Are the banks still too big to fail?

Germany’s biggest bank, and Europe’s biggest investment bank, appears to be in trouble. So what do Deutsche Bank’s problems say about the overall health of the financial system? Eight years on from the global financial crisis, are the banks still too big to fail?

The bank’s troubles date back to 2008, when it mis-sold banking products called Mortgage Backed Securities – the very straw that broke the global financial system almost a decade ago. The US Department of Justice is demanding $14bn back in fines from Deutsche Bank to settle civilian lawsuits related to the mis-selling. 

In a way, this is kind of a wake-up call to regulators, and in the US, there has been a lot of rhetoric around how do we get rid of 'too big to fail' - and the answer is ... I don't think you do.

by Chris Wheeler, banking analyst, Atlantic Equities

New European Union bail-in rules mean the German tax payer is protected from involvement with bank fines which all but rules out German state aid.

Deutsche Bank has also failed banking “stress tests”, which demonstrate how well banks would do in a severe market shock similar to the global financial crisis. 

But some argue that the position Deutsche Bank finds itself in is not quite as simple as it may seem. With what is predicted to be a solid balance sheet in terms of liquidity and deposit-loans ratio, Chris Wheeler, banking analyst at Atlantic Equities, a US brokerage firm based in London, clarifies:

“The problem it [Deutsche Bank] has is two-fold really: It is still trying to rebuild its earnings in markets that aren’t very favourable to it in investment banking. The other problem, of course, is its capital – it has something called a 10.8 percent common equity tier one ratio. That’s kind of moderate compared to its peers, but obviously it’s under pressure if we have this very substantial US fine.” 

With a much stronger balance sheet than some of the biggest banks that fell in the crisis, such as Lehman Brothers, and a solid bill of deposits rendering not liquidity but capital as the main issue for Deutsche Bank, does this further solidify fears of another global crisis?

“This has proved the point that ‘too big to fail’ is still with us. All the fear that gathered last week about Deutsche Bank and its prospects just reminded everybody that despite the fact that the balance sheets are much stronger, regulators will force banks to hold more capital, more liquidity, despite all of that … if Deutsche Bank were to collapse into the mode of Lehman Brothers and bankruptcy, the ripples will be absolutely enormous,” says Chris Wheeler.

Also on this episode of Counting the Cost:

South Korea’s new limits: South Korea’s tough new anti-graft laws are sending shockwaves through the local business community. It’s now a fine line to tread when wining and dining your guests – if they happen to be a journalist, a teacher or a public servant.

Paris Motor Show and the future of driving: We head to the auto show where it seems to be less about the car and more about the technology inside – which could change the entire driving experience. Kamahl Santamaria talks to Luca de Meo, the CEO of Seat Cars, about change in the automotive industry and the future of driving.

Property and divorce in China: In Naniing, China, a new law is limiting the number of properties a married couple can own. But the government’s attempt to curb rising property prices in one of China’s biggest cities, has had an unforeseen result: a surge in the divroce rate as couples are splitting up to buy more property.