Deutsche woes draw in Draghi and Berlin

Posted on September 28, 2016

FRANKFURT AM MAIN, GERMANY - SEPTEMBER 26: The headquarters of Deutsche Bank stand on September 26, 2016 in Frankfurt, Germany. Shares of Deutsche Bank dropped by over 6% today and fell to their lowest level since the 1980s following reports that the German government will not step in to shore up the bank. U.S. regulatory authorities are seeking a USD 14 billion fine from Deutsche Bank due to its role in contributing to the U.S. sub-prime mortgage crisis of 2007-2008. (Photo by Hannelore Foerster/Getty Images)©Getty

Fears for the financial health of Deutsche Bank moved into the German political arena on Wednesday as Berlin was forced to deny it was preparing a rescue and Mario Draghi was grilled by the Bundestag over the future of the bank.

    The European Central Bank president refused to answer questions on Deutsche during a closed-door meeting with legislators but told reporters after the session that negative interest rates imposed by the ECB were not responsible for the German financial system’s troubles.

    “If a bank represents a systemic threat it cannot be because of low interest rates. It has to be for other reasons,” Mr Draghi said.

    Anxiety over eurozone banks has risen since the market turmoil following the June UK vote to leave the EU. Until recently, however, concerns have focused on the bloc’s periphery, particularly Italy.

    The nervousness has begun to spread in recent days, with Deutsche becoming the latest focus of markets and analysts after the US Department of Justice told the bank it was seeking $14bn for mis-selling mortgage-backed securities. Tidjane Thiam, Credit Suisse’s chief executive, summed up the grim mood by saying that regulation and fines meant European banks were “not really investible”.

    Deutsche was at the eye of the storm after the newspaper Die Zeit reported German and eurozone officials were working on contingency plans if the US fine left Deutsche unable to fill its capital shortfall in the market.

    Germany’s finance ministry said the story — according to which the government could, in the worst case, take a stake of up to 25 per cent in Deutsche — was “false” and that it was not working on a rescue.

    Deutsche’s chief executive, John Cryan, reiterated the bank had not asked for help in dealing with the US authorities, and insisted that state aid was “not an issue” for the bank.

    Germany’s biggest bank has also made clear in recent days that it had no intention of paying anything near the $14bn the justice department demanded in its opening gambit to resolve the mis-selling allegations.

    However, the size of the demand — more than double Deutsche’s provisions for its legal woes — has reawakened concern about the bank’s capital levels, which are comfortably above regulatory requirements but below most peers and its own target.

    European banking stocks have fallen 24 per cent this year. However, Deutsche shares rose 2 per cent on Wednesday after it announced the sale of Abbey Life in the UK for €1.1bn, boosting its capital slightly.

    Tidjane Thiam, chief executive officer of Credit Suisse Group AG, speaks at the Credit Suisse Asian Investment Conference in Hong Kong, China, on Tuesday, April 5, 2016. The conference runs from April 5 to 8. Photographer: Justin Chin/Bloomberg©Bloomberg

    Tidjane Thiam

    Nicolas Véron, senior fellow at the Bruegel think-tank, said the idea of a government rescue of Deutsche was “far fetched”. But he added: “Europe has been going through a banking crisis for nine years now and there has been a huge amount of denial over this. It is always the fault of the US subprime crisis, or Greece, but never the banks.”

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    A statue is seen next to the logo of Germany's Deutsche Bank in Frankfurt...A statue is seen next to the logo of Germany's Deutsche Bank in Frankfurt, Germany, January 26, 2016. REUTERS/Kai Pfaffenbach/File Photo

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    Speaking in London, Mr Thiam of Credit Suisse said “regulatory uncertainty” on capital requirements meant that there was now a “fundamental doubt” over whether the industry still had a viable business model.

    “That’s the big, big, big question,” he told a Bloomberg conference. “You get extreme movements on the basis of relatively minor piece of news because there’s a lot of uncertainty.”

    On Friday, Commerzbank is due to unveil a strategy that is expected to involve thousands of job cuts at Germany’s second-largest lender as it tries to improve its flagging profitability.

    Norbert Brackmann, a member of the Bundestag budget committee, said: “I am not concerned about the German budget or the possibility of having to finance support as this possibility is very very far away. But I am concerned that Deutsche Bank has fallen in the international rankings. Deutsche Bank, with its worldwide position, plays a special role in the German economy.”

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