The ECB Holds Its Fire (Because Deutsche Bank Is Still Breathing)

The novel coronavirus out of Wuhan, China has completely decimated the way the world is supposed to work. All of the masters of the universe-types in the world’s capitals are basically now making things up on the fly as they have no idea what they are doing, where they are going, and how things will next unfold.

As I told you weeks ago, the novel coronavirus will not only be impacting your access to toilet paper (which is now being regained with the supply chain having somewhat caught up to increased demand), but also now our food supply chain, oil, etc. While this occurs and businesses remain shuttered awaiting word from our leaders that it’s safe to reopen (40 percent of small businesses here will not) and unemployment ticks up everywhere, the supposedly “too big to fail” banks may yet be exposed long enough to risk that they, in fact, fail.

Presently, the American banks that caused so much heartburn in the 2008 financial crisis have done well. They’ve been able to keep themselves going and there doesn’t seem to be any threat from these banks of impending collapse. No, the threat to our stability comes from Europe (as always). Specifically, Germany’s premier banking institution of Deutsche Bank. Here is a firm that, even before the coronavirus pandemic hit was looking bad. When the coronavirus hit, Deutsche Bank suddenly found itself under the ultimate stress test–and it was not looking good.

I reported to you that many of the financial experts that I spoke to assured me that, no matter what, Deutsche Bank was going to survive because if it did not then the Germany economy (and the whole European Union’s economy) is done for…and then the world’s. Deutsche Bank is sitting atop of $1.3 trillion of assets and it is the eighth-largest bank globally. Should it go, it will take the global financial sector with it. It is important to note that Deutsche Bank’s liabilities exceed its assets, which is a huge problem for a bank during an economic downturn.

Still, Deutsche is viewed as “safe” because it has the full backing of the European Central Bank (ECB). The ECB has already stepped into the morass that is the financial crisis traveling alongside the coronavirus pandemic in Europe and has been dumping money into the economy over there. Given Germany’s status as the de facto head of the EU and the fact that the German economy is a key driver of the Eurozone, the ECB must ensure that Deutsche Bank survives (given its large position in the German economy). The ECB will continue printing and pouring money into the Eurozone until firms like Deutsche are stable.

And it already seems to be working–somewhat.

Earlier today, the ECB head, Christine Lagarde, decided to leave the ECB’s policy interest rates unchanged, but she and her team importantly opted to boost liquidity rates to the ailing European banking sector (because Deutsche was thirsty, obviously), and the ECB lowered the interest rate on an existing program of long-term refinancing operations while introducing a second program of long-term loans, according to a recent MarketWatch report. Further, according to William Watts’ reporting at MarketWatch, “he ECB made no changes to its €750 billion pandemic emergency purchase program, or PEPP, that was introduced just last month, or to other asset-buying programs, though ECB President Christine Lagarde said that policy makers were ready to expand and adjust those programs if needed.”

Now, let’s get real, the likely reason that Lagarde “kept her powder dry” in the formulation of some financial analysts is likely because the great elephant in the room–Deutsche Bank–reported relatively decent earnings at the end of the quarter, despite having endured the opening salvo of the coronavirus pandemic.

Here is The Wall Street Journal reporting:

Liquidity reserves at the bank, meanwhile, dropped 8% to €205 billion in the quarter due to heavy client drawdowns on committed credit facilities. The bank said it is still €43 billion above regulatory requirements. The capital cushion it has to absorb future losses is also shrinking and may fall “modestly and temporarily” below the bank’s target. 

Despite all that, first-quarter results were actually strong and better than expected, mostly thanks to an 18% jump in investment-banking revenue. Deutsche Bank’s fixed-income trading business did particularly well, as customers shifted their assets around to better weather the virus storm, resulting in big fees and commissions. 

Overall profit for the three months ended March 31 still fell 67% to €66 million, from €201 million a year ago. But the figure beat analysts’ expectations, thanks to a higher-than-expected revenue of €6.35 billion. Revenue at its corporate bank unit, which caters to clients like midsize German companies, fell 1% from a year ago. It rose 2% at its private and retail banking.

Shares of the bank have risen over 19% since late Sunday, when the bank reported parts of the results. They are still down close to 6% since the beginning of the year.

It’s important to understand that few believe Deutsche Bank will walk away from this ordeal looking better than it did going in. Right now, the bank’s favorable report (for Deutsche standards, at least, and in the standards of the pandemic economy) is likely a response to the free money that the ECB has been pouring into the system ever since the pandemic hit. The longer that the pandemic continues, the longer the shutdowns are in place across Europe, the greater that the supply chains of food, energy, and other natural resources remain restricted, the more likely that the risk to the bank’s health will remain–and likely expand.

I suspect that the longer this crisis abates, the graver the challenge to Deutsche–and the overall financial system–there will be. Remember, the world’s major banks are linked. Unless the biological crisis abates soon, I have doubts that the ECB will be able to buttress Deutsche for very long. Then again, there are hopeful signs that Deutsche is getting by. The real question is: for how long? If the crisis averts within 18 months, we could be staring down a major financial collapse because Deutsche may go and take with it the global financial sector. We’ll see, I suppose.

As The Motley Fool concluded:

The bottom line is that while Deutsche Bank is making progress, it is expecting tough times. Investors buying into Monday’s rally should be prepared for more uncertain times ahead.

And uncertainty here is the real killer. Keep an eye out, though, and don’t believe the rosy estimates at face-value. These financial guys and gals have no clue where this thing ends. They’re just going to keep pumping money into the problem, hoping it resolves. Personally, I think we’re in for one wild ride.

Oh, yeah, and now we have to figure out if we’re going to be facing stagflation at the end of COVID-19 pandemonium or hyperinflation. Better buy some gold!

©2020, The Weichert Report. All Rights Reserved.

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