Deutsche Bank Not Alone in Leaking Liquidity Now

Deutsche Bank is leaking liquidity, but is only the currently most dangerous float chamber on the Titanic. Undercapitalization, even insolvency, is one thing: Now, serious liquidity problems are beginning to manifest themselves. Deutsche Bank has, comparatively a lot of liquidity, compared to much thinner RBS, Citibank, Goldman Sachs, for examples; so far only a small run on its $700 billion in deposits has begun. But when counterparties start withdrawing from derivatives deals and/or wholesale time deposits, it both reduces the bank’s liquidity and increases the pressure on remaining liquidity, threatening a stampede.

Zero Hedge reported a JPMorgan Chase analytical note on European banks, issued Sept. 30: They suddenly drew $6.35 billion in U.S. dollars from the ECB (putting up collateral) based on a Federal Reserve currency swap with ECB. Previous end-of-quarter dollar draws by European banks had been in the $500 million-$1 billion range for years.

But Deutsche Wirtschaftsnachrichten, in an article on Sunday, notes that French banks were the neediest in this sudden need for dollar (i.e., derivatives) liquidity.

Morgan: “In our opinion it is not so much funding issues but rather derivatives exposures that are more likely to trouble markets going forward if Deutsche Bank concerns continue. This is especially true if these concerns propagate into a confidence crisis inducing more rapid unwinding of derivative contracts.”

A cautious way of speaking of rope in the house of the about-to-be-hanged derivatives banks of the trans-Atlantic.

The Pam and Russ Martens “Wall Street on Parade” column for Oct. 1 looked at why certain banks’ stocks immediately tanked on Friday along with those of Deutsche Bank, once the news of potential liquidity leaks/sudden withdrawals at Deutsche Bank got out. Not surprisingly, they were the banks with the largest exposure to over-the-counter (OTC, opaque, uncleared) derivatives as a proportion of their total asset books. This was market recognition that the derivatives blowout threatens the liquidity of many large banks and therefore their ability to stay open.

“Why Goldman Sachs, Morgan Stanley and Citigroup shed more equity value than Wall Street banks with much larger balance sheets, like JPMorgan Chase and Bank of America, was foretold on February 12, 2015 when the research agency created under the Dodd-Frank financial reform legislation issued a report with the above troubling graph. The report from the Office of Financial Research (OFR) was titled `Systemic Importance Indicators for 33 U.S. Bank Holding Companies: An Overview of Recent Data.’ The data from the report indicates that Morgan Stanley, Goldman Sachs and Citigroup had the highest OTC derivatives values as a percent of their total exposures.”

Deutsche Bank representatives are coming to the United States this week to negotiate down the bank’s huge MBS-fraud fine; but they have also just been charged in Italy with derivatives crimes. German banks/markets are closed Monday for Reunification Day; watch London, French and Italian banks.