Germany's biggest bank is in big trouble again.
What's been happening at Deutsche Bank Aktiengesellschaft (NYSE: DB) is scary – because it may not be the only giant bank in trouble.
Of course, Deutsche Bank officials say they've got plenty of capital and liquidity.
But that's what "Too Big to Fail" (TBTF) banks always say, and what their regulators want the public to believe, even as they privately censure them because of their "troubled condition."
Here's what's happening at Deutsche Bank and what the Fed thinks about the giant bank's health…
The Canary's Still Singing
If you're not familiar with the analogy, a "canary in a coal mine" refers to when coal miners would bring small birds down into the mines with them to detect dangerous gasses, like carbon monoxide. The bird would succumb well before the miners would, giving them plenty of time to get back to safety. Sad for the bird, sure, but it was an effective warning.
Now it looks like Deutsche Bank might be the canary, a flashing sign that the big banks could once again tank the stock market and the global economies.
Deutsche Bank's U.S. operations have drawn regulatory heat for years. The Federal Reserve Bank of New York slammed DB in 2014 over repeated reporting failures and lack of follow-through on agreed-to fixes.
Deutsche Bank's U.S. operations failed the Fed's stress tests in 2015, in 2016, and again in 2017.
In each of those years, DB was hit with Fed enforcement actions for serious rules violations, including perceived lax controls tied to currency trading, money laundering, and Volcker rule trading restrictions, as well as paying billions of dollars to settle allegations stemming from U.S. Justice Department investigations.
Last year, the Fed quietly censured DB over controls measuring its exposure to clients and how it valued collateral on loans when examiners complained about the bank's inability to calculate its exposures.
The Fed called DB's condition "troubled." That slap on the wrist came to light on May 31.
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The censure by the Fed also landed the bank's FDIC-insured subsidiary, Deutsche Bank Trust Company Americas, on the FDIC's "Problem Banks" list of at-risk institutions.
Hours after Deutsche Bank's stock crashed to all-time lows, Standard & Poor downgraded DB's credit rating to BBB+ from A-, three notches from junk, citing "significant execution risks in the delivery of the updated strategy amid a continued unhelpful market backdrop."
S&P said it initiated the review on April 12 this year after Christian Sewing, a DB-lifer most recently in charge of retail and commercial banking, replaced John Cryan as CEO.
The rating agency cited how repeated leadership changes posed questions over DB's long-term direction and cited chronically low profitability. Specifically, S&P said the bank "appears set for a period of sustained underperformance compared with peers, many of whom have now finished restructuring."
New CEO Sewing, in a letter to staff following the downgrade, said that the bank's financial strength is "beyond doubt." About its corporate and investment bank, Sewing said, "We have a clear, strategic direction and we're well on the way to implementing what we recently announced."
Unfortunately, what they just announced was disappointing first-quarter revenue. Overall company revenue was down 5%, and net income was down 79%. Investment banking revenue was down 13%, fixed-income trading was down 16%, and equities sales revenue was down 21%.
It looks like the bank is on its way down.
About the Author
Shah Gilani boasts a financial pedigree unlike any other. He ran his first hedge fund in 1982 from his seat on the floor of the Chicago Board of Options Exchange. When options on the Standard & Poor's 100 began trading on March 11, 1983, Shah worked in "the pit" as a market maker.
He helped develop what has become known as the Volatility Index (VIX) - to this day one of the most widely used indicators worldwide. After leaving Chicago to run the futures and options division of the British banking giant Lloyd's TSB, Shah moved up to Roosevelt & Cross Inc., an old-line New York boutique firm. There he originated and ran a packaged fixed-income trading desk, and established that company's "listed" and OTC trading desks.
Shah founded a second hedge fund in 1999, which he ran until 2003.
Shah's vast network of contacts includes the biggest players on Wall Street and in international finance. These contacts give him the real story - when others only get what the investment banks want them to see.
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