Forex Q&A: What’s Up With Deutsche Bank?

In case you missed the memo, market warriors are freaking out over the potential downfall of Deutsche Bank, one of the biggest banks in the world.

What the heck is going on with Deutsche Bank and why should forex traders pay attention? Here are answers to most common questions about the issue:

What’s all the fuss about Deutsche Bank?

Deutsche Bank is a global banking and financial services company. Though based in Frankfurt, Germany, it has over 100,000 employees and is offering services to at least 70 countries across the globe. As of 2015, it’s recognized as Germany’s largest lender and the fourth largest European bank.

The company’s slow train wreck started gaining traction in April 2015 when the banking giant got involved with the Libor scandal. Long story short, Deutsche Bank employees were charged with manipulating the London Interbank Offered Rate (Libor) over an 11-year period and were fined $2.5B for it. Then, barely out of the Libor scandal, the bank picked up another set of fines after doing business with countries that were under U.S. sanctions between 1999 – 2016.

The silver lining proved elusive in 2016. For starters, Deutsche Bank kicked off the year by announcing a record loss of 6.8B EUR in 2015. Then, in June it was labelled as the “greatest contributor to systemic risk among the world’s biggest lenders” by none other than the IMF. Talk about bad street cred!

The straw that’s promising to break the camel’s back (or at least Deutche Bank’s piggy bank) is the U.S. Justice Department charging the company $14B worth of fines in connection to the bank issuing and underwriting residential mortgage-backed securities between 2005 and 2007. You know, the ones that had a big role in the 2008 financial crisis.

Why are market players worrying?

Market players are worried that we’re seeing the Lehman Brothers crash, this time in 3D. See, this global banking giant might NOT have $14B in its coffers. Remember that Deutsche Bank has its hands on way more cookie jars than Lehman had. But between its fines, the European debt crisis, Brexit scare, and limited market yields, the company only has about $6B set aside for litigation until 2017.

If Deutsche can’t pull together enough moolah to pay its bills, then it might need to dial 112 and ask the German government for a bailout. Heck, it might even declare bankruptcy! Déjà vu, anyone?

In the U.K., a Deutsche Bank bankruptcy would mean the loss of at least 8,000 jobs as well as losing its largest European bank. In the euro zone, the tightening of Deutsche Bank’s purse strings could mean tighter credit conditions, which is the last thing the ailing economy needs. And then there’s the global banking system bit, where the bank’s lenders across continents are at risk of losing their investments in the event of a default.

How have markets reacted?

Deutsche Bank is a big enough fish that its liquidity troubles spooked not only equities traders, but also forex traders into dumping their higher-yielding bets. Shares of the company have dropped by 20% this month and are now only at 8% of its record high value in May 2007.

In the forex scene, the franc, the euro region’s favorite safe-haven, has been raking in pips for the past couple of days. USD/CHF is down by 150 pips (-1.53%) since the start of last week while EUR/CHF is down by 148 pips (-1.33%) and GBP/CHF is down by 250 pips (-1.96%).

Should we jump on the selloff train then?

Not necessarily. For starters, the company is insisting that it could lighten its $14B fine. John Cryan, the company’s CEO since last summer, has also set out a five-year plan that will shed about 15,000 employees and close dozens of overseas offices. He has also sold Abbey Life, a portfolio of British life insurance products, for 1B EUR earlier this week.

Another popular solution is “switch off” its contingent convertible (CoCo) bonds, an instrument that allows the bank to stop paying interest on its bonds and automatically convert said bonds into shares or write down their value should the bank’s capital fall below a certain level. Deutsche Bank hasn’t converted those bonds into shares yet, but its trading volumes have spiked in the month, leading analysts to believe that investors are passing them around like a hot potato.

The last but definitely not the least option is to ask bailout money from the German government. A bailout from the government would mean more anti-Merkel protests in the streets though, so Germany is saying “no thanks” on the invite.

For now Deutsche Bank’s liquidity scare is fueling the end-of-month and end-of quarter vibe, with relatively limited impact on global equities and the major currencies. But if the bank fails to secure enough funds or fails to reassure its investors, then we might see further selloffs in high-yielding investments in the next couple of weeks.


These are some of our favorite trading books, and BabyPips.com receives a small credit from any purchases through the Amazon links above to help support the free content and features of our site…enjoy!

  • sitting duck

    Hi Forex gump,

    Thanks for explanation !! In regards to the effect on the currency markets you said the following. ”In the forex scene, the franc, the euro region’s favorite safe-haven, has been raking in pips for the past couple of days. USD/CHF is down by 150 pips (-1.53%) since the start of last week while EUR/CHF is down by 148 pips (-1.33%) and GBP/CHF is down by 250 pips (-1.96%).”

    Is this the main reason why the CHF is gaining more the last few days opposed to the JPY?
    I am correct in understanding that the european investors are spooked themost by this and flee to the CHF because of geographical reasons? Or is it because the riskier investments where paid with CHF so it’s now more acting like a funding currency instead of a save haven currency?

    Best regards,
    Nik

    • Pip Diddy

      Hello again, Nik! 🙂

      Forex Gump won’t be back until tomorrow or Monday, so I’ll answer your question instead (he may chew me out later, though).

      Regarding the Swissy’s relatively better performance compared to the yen (at the time), it very likely had more to do with the yen being more vulnerable to the bouts of risk appetite versus the Swissy. The yen’s weakness due to risk-on vibes after the OPEC deal is particularly noticeable. I wrote more about this in my latest weekly recap

      http://www.babypips.com/blogs/pipnoculars/forex-weekly-20161001.html

      Anyhow, evidence for the yen’s greater vulnerability can be gleaned from CHF/JPY’s price action. As you can see below, the Swissy completely dominated the yen in the aftermath of the OPEC deal. However, the yen was able to overpower the Swissy when risk aversion returned because of the reports about Deutsche bank, which implies that there was more safe-haven demand for the yen than the Swissy.

      https://uploads.disquscdn.com/images/6af70738c449d439d40858801f123b5bd9586f96dc038b11a270b3f269708b85.png

      Of course, if you’re also a technical analyst, you could just conclude that CHF/JPY didn’t go any higher because the area of interest at 105.00 served as resistance, haha.

      https://uploads.disquscdn.com/images/51f2cfeaedc740c02158824862a80faab0c3fc4cff3f7dae33331f37df84abc6.png

      I hope I was able to answer your question.

  • Pingback: Top Forex Market Movers of the Week (Sept. 26-30, 2016)()

  • Pingback: Weekly Watch: Oct. 3-7, 2016()