All eyes are on the European banks, especially Deutsche Bank – but in the U.S., extraordinarily quick moves by the financial authorities have calmed markets and facilitated restructuring. First Citizens, a bank holding company with some $110 billion in assets, recently concluded the purchase of a big chunk of the failed Silicon Valley Bank’s assets. First Citizens picked up some $72 billion in those assets at a massive discount for only $16.5 billion. The company’s shares skyrocketed by over 50% in the last several days. A big portion of the remaining SVB assets will remain in receivership for disposition by federal depositors. The deal was a show of confidence in the ability of the market to straighten out the damage that was done from the failure of SVB’s risk management approach and its recent record of bond purchases.
A key point is that what happened with SVB was not a crisis along the lines of the 2007-2008 subprime mortgage crisis. It was fundamentally a case of rapidly rising interest rates exposing the structural weaknesses of banks that saw the value of their debt securities fall. Weak banks were forced to sell and stomach big losses. Deutsche Bank’s shares have recovered from a 6 month low of 8.54 euros on March 24th to 9.30 euros by March 30th. Deutsche Bank has had a long record of restructuring, leadership challenges, and losses in recent years.
In January 2014, the bank reported a pre-tax loss of €1.2 billion for the fourth quarter of 2013, despite analysts predicting a profit of nearly €600 million. Revenues also slipped by 16% compared to the previous year. In 2015, Deutsche Bank’s Capital Ratio Tier-1 (CET1) was reported to be only 11.4%, lower than the median CET1 ratio of Europe’s 24 largest publicly traded banks, resulting in no dividends for 2015 and 2016. The bank also announced that 15,000 jobs would be cut.
In June 2015, the co-CEOs at the time, Jürgen Fitschen and Anshu Jain, both offered their resignations to the bank’s supervisory board, which were accepted. John Cryan was announced as the new joint CEO, effective July 2016, and became the sole CEO at the end of Fitschen’s term. In January 2016, Deutsche Bank pre-announced a loss before income taxes of approximately €6.1 billion for 2015, and a net loss of approximately €6.7 billion. Analysts predicted that the bank would need to raise up to €7 billion in capital to address an equity shortfall.
In May 2017, Chinese conglomerate HNA Group became Deutsche Bank’s largest shareholder, owning 9.90% of its shares. However, HNA Group reduced its stake to 0.19% as of March 2019. In November 2018, Deutsche Bank’s Frankfurt offices were raided by police in connection with investigations around the Panama papers and money laundering. The bank released a statement confirming it would cooperate with prosecutors.
In May 2019, CEO Christian Sewing announced that he was expecting a “deluge of criticism” about the bank’s performance and was ready to make “tough cutbacks” after the failure of merger negotiations with Commerzbank AG and weak profitability. In June 2019, the bank announced plans to cut 20,000 jobs, over 20% of its staff, in a restructuring plan.
In February 2021, Deutsche Bank reported a profit of €113 million ($135.6 million) for 2020, its first annual net profit since 2014. In March 2021, the bank sold approximately $4 billion of holdings seized in the implosion of Archegos Capital Management in a private deal, helping it emerge unscathed after Archegos defaulted on margin loans used to build up highly leveraged bets on stocks. Overall, Deutsche Bank’s string of controversies and structural weaknesses leaves it extremely exposed to rising interest rates, a weakening European economy, and international financial instability.
The Bank of Canada has come out indicating that it is ready to step in and defend Canadian banks if the European banking crisis spills into the country. The BOC has said it would offer liquidity to banks and pension funds if necessary to reduce anxiety and shore up financial stability. However, for now, the BOC is confident that the Canadian banking system is in sound shape: “The Canadian banking sector is in a quite different place than the regional banks in the U.S., but just in terms of the current crisis, our current assessment, although we are keeping a close eye, we don’t feel anywhere close to concerned in terms of financial system stress.”