Shares of Deutsche Bank have been getting hammered, and it is spreading to the overall markets.
Stocks were down big on Thursday – including U.S. stocks – as the news for the major German bank darkened. It has been a rough couple of weeks for the bank.
The U.S. “Justice” Department announced a couple of weeks ago that Deutsche Bank would face $14 billion in fines, although it is expected that this will be negotiated down. If there is major financial trouble for the bank that could cause major ripple effects throughout the global economy, then we can expect that this proposed fine will be reduced quite a bit. Otherwise, it will just be another case of the central banks bailing out a company after it pays fines. What’s the point?
I think the more significant news just came out that some hedge funds are reducing their business exposure in terms of trading derivatives related to the bank.
This is a modern-day version of a bank run. The bank runs of today aren’t what they used to be, where you would see a line of customers outside on the street, waiting to hopefully withdraw their deposits.
In today’s world of big banking, there is little threat of such a run. There isn’t enough physical currency to matter that much. The bank runs take place when other businesses withdraw their money. They move their digits from one bank to another bank. They move from a bank that they see as unstable to a bank that is seen as more stable.
This is essentially what happened to Lehman in 2008, which preceded the financial crisis. Of course, this was part of the financial crisis, but people just didn’t know it yet.
If German officials or the European Central Bank is essentially forced to bail out Deutsche Bank, this isn’t going to look good. It is also going to have a major impact on the economy.
And for all we know, maybe the Fed will help in the bailout process too. Since the Fed basically keeps a lot of what it does hidden, we might not even know about it.
We already know that the Italian banks are shaky. Now we are adding a behemoth German bank to the mix. And who knows how many others could fall easily with another financial crisis.
I think the major U.S. banks are more stable at this point. They should be, since the Fed has been bailing them out since 2008. Not only did the Fed buy off their bad debt (mortgage-backed securities), but the Fed has been paying the banks interest on their reserves this whole time. One would hope that the U.S. banks are more solvent today than they were 8 years ago.
Still, we know that the global economy is shaky with all of the easy money and low (sometimes negative) interest rates. There is going to be some kind of a global correction at some point. Perhaps the word correction is too light.
All it takes is one thing to tip the first domino over. In a healthy economy, the story of Deutsche Bank wouldn’t matter as much. But we can be rather certain that this trouble isn’t just confined to Deutsche Bank.