Deutsche Bank Has Problems, but Not With Liquidity


The stock exchange in Frankfurt this week as shares in Deutsche Bank dropped.

Daniel Roland/Agence France-Presse — Getty Images

Deutsche Bank has credible liquidity shock absorbers.

The German lender reassured its own employees on Friday, not for the first time, after reports that some hedge funds were withdrawing cash. It clearly has big problems, but a 2008-style liquidity implosion need not be one of them.

Since that crisis, regulators have revamped the way they oversee bank liquidity. The centerpiece of this is the so-called liquidity coverage ratio, which tests the quantity of assets a lender holds to withstand 30 days of investors pulling money in a stress situation partly modeled on the financial crisis. The idea is for liquid reserves to be at least 100 percent of likely outflows. Deutsche Bank’s 124 percent as of June is better than that of big peers like BNP Paribas and Citigroup, and means at the very least that regulators have breathing space if lots of Deutsche Bank’s varied customers decide to withdraw their money.

That’s not a problem at the moment. Some 72 percent of its balance sheet of 992 billion euros was funded by capital providers such as retail depositors, who are likely to be the least flighty, as of the end of June. True, what’s left still exceeds the €223 billion of cash and liquid securities that represent the bank’s first line of defense. But jittery hedge funds provide only €33 billion.

Deutsche Bank’s own relatively robust liquidity cannot stop customers withdrawing money if they start to panic. But the real reason they should not is the arsenal of central bank liquidity support available to it should that be needed. Since 2008, when Lehman Brothers collapsed, and panicked authorities had to take stakes in banks like the Royal Bank of Scotland to neutralize fears over their access to funding, the system has been significantly tooled up.

In return for central bank funding, Deutsche Bank would have to offer collateral it could swap for overnight, one-week, three-month or four-year funding from the European Central Bank. That funding costs next to nothing, and Deutsche had €120 billion of very low-risk German mortgages as of the end of last year. Even if it runs out of eligible collateral, it could access unlimited emergency liquidity assistance from its national central bank – as long as the central bank’s governing council signed off and the bank was deemed solvent.

Of course, if Deutsche Bank were to be in the position of needing hundreds of billions of euros of emergency liquidity assistance, it would become a huge political issue. But the German government would probably have taken steps to restore confidence long before that happened.

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30 September 2016 | 2:06 pm – Source:


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