Deutsche Bank Is Shaking To Its Foundations – Is A New Banking Crisis Around The Corner?

The earnings season has started, and several major banks in the Eurozone have already reported on how they performed in the fourth quarter of 2015, and the entire financial year. Most results were quite boring, but unfortunately Deutsche Bank (DB) once again had some bad news.

Just one week before it wanted to release its financial results, it already issued a profit warning to the markets, and the company’s market capitalization has lost in excess of 5B EUR since the profit warning, on top of seeing an additional 18B EUR evaporate since last summer. Deutsche Bank is now trading at less than 50% of the share price it was trading at in July last year.

Source: stockcharts.com

And no, the market isn’t wrong about this one. The s**t is now really hitting the fan at Deutsche Bank after having to confess another multi-billion euro loss in 2015 on the back of some hefty litigation charges (which are expected to persist in the future). And to add to all the gloom and doom, even Deutsche Bank’s CEO said he didn’t really want to be there . Talk about being pessimistic!

Right after Germany’s largest bank (and one of the banks that are deemed too big to fail in the Eurozone system) surprised the market with these huge write-downs and high losses, the CDS spread  (‘Credit Default Swap’) started to increase quite sharply. Back in July of last year, when Deutsche Bank’s share price reached quite a high level, the cost to insure yourself reached a level of approximately 100, but as you can see in the next image, the CDS spread started to increase sharply since the beginning of this year. It reached a level of approximately 200 in just the past three weeks, indicating the market is becoming increasingly nervous about Deutsche’s chances to weather the current storm.

Source: Boursorama.com

Let’s now take a step back and explain why the problems at Deutsche Bank could have a huge negative impact on the world economy. Deutsche has a huge exposure to the derivatives market, and it’s impossible, and then we mean LITERALLY impossible for any government to bail out Deutsche Bank should things go terribly wrong. Keep in mind the exposure of Deutsche Bank to its derivatives portfolio is a stunning 55B EUR, which is almost 20 times (yes, twenty times) the GDP of Germany and roughly 5 times the GDP of the entire Eurozone! And to put things in perspective, the TOTAL government debt of the US government is less than 1/3^rd of Deutsche Bank’s exposure.