What does the future look like for Deutsche Bank?
Less than a week after it was reported that the German chancellor Angela Merkel would not step in to bail out the troubled German bank Deutsche Bank, rumours were once again circulating that a rescue plan was in fact being prepared should the bank not be able to pay the fines levied on it by US regulators due to its mis-selling of mortgage-backed securities before the subprime crisis of 2008/09.
Despite denials coming from both Deutsche Bank itself and also the German government, the Die Zeit newspaper is reporting that a rescue plan is now being prepared, with the option of the German government taking a stake of up to 25% in the struggling bank being on the table if necessary, in order to try and stem the current declines in the bank’s share price and ward off a potential collapse of the bank itself – which could lead to dire consequences for the financial system as a whole.
Why State Aid Might Be Needed
It was already known to many that Deutsche Bank is not the safest of banks in the world right now. In fact, back in July of this year, the IMF said that of all of the big banks out there who were big enough to bring down the financial system in the event of a collapse, Deutsche Bank was the riskiest of them all.
Then, a couple of weeks ago, Deutsche Bank was hit with a bombshell as news came out about the amount it may be asked to pay in the way of US fines over the mis-selling of mortgage-backed bonds, with the first estimates being in the region of around $14bn.
Not great for a bank that already had question marks over its capital position. It’s no surprise, then, that shares in the bank are down by more than 50% this year.
What Are the Options for Deutsche Bank?
If Deutsche Bank does have to pay fines ranging into the tens of billions of dollars, then this will almost certainly involve some kind of sale of assets in order to raise the needed capital.
The problem for Deutsche Bank – and in turn the German government and Angela Merkel – is that the sale of assets often takes a degree of time. It is also the case that if the assets are having to be sold in a ‘fire sale’ fashion, then they will also not achieve their full market value.
This is where state aid and state guarantees could come into play, buying the bank some time to sell the needed assets in a way that will minimise its losses and thereby reduce the burden on the bank overall.
So, while Chancellor Merkel and the German government may publicly be saying that there will be no state intervention in the case of Deutsche Bank, more and more rumours are beginning to circulate that would suggest just the opposite, with some kind of bailout for Germany’s biggest bank seeming like more of an inevitability as each day passes.
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