+++ M.P.O./V.V.I. (BBG) Deutsche Bank Puts Safeguards to the Test: Mark Whitehouse


Having been involved in Financial Markets,in one way or another for more than fifty years, I can comfortably say that European laws and Regulations on resolution of banks are wrong and don’t work.

Some ideas in them are, from my point of view, correct, but the hierarchy and timings of the different steps turn them impossible to implement.

When there is a run to the bank, one has time for nothing except putting out the “fire”.

There is a zero chance that these laws and regulations will ever be used and work, in a bank with a large market share.

Among many other things, because in such a case the rest of the banks that would be supposed to “bail it in”, wouldn’t have enough capital to do so…

It has been said lately that that there is no such thing as a bank “too big to fail”.

This statement is not true, full stop.

It is the commercial banks that create money when they lend.

The failing of a large bank not only would spread to the other banks and the entire Financial System, but would destroy such a large amount of money that failing would not be an option.

All the rest you hear on this issue is crap.

Crap to throw away down the garbage can.

And in this case, and in my opinion again, in such an eventual scenario, Deutsche Bank would certainly be too big to fail.

Deutsche Bank is involved in twenty per cent of all the derivatives in the World.

Can you imagine what one trillion US dollars is?

Deutsche Bank’s exposure in the derivatives market is anywhere between 200 and 1000 trillion US dollars…

No responsible government would allow it to fail.

Regardless of what you hear the politicians say.

Even Lehman Brothers would not be allowed to fail, with what we know today.

[Letting Lehman fail is among the ten worse economic decisions taken by any government in the last century]

And in this eventual scenario the final decision would be taken after talking to, among others, Washington,London,Bern,Tokyo and Beijing.

Regardless of what you hear the politicians say.

Francisco (Abouaf) de Curiel Marques Pereira

Post ScriptumWhat I wrote above does not change in any my opinion, which I have had for a number of years, on Deutsche Bank.

Belly up!

That’s what I think DB is…

(BBG) The travails of Deutsche Bank, which has seen its share price plunge to record lows amid concerns about the size of a looming U.S. fine, raise a crucial question: If the German bank needed salvaging, could authorities pull it off without damaging the rest of the financial system?

Judging from the reaction so far, markets aren’t so sure.

Spurred by the disastrous experience of the 2008 crisis, regulators have created various safeguards designed to ensure that distress at a large financial institution won’t trigger contagion. Europe’s Single Resolution Mechanism, for example, is supposed to allow them to swoop in quickly and recapitalize a big bank — largely at the expense of creditors — with little or no adverse effect on all the other institutions that do business with it.

Financial Contagion

The Deutsche Bank case offers a unique opportunity to see what markets think about regulators’ plans. After all, the threat of a big fine shouldn’t be a systemic event: It applies to a specific institution. If markets believe the resolution mechanism will work, they should focus their concerns on Deutsche Bank, not on others.

So what’s the verdict? Not comforting. Since mid-September, when Deutsche Bank announced that the U.S. Justice Department was seeking $14 billion to settle a probe tied to mortgage securities, measures of credit risk have risen for banks throughout Europe and beyond. Here’s a chart showing the percentage increase in the cost of five-year default insurance on the senior debt of Deutsche Bank and the largest banks in France, Italy, the U.K. and the U.S.:

To be sure, resolution mechanisms are still works in progress. For one, banks have yet to build up special layers of debt that regulators can “bail in” when they need to shore up an institution’s finances. Still, the market’s reaction doesn’t suggests much confidence. It also reflects the recognition that the world’s largest banks — Europe’s in particular — are still so thinly capitalized that it wouldn’t take much to send them into distress.

Ample loss-absorbing equity capital — that is, money from investors willing to share in banks’ risks — is among the best antidotes to financial contagion. Instead of pretending that they can safely handle the failure of a systemically important bank, regulators should demand a lot more of it.