Deutsche Banks’s London Operations Can Blow Out the Entire System

Italian Prime Minister Matteo Renzi told reporters during a recent joint press conference with Swedish Prime Minister Stefan Lofven that, no matter how serious Italy’s banking problems are, they are dwarfed, by comparison, with Deutsche Bank.  “If this non-performing loan problem is worth one, the question of derivatives at other banks, at big banks, is worth one hundred.”  Renzi’s remarks were described by Alex Christoforou as a not-so-subtle pressure move by Renzi against German Chancellor Angela Merkel and German Finance Minister Wolfgang Schäuble, over their refusal to bend the rules to allow Italy to bail out Banca Monte dei Paschi di Siena without invoking the EU’s bail-in policy, in force since Jan. 1.  The “derivatives at big banks” referenced by Renzi was directed at Deutsche Bank, which has been widely described in recent weeks as the most volatile bank in the entire trans-Atlantic system, with a derivatives exposure of $75 trillion, 20 times bigger than the GDP of Germany, and a 40:1 leverage rate, far beyond the Lehman Brothers case in 2008.

Zero Hedge on Saturday further detailed the Deutsche Bank disaster under the headline “Charting the Epic Collapse of the World’s Most Systemically Dangerous Bank.”  Tyler Durden wrote “If the deaths of Lehman Brothers and Bear Stearns were quick and painless, the coming demise of Deutsche Bank has been long, drawn out, and painful.”  But according to a time-line of recent events, Deutsche Bank is now on the edge of blowout, with massive implications for the entire London-Wall Street centered system of trans-Atlantic finance.  On June 2, two former Deutsche Bank employees were charged in the ongoing U.S. Justice Department probe of the Libor rigging scandal.  A total of 29 Deutsche Bank officials are still under investigation in that probe.  Following the Brexit vote, Deutsche Bank, the largest European bank operation in London, has been further reeling.  On June 29, the IMF issued a warning that “DB appears to be the most important net contributor to systematic risks.”  The next day, the Fed announced that DB had failed the stress test as the result of “poor risk management and financial planning.”

Deutsche Bank shares are now selling at 8% of the peak price in May 2007, with 9,000 employees having been recently laid off, and the bank shutting down operations in 10 countries.  However, the real problem is Deutsche Bank’s enormous derivatives exposure, the largest of any bank in the world.  Zero Hedge warned:  “Now that Deutsche Bank’s dirty laundry has been exposed for all to see, Renzi’s gambit is clear: If Merkel does not relent on bailing out Italian banks, the collapse of Italian banks will assure the failure of Deutsche Bank in kind.  And since in a fallout scenario of that magnitude DB’s derivatives would not net out, there will be no change to save the German banking giant, bail out, in or sideways.”