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The German financial services giant, Deutsche Bank AG, is one of the largest and most important economic institutions in the world. Mainly due to self-imposed scandals, the bank must now take drastic measures to stay afloat. Investors around the world need to know that if such a critical element of the banking system, which is too big to fail, weakens, it could trigger a new global financial crisis.
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Deutsche Bank struggles to survive
Deutsche Bank AG, the largest banking group in Germany with over $ 1 trillion in badets, has been a concern for investors, economists and international decision-makers for more than two years. In fact, in 2016, the International Monetary Fund described the bank as "the leading net contributor to systemic risk" for the global financial system. The same year, various financial publications from around the world also began to warn that Deutsche could be the "next Lehman Brothers", referring to the investment bank whose collapse is considered a major element of the beginning of the 2008 global financial crisis.
Now, the German bank still seems to be struggling, with some commentators worried that they will not be able to survive. This month alone, it was announced that Deutsche would undergo a major reorganization to stop the bleeding. As has been widely reported, the process of restructuring the company will involve downsizing about one-fifth of its employees worldwide, or about 18,000 to 20,000 people. In addition, it was revealed that Deutsche would reduce its investments in information technology by more than a billion dollars a year, which would prevent it from getting closer to its competitors or making facing new competitors in the field of financial technologies. In addition, some markets in the marketplace reported that some institutional investment funds were withdrawing their badets from the bank, which could indicate a lack of confidence in the success of the reorganization efforts.
Costly scandals and billions of fines
Before thinking about how things are going, let's see how Deutsche Bank has reached its current state. In recent years he has been involved in a number of scandals such as the facilitation of money laundering which cost the bank a fortune in legal fees, a damage to the reputation and heavy fines. Its shares are now trading at their lowest level in 30 years, after losing more than 70% in value since 2007. The bank also experienced frequent changes at the top, after which it replaced CEOs and other top executives at an alarming rate for a company. of its kind in his industry. In November 2018, its headquarters were even raided by law enforcement officials and representatives of the German tax authorities.
The myriad of the legal problems it has faced cost Deutsche Bank an incredible amount in the last few years. For example, in April 2015 it was necessary accept Pay a combined fine of $ 2.5 billion at American and British authorities for his involvement in the Libor scandal, or several banks have been accused of collusion to set interest rates widely used around the world. And men January 2017, Deutsche achieved a $ 7.2 billion settlement with the US Department of Justice for its sale and pooling of toxic mortgage securities. In total, Deutsche Bank has paid more than $ 13 billion in litigation since 2012.
What happens when too big to fail fails?
What will happen if Deutsche Bank does not succeed in its reorganization efforts and can no longer survive alone? If it operated in an economy governed by the true principles of the free market, the bank would cease its activities in the same way that other companies do it all the time. However, it is more than possible that politicians and bureaucrats feel the need to intervene to prevent this.
Agencies such as the German government and the European Central Bank (ECB) can argue that the bankruptcy of the largest commercial banking institution in Europe's economic heartland would have disastrous consequences for the continent and the world because the lack investor confidence would send a great danger. Economic shock wave from Germany to the outside. That's why they can claim to have no choice but to save Deutsche Bank with other people's money. This can be done in different ways, for example by forcing other banks to buy back Deutsche (there have been attempts to merge with Commerzbank AG), by printing more fiduciary money and by giving it to Deutsche or even outright nationalizing it. .
In any case, it will have lasting consequences for the global economy. In addition to the repercussions on other financial institutions, a collapse of Deutsche Bank, as well as its rescue with the money of European citizens, could create a serious downturn in politics. As we saw in the last global financial crisis, disillusioned voters might feel that those in power are sacrificing their savings to help the wealthy bankers of institutions that are too big to bankrupt, thereby fueling the financial crisis. shift towards populism of the extreme right and left parties. , further destabilizing the established order.
A new financial crisis triggered by the collapse of Deutsche Bank may also lead more people to discover cryptocurrency as an alternative to fiat, while the flaws of the old system become obvious to understand. An expensive and unfair rescue of the failing system will also have such an effect, evoking the title of the Times "Chancellor on the point of second bailout of banks" of January 3, 2009, consecrated by Satoshi Nakamoto in the genesis block of Bitcoin for a reason.
What do you think of the current state of Deutsche Bank and the likelihood of its eventual collapse to collapse global financial markets again? Share your thoughts in the comments section below.
Images courtesy of Shutterstock.
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Avi Mizrahi
Avi Mizrahi is an economist and entrepreneur who has been covering Bitcoin as a journalist since 2013. He spoke about the promise of cryptocurrency and blockchain technology at numerous financial conferences around the world, from London to Hong Kong. Kong.
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