Well, it was bound to happen. You know, a too big to fail bank in Europe creates headlines at home. This time, it originated in Germany.
Deutsche Bank is Germany’s largest bank, sporting assets that are just shy of $2 trillion. It’s also Europe’s fourth-largest bank.
Like many of its counterparts in Europe, its capital cushion isn’t where it needs to be in the event of a serious economic downturn.
Further, negative interest rates and a weak European economy are a hindrance to profitability.
Unlike major banks in the U.S., which were much more aggressive in raising capital post-2008, European banks gambled on faster economic growth to bolster their capital positions.
It hasn’t been a good bet.
Lehman Moment—not likely
Unlike 2008, the economic fundamentals aren’t deteriorating, Deutsche isn’t choking on toxic assets (that we’re aware of), its funding sources are more diverse, and it can tap into a liquidity lifeline from the European Central Bank. In each case, the same couldn’t be said of Lehman Brothers.
Moreover, we know what happens when a systemically important financial institution fails. While new EU rules limit taxpayer support for bailouts, it does not prevent them.
And it’s hard to imagine a scenario where Germany would allow its largest bank to implode in a disorderly fashion, taking the German economy with it.
That doesn’t mean we can’t see short-term volatility in U.S. markets that are tied to a European bank, but a crisis sparked by the disorderly failure of one of its largest banks is unlikely.
