By: Alice Foster
Thursday, September 29, 2016
What would happen if Deutsche Bank collapses? The dramatic collapse of Lehman Brothers eight years ago this month was a defining moment of the devastating financial crisis.
Will Deutsche Bank collapse and take down the European banking system with it? DBKGn hit record lows this week on mounting concerns about the survival of the struggling German lender.
Worries about Deutsche’s capital position, overburdened by a $14 billion fine from the U.S. authorities related to its mortgage-securities investigation, have recently sent the bank’s shares into a tailspin.
The recent woes sparked speculation amongst market players that the German banking giants could need a state rescue.
Shares of Deutsche Bank are down nearly 60% so far this year amid concerns over the lender’s weakening financial health.
There are fears in the market that Deutsche’s trouble will spill over and affect other big-name European banks in France, Italy and Spain, threatening the region’s financial system.
What happens if Deutsche Bank collapses?
Phoenix Capital Research, an investment research firm based in Washington DC, believes that the trouble at Deutsche Bank signals a banking crisis in the EU.
Phoenix said: “DB is the proverbial ‘canary in the coalmine’ for Europe.
“Perched atop one of the largest derivatives books in Europe, DB has ties to most major financial institutions in the region.
“Which is why as soon as DB starts nose-diving, you know something big is up.”
The investment research firm said that the bank’s shares fell by nearly 20% over about two weeks between Friday September 9 and Monday September 26.
But the German Government has offered reassurances about the situation Deutsche Bank and has rejected comparisons to Lehman Brothers.
Senior conservative German lawmaker Hans Michelbach said it was “unimaginable” that the state would support the bank because there would be “public outcry”.
Mr Michelbach said: “You can’t compare Deutsche Bank with Lehman… The bank is in a position to get out of this situation on its own.”
Laith Khalaf, senior analyst at Hargreaves Lansdown, acknowledged that the collapse of Deutsche Bank would be “very bad in many ways” for the banking industry.
But Mr Khalaf said: “The banking system as a whole is much stronger than it was in 2008. Solvency ratios are much better than they were.
“Although it would be a pretty catastrophic event, I suspect that actually the banking sector would probably hold up better. The knock-on effect would not be as bad.”
Nevertheless Mr Khalaf warned that was difficult to be certain because something of that magnitude could lead to the “resurfacing of fears” about the financial system.
He said that central banks around the world have also already used big stimulus packages and cut interest rates to almost zero to shore up the economy.
If financial fears hit the real economy, he said: “There is little central banks could do to stimulate the economy. They have already thrown the kitchen sink at it.”
Allianz Global Investors chief investment officer Andreas Utermann believes the German government would have to bail out Deutsche Bank if the situation gets bad enough.
“I don’t buy at all what’s coming out of Germany in terms of Germany not wanting to step in ultimately if Deutsche Bank was really in trouble,” he told Bloomberg.