Investors’ fear about the financial health of banks globally was palpable today. As they swarm bank after bank, Deutsche Bank was next on their list. They pummeled Deutsche Bank’s stocks and bonds. And the price for protection against a Deutsche Bank’s bond default rose significantly as evidenced in the credit derivatives market.
Nothing new, in particular, came out about Deutsche Bank today. It is not as if market participants only discovered today that Deutsche Bank has a long history of weak risk controls and a list of scandals rivaling Credit Suisse. Every time that there have been scandals about Deutsche Bank’s poor risk management, the stock falls, but eventually investors seem to just shrug their shoulders and move on. Yet, when you look at the stock over a much longer period of time, investors have been showing their discontent with the beleaguered bank for over a decade. Deutsche Bank has never recovered from its high on April 1, 2007. In fact, the stock has fallen almost 95% since then.
Liquidity Risk Is Key
What investors should be monitoring for all banks is how liquid they are, that, is whether they can pay all their obligations when they come due. It is difficult, if not impossible to know, how liquid Deutsche Bank is right now. Banks are only required to disclose financial and risk information on a quarterly basis. By the time, market participants get this information, it is already old.
According to Deutsche Bank’s Basel III Pillar III Risk Disclosures, as of the end of December 2022, Deutsche Bank’s Liquidity Coverage Ratio was 135%, higher than the minimum requirement of 100%. The figure tells us that at that 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. That figure has declined by 7% from 2018 when it was at 145%.
In the U.S., 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 more frequently, so no one outside of Deutsche Bank knows what the LCR is today.
Unlike Silicon Valley Bank, Deutsche Bank has a diversity of funding sources such as retail and corporate deposits from different geographies, short-term and medium-term credit lines, as well as access to wholesale funding. Stable sources of funding are always important, especially right now.
In comparison to its globally systemically important bank (G-SIBs) peers in Europe at the end of 2022, however, Deutsche Bank did not have as high a percent of liquid assets as a percent of total assets. It appears to be less liquid than Barclays, UBS, Société Générale, Credit Suisse, or HSBC
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. Deutsche Bank’s LCR and Net Stable Funding Ratio, a measure of funding stability for a twelve-month period, are also both lower than most European banks in that peer group.
As of today, the global rating agencies had Deutsche Bank in the A – BBB+ range which is considered investment grade, and the outlook is stable or positive. The very nature of processes that have to be abided by ratings analysts means that market participants always move faster to exhibit what they think of any company.
What Deutsche Bank should be doing right now is disclosing granular information about its current liquidity levels, sources of funding, and capital ratios. That certainly would give market participants a good idea of how the bank stands. No one had banking chaos on their bingo card at the end of 2022. So why should we be relying on financial information from then? In this environment, opacity only unnerves market participants even more.
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