Wednesday 23 August 2017

Deutsche may be the new Lehmans, but at least it will force decisive action

The US acted promptly after the collapse of Lehmans - unlike eurozone politicians, says Colm McCarthy

Troubled: Deutsche Bank has total liabilities of about €1,800bn. It is faced with fines from the US authorities over the mis-selling of mortgage-backed securities, while the current low-interest environment is not helping its profitability eitherpened
Troubled: Deutsche Bank has total liabilities of about €1,800bn. It is faced with fines from the US authorities over the mis-selling of mortgage-backed securities, while the current low-interest environment is not helping its profitability eitherpened
Colm McCarthy

Colm McCarthy

The latest leg of the long-running eurozone banking crisis is playing out - not in Greece or in Italy, but in Germany, home to the headquarters of Deutsche Bank, whose share price has collapsed and which may shortly require support from the authorities. Comparisons are being made with the failure of Lehman Brothers on September 15, 2008, which triggered the freeze-up of world financial markets.

Deutsche has total liabilities of about €1,800bn, making it one of the largest international banks. According to its published balance sheet, Deutsche's assets exceed liabilities by about €60bn, a thin margin of equity capital: for every €100 owed by Deutsche there is (supposedly) just €3.30 that can absorb losses if things go wrong. The stock market delivers a judgement on the value of this €60 billion every day, and the shares are now trading at only one-quarter of this book value.

Deutsche Bank's equity is valued at just €15bn, comparable to the market capitalisation of strong companies like CRH or Ryanair, which have no exposure to these enormous short-term liabilities. The market thinks that Deutsche's true capital is worth less than 1pc of liabilities.

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