#DeutscheBank Could European banks be teetering on the brink yet again?

By Catherine Feore

Following a very difficult day’s (8 February) trading, Deutsche Bank issued a press release to reassure investors that they had sufficient liquidity to make coupon payments at the end of April. Very low oil prices, faltering growth and growing concern about Bank assets have made investors worry about whether the banking sector is experiencing another crisis of the scale of 2008. Commerzbank experienced a similar slump in its value and all banking stocks were down throughout Europe.

Sheila Bair, the former Chair of the US the deposit insurance and bank resolution organization FDIC has already pointed to European banks, calling the levels of leverage ‘astonishing’. She also predicted that there will be large bank failures, which will require taxpayer bailouts or a Lehman Brothers type bankruptcy in the next few years.

Though US banks are thought to be in a sounder position, the last seven months have seen over $200 billion knocked off the market value of the five top banks. What is causing even more concern is the interconnectedness of the banking sector; combine this with pitifully low capital requirements and global economic weakness, and the situation looks precarious.

Deutsche Bank has had a particularly bumpy ride since the crisis. Management has been overhauled and the bank has paid out more than $12bn in fines for various breaches including for manipulating markets (LIBOR), helping some clients break the law and not adequately disclosing the risk of financial products. DB is still keeping money aside for further legal challenges. It also reported a full-year net loss of €6.8bn in 2015.

John Cryan, co-chief executive officer, appointed seven months ago, said: “In 2015 we made considerable progress on the implementation of our strategy. The much-needed decisions we took in the second half of the year contributed to a net loss for the fourth quarter and full year. We are focused on 2016 and continue to work hard to clear up our legacy issues. Restructuring work and investment in our platform will continue throughout the year.”

Cryan remains optimistic: “We know that periods of restructuring can be challenging. However, I’m confident that by continuing to implement our strategy in a disciplined manner, we can and will transform Deutsche Bank into a stronger, more efficient and better-run institution.”

DB is also optimistic about its reserves; this includes approximately €1.6bn from the completion of the sale of 19.99% stake in Hua Xia Bank.

The EU’s Single Resolution Mechanism that implements EU-wide bank recovery and resolution became fully operational on 1 January this year. The SRM aims to bolster the resilience of the financial system and help avoid future crises by providing for the timely and effective resolution of cross-border and domestic banks - they estimate that they can cope with eight to ten bank failures over a four-year period.

Financial Stability, Financial Services and Capital Markets Union Commissioner Jonathan Hill said: "The Banking Union already has the tools it needs to supervise the banks within the eurozone. As of 1 January, the Single Resolution Mechanism will now also be in place. This means that we now have a system for resolving banks and of paying for resolution so that taxpayers will be protected from having to bail out banks if they go bust. No longer will the mistakes of banks have to be borne on the shoulders of the many."

We certainly hope that this will be the case.

The Single Resolution Mechanism works as follows:

• The Single Supervisory Mechanism (SSM), as the supervisor, would signal when a bank in the eurozone or established in a member state participating in the Banking Union is in severe financial difficulties and needs to be resolved.

• The Single Resolution Board (SRB), consisting of representatives from the relevant national authorities (those where the bank has its headquarters as well as branches and/or subsidiaries), the SSM and the European Commission, will carry out specific tasks to prepare for and carry out the resolution of a bank that is failing or likely to fail. The SRB decides whether and when to place a bank into resolution and sets out, in the resolution scheme, a framework for the use of resolution tools and the Single Resolution Fund (SRF).

• The resolution scheme can then be approved or rejected by the Commission or, in certain circumstances, by the Council within 24 hours.

• Under the supervision of the SRB, national resolution authorities will be in charge of the execution of the resolution scheme.

• The SRB oversees the resolution. It monitors the execution at national level by the national resolution authorities and, should a national resolution authority not comply with its decision, directly addresses executive orders to the troubled banks.

• An SRF was set up under the control of the SRB. It will ensure the availability of funding support while the bank is resolved. It is funded by contributions from the banking sector. The SRF can only contribute to resolution if at least 8% of the total liabilities of the bank have been bailed-in.

What benefits does the SRM bring to the Banking Union?

In the Banking Union, the Single Resolution Mechanism (SRM) allows for:

• More uniform financing conditions for individuals and businesses, thanks to a single mechanism to deal with the failure of banks irrespective of the Member State of origin, reducing the interdependence between credit supply and the health of public finances;

• Enhanced preservation of financial stability, with a more predictable environment for consumption and investment decisions, through centralized crisis management for large and cross-border banks, whose disorderly failure could otherwise cause contagion and panic.

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