, the festering problems in European banks are a source of potential risk that could cause significant economic problems for all of us. Stay tuned.

Avoid Digital and ETF Gold: 7 Real Risks to Your Gold Ownership


News & Commentary

“Poor seasonal time for gold is over as we move into May and June and…increasing volatility and risk-off sentiment in the wider financial markets should support gold and see it trade back above $1,300 in the near future” – GoldCore

Stocks Resume Slide on Tariff Worries; Dollar Dips

China vice premier going to U.S. for trade talks despite Trump threatsGold glitters in India during key festival as prices dip

Gold ends higher on U.S.-China trade-induced jittersWatch Video Here

https://www.youtube.com/watch?v=MtKSxpVQQFc&t=132s


Global Stock Sell-Off Exposes Stretched Valuations

A Synchronized Global Downturn Intensifies As JPM Global Manufacturing PMI Plunges

Silver Backwardation Signals Rally – Maguire

When The S&P Hit A Record High, The Only Buyer Was Buybacks; Everyone Else Was Selling 

American Scholars Say The Real Threat To The U.S. Is Russophobia 

<< Previous article
Rate : Average note :0 (0 vote)
>> Next article
Mark O'Byrne is executive and research director of www.GoldCore.com which he founded in 2003. GoldCore have become one of the leading gold brokers in the world and have over 4,000 clients in over 40 countries and with over $200 million in assets under management and storage.We offer mass affluent, HNW, UHNW and institutional investors including family offices, gold, silver, platinum and palladium bullion in London, Zurich, Singapore, Hong Kong, Dubai and Perth.
WebsiteSubscribe to his services
Comment this article
>Follow all commentairies
You must be logged in to comment an article8000 characters max.
Log in or Sign up
Latest comment posted for this article
Be the first to comment
Add your comment
Top articles
Latest Comments
Crisis? What Crisis?
11 Maycarlomar
This is an excellent article, it deserves 5 STARS, your rating system is failing. I wanted to give it 5 STARS and the system marked obly one. M...
Crisis? What Crisis?
13 MayJ.
Yes! A return to constitutional government is what is in order.
More Trouble in Mexico: Second Largest Silver Mine Suspended Operat...
06 Mayrokdok25
I thank you for outing a thoroughly rapacious operation which not only harms the environment and its local communities, but which damages the reput...
Body Armor: Because If You’re Shooting Down Range, You Can Bet Some...
04 Mayprljr-1
Ah, sympathy for the triggered child. how sweet
Tom Petty was Right
01 Maywalkingdead1
The always insightful Mr Kunstler had me captured with his opening sentence: "anxious, fearful, and stressed-out", which pretty much describes my o...
Boeing 737 Max Unsafe to Fly: New Scathing Report by Pilot and Soft...
30 Aprsneezy671
The "Anything to save a few bucks" routine and we the passengers lose big time. Replacing costly intense pilot training for particular aircraft wit...
Body Armor: Because If You’re Shooting Down Range, You Can Bet Some...
27 AprWatchdoctor0
Hey, I love ya, and so do a lot of the other guys. You hang in there ! https://www.youtube.com/watch?v=msn-mDaJInA
Body Armor: Because If You’re Shooting Down Range, You Can Bet Some...
26 AprS W.-2
Honestly.. I thank those for all the down arrows Just confirms how effing stupid your below average sub human American can get. Good luc...
Most commented articlesFavoritesMore...
World PM Newsflow
ALL
GOLD
SILVER
PGM & DIAMONDS
OIL & GAS
OTHER METALS