Unlike other large banks, during the GFC in 2008 Deutsche Bank (DB) did not raise capital or receive an outright government bailout. That was a mistake for management to not avail themselves at the time of the opportunity to get a government bailout like their American competitors. As a result the bank emerged from the GFC much weaker, and since then has been one of the worst performing multinational banks. DB instead doubled down on a strategy to be a derivatives powerhouse. However, DB does not have the same operational excellence nor strength of balance sheet as their American competitors.
DB never got it’s balance sheet under control. The negative interest rate policies of the ECB, and the Fed’s resumption of interest rate hikes has precipitated the destruction of the largest European Banks. This is a purely political situation at the current moment. Deutsche Bank is finished in its current form. There are two options, one is bad but manageable, the other is catastrophic.
- Germany bails out DB. If that happens, then every European government will bail out their respective troubled banks. Given the shared liability due to having a common currency, the printing of Euros could ultimately drive some countries to leave the Euro.
- Germany doesn’t bail out DB. Then a bank run happens as depositors flee DB in advance of a bail-in. If you were a Bitfinex customer, you know exactly what a bail-in looks and feels like. DB’s banking counterparties will pull their credit lines as well, hastening the demise of bank. Given DB is the largest derivatives counterparty in the world, all large global banks will be affected. The magnitude of that is unknown and is likely to spark global contagion. At that point every major central bank will have to step up and ring fence troubled financial institutions.
If the Fed lowered rates, and the ECB raised rates, DB could have a chance of survival. This would alleviate the global USD short and raise its EUR Net Interest Margin, both of which precipitated the collapse of DB. However, neither of those two actions appear likely to occur.
I believe the most likely option is for Germany to cave-in at some point and rescue DB. The cost of the rescue will be that DB jettison its Corporate Investment Bank and return to a purely German focused commercial bank. Italy will be next to follow with a government bank bailout. Ultimately I believe it will be less of a global systemic risk if national governments are allowed to bail out their country’s banks. Option 2 is much worse in my opinion, and I believe global policy makers understand this. As such, they will coerce Merkel to bail out DB.
Both options 1 and 2 will result in money printing on a gargantuan scale. That is Bitcoin positive. It will also result in more financial repression as central banks once again must prevent assets from fleeing the banking system. That also favors a non-central bank controlled currency like Bitcoin.