Category German’s Deutsche Bank

Mar 25 2023

Credit Suisse Banking Crisis


Armstrong Economics Blog/Banking Crisis Re-Posted Mar 24, 2023 by Martin Armstrong

It is refreshing when you actually find a journalist who is honest and is not being included by the Neocons to put out their propaganda. Her review of Credit Suisse is a worthwhile read. Especially when this is not over yet and the winds of finance are now turning toward questioning Deutsche Bank.

Izabella Kaminska is senior finance editor at POLITICO Europe.

Over the span of 10 days, the global financial system was once again shaken.

The time frame between the collapse of Californian lender Silicon Valley Bank, America’s 16th largest bank, and that of the 167-year-old lender Credit Suisse was approximately just that — 10 days.

And as we witness the fallout, so far it appears contained. Stock markets are up, bank stocks seem stabilized and government bonds are in high demand. Officials reassure ad nauseam that the financial system remains strong and stable.

But the truth is, even if so, what happened in this period of time has changed the financial system forever — and worryingly, most people haven’t even noticed.

Governments and central banks would have you believe that in both cases, private sector solutions were found to resolve the failures. No taxpayer funds were used.

But that is likely not true.

In the United States, growing calls from the country’s top billionaires and hedge fund bosses to guarantee the full extent of customer deposits would, if acted on, deliver a backstop that must be underwritten by public funds. That’s the case even if costs are distributed among whatever healthy banks remain later. The sums involved are eye-watering — by some measures up to $17 trillion of unfunded liabilities.

If the rule is passed — and all indications are that it will be — this would finally make the implicit explicit: that the financial system was never really rescued following the 2008 financial crisis but merely put on life-support. And that has now failed, which means socialization of the losses beckons.

Over in Europe, things are potentially worse. This time, it wasn’t the storming of the Winter Palace Hotel in Gstadt that seized the means of financing but something far more mundane: an untidy bank resolution for Credit Suisse, which relies far too heavily for comfort on Swiss National Bank (SNB) guarantees.

As one former top British central banker told POLITICO, “They could have used bail-in; it would have worked; and banking would become part of a capitalist market economy” — a reference to the loss-absorbing processes regulators came up with after 2008 to ensure bank failures didn’t have to draw on public resources ever again. “The only stable equilibrium is one where bank resolution works, or socialism,” he added.

But the resolution didn’t work. And investors are belatedly realizing this.

Key to this reality is that Credit Suisse was a bank considered to be in good condition and solvent by all regulatory measures. As one bank analyst told POLITICO, going by the assets, you would never have seen the problem coming. Even the SNB and financial markets regulator FINMA said so as recently as last week.

The SVB Private logo is displayed on an ATM outside of a Silicon Valley Bank branch in Santa Monica, California | Patrick Fallon/AFP via Getty images

So were the regulators lying? Or is the accounting somehow fundamentally broken?

What we know for sure is that markets questioned the numbers, and this was evidenced by a run on the bank’s deposits, equity and bonds. And the discrepancy poses a big problem going forward, as it knocks trust in the accounting of all similarly assessed banks, which, thanks to international accounting standards, means pretty much all of them.

Credit Suisse’s sale to domestic rival UBS at cents on the dollar of what regulators claim the underlying assets are worth presents another problem too. If similar assets are lurking in UBS’ own balance sheet — and chances are that is the case, as the assets in question are probably government bonds — they might have to be written down to a similar degree. This is probably why UBS needed the guarantee from the SNB to be doubled to 100 billion Swiss francs to do the deal.

In light of this, Switzerland now faces an even larger issue: If UBS were to become stressed — and it very well could due to this discrepancy — there’s no private sector pathway for resolution left. The country now only has one major bank and, thus, only two possible pathways to deal with a failure — nationalization or acquisition by a foreign buyer with enough cash to keep the valuation of all the consolidated assets at a price that brings everything back to par. And there are few of those in the Western hemisphere.

With a full foreign acquisition off the table due to global discord, this leaves only an unthinkable solution for the home of Swiss private banking — the dawn of a type of finance more commonly seen in communist countries, where banks are directed by the state to allocate funds to activities they prioritize. Combined with a central bank digital currency, this would reduce banks to mere proxies of the state, with uncertain consequences for efficient capital allocation and inflation.

How things would unfold from then on is unclear. The only thing we can be sure of is that nothing in banking, or capitalism, may ever be the same again.

Mar 25 2023

Deutsche Bank Loses 10% Value After EU Leaders Say “Banking System Is Stable in Europe”


Posted originally on the CTH on March 24, 2023 | Sundance

Almost as soon as German Chancellor Olaf Schulz said, “The banking system is stable in Europe – Generally, I think we are in good shape,” shares of German-based Deutsche Bank began dropping.

After a Friday loss of 14%, the bank came back to close -9.8%, and on the heels of the Credit Suisse collapse and subsequent purchase, concerns are still reverberating.

BRUSSELS (AP) — European Union leaders Friday played down the risk of a banking crisis developing from recent global financial turbulence and hitting the economy even harder than the energy crunch tied to Russia’s war in Ukraine.

After a meeting in Brussels, the EU government heads said lenders in Europe are generally in sound health and in a position to weather a combination of rising interest rates and slowing economic growth.

“The banking system is stable in Europe,” German Chancellor Olaf Scholz told reporters after the summit. Dutch Prime Minister Mark Rutte said: “Generally, I think we are in good shape.”

The EU deliberations came in the wake of U.S. regulators’ shutdown of two U.S. banks, including Silicon Valley Bank, and a Swiss-orchestrated takeover of troubled lender Credit Suisse by rival UBS.

The emergency actions on both sides of the Atlantic revived memories of the 2008 global financial meltdown and the ensuing EU sovereign debt crisis, which almost broke apart the euro currency now shared by 20 European countries.

In a sign of market jitters in Europe, shares of Deutsche Bank, Germany’s largest lender, fell as much as 14% in Frankfurt on Friday. The drop, which dragged down the stocks of other European lenders, followed a steep rise in the cost of financial derivatives known as credit default swaps that insure bondholders against the bank defaulting on its debts.

Scholz dismissed the idea of basic weaknesses at Deutsche Bank, saying it has become “very profitable” after modernizing its business.  “There is no reason to have any concerns,” he said. (read more)

The German bank has lost about a fifth of its market value this month. Other European banks were also down at closing, including Deutsche Bank German rival Commerzbank, which was down 9%. Credit Suisse and its new parent company, Barclays and Societe Generale were all down over 6% on Friday.