The global financial system simply cannot afford for Deutsche Bank (DE:DBKGn) to fail, and right now it is literally melting down right in front of our eyes. Indeed, many now believe that the end is near for Deutsche Bank. Here’s why.
On July 7, the beleaguered German giant announced that it is laying off 18,000 employees – roughly one-fifth of its global workforce – and pursuing a vast restructuring plan that most notably includes shutting down its global equities trading business. These moves may delay Deutsche Bank’s inexorable march into oblivion, but not by much and, as Deutsche Bank (DE:DBKGn) collapses, it could take a whole lot of others down with it at the same time.
According to Wall Street On Parade, the bank had US$49 trillion in exposure to derivatives as of the end of last year … putting it in the same league as the U.S. juggernauts JPMorgan Chase (NYSE:JPM), Citigroup (NYSE:C) and Goldman Sachs (NYSE:GS), which logged in at US$48 trillion, US$47 trillion and US$42 trillion, respectively.
The actual credit risk to Deutsche Bank (DE:DBKGn) is much, much lower than the notional value of its derivatives contracts, but we are still talking about an obscene amount of exposure and this is especially true when we consider the state of Deutsche Bank’s balance sheet.
According to Nasdaq.com, as of the end of last year, the bank had total assets of $1.541 trillion and total liabilities of $1.469 trillion. That’s not much in the way of equity…and things have deteriorated rapidly since that time. In fact, it is being reported that $1 trillion a day is being pulled out of the bank at this point.
The global derivatives market played a starring role during the last financial crisis, and it will play a starring role in the next one, too.
The failure of Deutsche Bank (DE:DBKGn) could quickly become a major crisis for the entire global financial system as some of the largest “too big to fail banks” in the United States, such as JPMorgan Chase (NYSE:JPM), Citigroup (NYSE:C), Goldman Sachs (NYSE:GS), Morgan Stanley (NYSE:MS) and Bank of America (NYSE:BAC), as well as other mega banks in Europe, are “heavily interconnected financially” to Deutsche Bank.
In fact, the International Monetary Fund concluded that Deutsche Bank (DE:DBKGn) posed a greater threat to global financial stability than any other bank as a result of these interconnections (and that was when its market capitalization was tens of billions of dollars larger than it is today).
Conclusion
It appears that the next “Lehman Brothers moment” may be playing out right in front of our eyes. Now more than ever, keep a close eye on Deutsche Bank (DE:DBKGn), because it appears that they could be the first really big domino to fall.
The above excerpts from the original article by Michael Snyder have been edited and abridged for the sake of clarity and brevity.