Dangerous Tides

We have a word in Finnish that perfectly describes the latest actions taken place by the executives of Deutsche Bank. It's called "puuhastelu".

I've been following the situation of Deutsche Bank since spring very closely with my friend from University of Exeter. It's a long way there but he drops by to have a beer a couple times during the year. Thanks for the inspiration for this text!

We start by providing some background. Deutsche Bank AG is a German global banking and financial services group and one of the biggest financial institutions in Europe. More than 100 000 employees work for Deutsche Bank in 70 different countries including Europe, the Americas and Asia-Pacific. In 2009 Deutsche Bank was the world's largest foreign exchange dealer with a market share of 21 %. The amount of assets in 2015 was close to 1,7 trillion euros.

The reason I'm telling you all this, is that currently the bank is in the edge of a crisis. The whole Europe is waiting for the next case of Lehman Brothers in Europe. The stock value decreased almost 20 % in September alone and the whole company has decreased in value over 50 % since January. The bank experienced losses of over 6 billion euros in 2015 and the signs of the next financial crisis seems to be at present.

Before I'm willing to comment on the relevance of the anxiety towards the case, let's us first see what are the reasons behind all this. First of all, due to the actions of Deutsche Bank during the subprime-crisis of 2008, the United States Department of Justice has imposed sanctions of 14 billion US dollars for Deutsche Bank. According to the Department of Justice, Deutsche Bank provided false information for the investors regarding the risks of the estate-derivatives that Deutsche Bank sold at the time. The situation is very concerning, taken into account that the current market-value of Deutsche Bank has been estimated to be somewhere around 15 billion US dollars. Deutsche Bank itself has however commented on the matter and stated that they are not going to settle.

Also during the years of 2012 and 2014, a Russian branch of Deutsche Bank was founded guilty on money laundering and during 2013 the bank was founded guilty with 5 other banks in manipulating Euribor and Libor-rates. From these actions Deutsche Bank had tons of bad publicity, and had to pay 2,5 billion US dollars worth of fines.

Not only the internal control seemed to fail in Russia during 2012 and 2014, but also the whole management of the bank seemed to fail. The executives were given tremendous bonuses and dividends in the cost of weakened capital structure. Partly because of the large bonuses, the capital structure of the bank hasn't been in a sufficient level in case of a crisis.

The question you're all probably wondering is that why should we care. Why should we care about the scandals, bad management and the decreased stock-value of Deutsche Bank? The answer lies in the derivatives. Deutsche Bank is the world's largest bank in trading derivatives such as options, warrants and futures. According to some estimations, Deutsche Bank possesses 46 000 000 000 000 US dollars worth of derivatives. That's more than ten times the gross domestic product of Germany.

When a bank trading derivatives gets into trouble, there exist a concern that the effects will spread quickly to other participating banks possessing and trading the same derivatives. When a bank trading huge amounts of derivatives, well, you can guess the concern facing the global banking system. Derivatives are generally concerned as more risky investments than traditional debt or equity instruments, partly because of the lack of transparency.

Latest actions of the bank have been more or less devastating. Due to the great amount of possessed derivatives of Deutsche Bank, the bank is considered too big and too critical to fail. This means that when the bank gets into trouble, either the European Central Bank or the International Monetary Fund will aim to rescue the bank from the crisis, and the bill will be sent most likely again for the tax-payers.

As a conclusion I want to state my personal concern towards Deutsche Bank and the situation of the current financial sector. Stock-values have been setting constantly new records throughout the years, the S&P500-index is in all time high and the amount of debt is constantly rising. It is clear that this kind of growth cannot continue in this way much longer. It defies against world history. 8 years has passed from the previous crisis and situation of Deutsche Bank is probably giving us the prologue of the next potential financial crisis.

And as a final note if you are more interested about financial crisis's, I recommend you to watch the movie Big Short. One of my absolute favorite movies based on the world of finance. Right after The Wolf of Wall Street.

Text: SW

Picture's don't belong to me