Deutsche Bank simulates a crisis scenario

Deutsche Bank simulates a crisis scenario

Deutsche Bank simulates a crisis scenario, according to a report from Germany’s Süddeutsche Zeitung newspaper dated April 16.

It was only just in 2016 that Deutsche Bank, Europes’s largest bank, was described by an International Monetary Fund report as the bank “with the most important net contributor to systemic risks”. Fast forward a few years and the latest news coming from the world’s most systemic risk bank doesn’t fill investors with much confidence as Deutsche Bank simulates a “crisis scenario”.

But should invest/traders think it is normal (business as usual in the post-2008 financial crisis world) that Deutsche Bank simulates a crisis scenario on the request of Europe’s central bank, the ECB?

Apparently, Eurozone economic growth has never been so good in a decade…but growth has now peaked, according to date from Eurostat. See EU’s economic growth rate over 10 years.

So Deutsche Bank simulates a crisis scenario on the request of the ECB and that is somewhat perplexing, bearing in mind the relatively rosy economic data coming out of Eurostat. Moreover, the earning dashboard for S&P 500 (a good yardstick for European earnings too) looks reasonable. Q1 2018 earnings have come in slightly above expectations and if 17.3% is the actual growth rate for the quarter then it will mark the highest earnings growth since Q1 2011 (19.5%).

However, investors/traders need to keep in mind the earnings is a backward indicator.

Nevertheless, Deutsche Bank simulates a crisis scenario what’s more it is made public by Germany’s Süddeutsche Zeitung newspaper. The Central Bank role is to maintain confidence in the financial. So central banker will tend to underplay risks. They will tend to be more optimistic than pessimistic (in public). Don’t expect a “head for the hills” clue from a central banker that is not what they are hired to do. So when the central bank publicly expresses concern there is good cause for investors to head for the exit.

So what should investors read into this latest Deutsche Bank simulates a crisis scenario?

A flight attendant goes through crash landing procedures on the tarmac before the flight but that doesn’t mean the plane is about to crash. Equally, the ECB instruction to DB could be part of a financial stability stress test procedure.

But equally Deutsche Bank simulates a crisis scenario should not be ignored by traders/investors.

Shine the spotlight on Europe’s largest bank and it reveals a $46 trillion derivatives exposure. Furthermore, most of those exposures are loss-making bets in the energy market.

If DB (Europe’s largest bank) goes down the drain who will honor its derivative losses (which could amount to $ trillions). Put another way the other banks on the other side (winning side) of DB trades could be left holding worthless paper.

DB is too big to fail but equally, it’s too big to save, even for (cash-strapped) governments and that is why on ECB instructions Deutsche Bank simulates a crisis scenario.

Furthermore, Deutsche Bank simulates a crisis scenario at a time when the bank has been circling the drain for some time and just when things couldn’t get worse its captain CEO John Cryan, has abandon ship (which is always a worrying sign) after serving just three years at the ailing bank.

So Deutsche Bank simulates a “crisis scenario”, meanwhile Italian banks are struggling with bad loans. With trade wars (internal link) and deteriorating geopolitical situation in play Deutsche Bank simulates a crisis scenario but maybe the entire European banking should simulate a “crisis scenario”.

The sell-off European banking sector stocks and widening credit spread could continue.