Deutsche Bank’s chief executive sought to reassure his staff yesterday that Germany’s largest lender remained robust after fears over its stability sent tremors through global financial markets.
Deutsche, which employs around 100,000 people, has been engulfed by crisis after being handed a demand for up to $14bn earlier in September from the US authorities for misselling mortgage-backed securities.
The bank is fighting the fine but would have to turn to investors for more money if it is imposed in full.
The German government this week denied a newspaper report that it was working on a rescue plan for the bank.
Chief Executive John Cryan’s letter, seen by Reuters, addressed reports of the departure of a few hedge fund clients, hitting out at “certain forces” that wanted to weaken trust in the bank.
Deutsche shares were volatile again, initially falling around 8% in Frankfurt to a record low below €10 before bouncing back to €10.96 by late afternoon.
They have lost more than half their value this year and the bank’s market capitalisation has fallen to €15bn ($16.8bn).
Trading volume in Deutsche’s debt has more than doubled this week and soared 15-fold in a month as investors rush to offload the troubled German lender’s bonds.
People familiar with the matter had earlier told Reuters that one large hedge fund in Asia had pulled out collateral from Deutsche amounting to $50mn in the last two days, while other sources said this had happened elsewhere, albeit on a small scale.
On Friday, Cryan sought to put the moves into perspective.
“We should look at the complete picture,” Cryan said in the letter to the bank’s workers, adding that Deutsche had more than 20mn customers and reserves of more than €215bn.
“We are and remain a strong Deutsche Bank.” Deutsche is much smaller than Wall Street rivals such as JPMorgan and Citigroup.
But it has significant trading relationships with all of the world’s largest finance houses and the International Monetary Fund this year identified it as a bigger potential risk to the wider financial system than any other global bank.
Worries over a major bank in Europe’s largest economy and talk of a government rescue have stirred painful memories of the 2007-2009 financial crisis.
Banks are now required to have plans showing how they would respond to a major market shock, with improved controls on liquidity.
Regulators also draw up plans on how lenders could be smoothly closed down in the event of impending failure.
Italy, whose banks have their own troubles caused by soured loans, called for swift action on Deutsche.
“Just like the problem of bad bank loans must be solved within a reasonable time frame, so it should be for Deutsche Bank’s problems,” Economy Minister Pier Carlo Padoan told Italian daily La Stampa.
With Germany facing elections next year, there is little political appetite for helping a group disliked by many Germans because of its pursuit of investment banking abroad that resulted in billions of euros of penalties for wrongdoing.
However, the German government faces a delicate balancing act with a deeper crisis for Deutsche Bank potentially spilling over into Europe’s largest economy.
The problems of Deutsche, once Germany’s flagship on Wall Street, are awkward for Berlin, which has berated many euro zone peers for economic mismanagement and pushed for countries such as Ireland and Greece to cope with their banking problems alone.
Dutch finance minister Jeroen Dijsselbloem said yesterday that Deutsche Bank must survive “on its own”, without assistance from the German state.
German banks have found their profits squeezed by the European Central Bank’s ultra-low interest rates and Commerzbank, the country’s second largest lender, is cutting almost 10,000 jobs. The pressure on Deutsche was evident in markets.
Deutsche’s ‘CoCo’ bonds slumped to a record low yesterday, with the 6% coupon CoCo trading as low as 69.55 cents on the euro — down from 83 cents earlier in September.
Contingent convertible bonds, known as CoCos, are converted into equity when a bank’s capital level falls below a certain threshold.
Some hedge funds stand to benefit from Deutsche’s share price decline, having taken “short positions” effectively a bet on the price falling further.
“It doesn’t matter whether the bank is in real trouble or not, as long as people think it is, then it is bad news,” said Rabobank markets strategist Lyn Graham-Taylor.
Austrian finance minister Hans Joerg Schelling this week sought to play down fears over Deutsche, saying the case could not be compared with Lehman Brothers, the US
investment bank whose collapse in 2008 sent shock waves around the world.
Alberto Gallo, a partner and portfolio manager with hedge fund Algebris Investments, shared that view.
“Deutsche Bank is faced with a business model profitability issue, not a solvency issue,” he said.