October 3, 2023

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Globally, the fear of investors regarding the financial health of banks can be clearly seen today. As they swarmed bank after bank, Deutsche Bank was next on their list. He dumped the shares and bonds of Deutsche Bank. And the protection against Deutsche Bank’s bond default increased significantly in price, as seen in the credit derivatives market.

Nothing new came out today about Deutsche Bank. Not that market participants discovered today that Deutsche Bank has a long history of weak risk controls and a rivalry of scandals swiss credit, Every time there are scandals about Deutsche Bank’s poor risk management, the stock falls, but eventually investors seem to shrug their shoulders and move on. Yet, when you look at the stock over the long run, investors have been showing their discontent with the beleaguered bank for more than a decade. Deutsche Bank has never recovered from its April 1, 2007 high. In fact, the stock has fallen nearly 95% since then.

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Liquidity risk is key

What investors should watch for all banks is how liquid they are, that is whether they can pay all their obligations when they come due. It’s difficult, if not impossible, to know how liquid Deutsche Bank is right now. Banks are required to disclose financial and risk related information only on a quarterly basis. By the time market participants receive this information, it is already out of date.

According to Deutsche Bank Basel III Pillar III Risk DisclosureBy the end of December 2022, Deutsche Bank had a liquidity coverage ratio of 135%, well above the minimum requirement of 100%. This figure tells us that at the end of 2022, Deutsche Bank had enough high-quality liquid assets such as cash, money market instruments, and unencumbered investment grade bonds to cover net cash outflows in periods of stress. . This figure has come down by 7% from 2018 when it stood at 145%.

In the US, as a stand-alone entity, Deutsche Bank’s liquidity coverage ratio at the end of December 2022 was 141%, Banks are not required to disclose this ratio very often, so no one outside Deutsche Bank knows what the LCR is today.

Different Silicon Valley BankDeutsche Bank has a diversity of funding sources such as access to retail and corporate deposits, short-term and medium-term credit lines as well as wholesale funding from different geographies. Stable sources of money are always important, especially now.

Compared to its globally systemically important bank (G-SIB) counterparts in Europe, Deutsche Bank did not have a higher liquid assets percentage as a percentage of total assets at the end of 2022. It appears to be less liquid than Barclays, UBS, Societe Generale, Credit Suisse, or HSBC.
, Deutsche Bank’s LCR and net stable funding ratio, a measure of funding stability over a twelve-month period, are both lower than most European banks in that peer group.

To date, global rating agencies had Deutsche Bank in the A-BBB+ category, which is considered investment grade, and the outlook is stable or positive. The nature of the processes followed by ratings analysts means that market participants are always quick to reflect on what they think about any given company.

What Deutsche Bank should be doing now is disclosing detailed information about its current liquidity levels, sources of funds and capital ratios. This will surely give a good idea to the market participants about the position of the bank. At the end of 2022 no one had a banking glitch on their bingo card. Then why should we depend on financial information? In this environment, opacity only makes market participants more nervous.

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