Deutsche Bank "Is Horribly Undercapitalized... It's Ridiculous" Says Former Fed President Hoenig

Tyler Durden's picture

Back in May 2012, when we were making fun at the latest iteration of the now fatally discredited European stress tests, we took the first of many jabs at the what may currently be the world's most systematically important, and undercapitalized, bank in the world:

Finally, if anyone is still confused where the pain is headed next, here is a list from Morgan Stanley of all Euro banks with a Core Tier 1 ratio that is so low, that the banks will soon regret not raising more capital in the period of calm that the ECB's LTRO bought them.



Also, one bank is missing from the list above: Deutsche Bank. CT1/TA: 1.68%. Oops.

That's right - Deutsche Bank was so bad that it wasn't even allowed to appear on a screen of Europe's most undercapitalized banks - and we helpfully pointed out its true capital ratio of just under 2%, and an implied leverage of 60x!

Fast forward 13 months to a Reuters interview with former Kansas City Fed president and FOMC dissenter and sole voice of reason at the Federal Reserve, and current FDIC Vice Chairman Tom Hoenig, who confirmed that once again Zero Hedge was just a year ahead of the curve.

A top U.S. banking regulator called Deutsche Bank's capital levels "horrible" and said it is the worst on a list of global banks based on one measurement of leverage ratios. "It's horrible, I mean they're horribly undercapitalized," said Federal Deposit Insurance Corp Vice Chairman Thomas Hoenig in an interview. "They have no margin of error."  Deutsche's leverage ratio stood at 1.63 percent, according to Hoenig's numbers, which are based on European IFRS accounting rules as of the end of 2012.

In other words, the slighest systemic shock in Europe and Deustche Bank gets it. And as Deutsche Bank goes, so does Germany, so does Europe, so does the world.

Immediately confirming Hoenig's (and Zero Hedge's) observations, was Deutsche's prompt repeat that "all is well" and that "these numbers" are not like "those numbers."

"To say that we are undercapitalized is inaccurate because if you look at the Basel framework, we're now one of the best capitalized banks in the world after our capital raise," Deutsche Bank's Chief Financial Officer Stefan Krause told Reuters in an interview, when asked about Hoenig's comments. "To suggest that leverage puts us in a position to be a risk to the system is incorrect," Krause said, calling the gauge a "misleading measure" when used on its own.

Of course, DB's lies are perfectly expected - after all it is a question of fiath. So let's go back to Hoenig who continues to be one of the few voices of reason among the "very serious people":

Hoenig pointed to the gain in Deutsche Bank shares in January on the same day it posted a big quarterly loss, because it had improved its Basel III capital ratios by cutting risk-weighted assets.


"My other example with poor Deutsche Bank is that they lose $2 billion and raise their capital ratio. It's - I don't want to say insane, but it's ridiculous," Hoenig said.


A leverage ratio is a better method to show a firm's ability to absorb sudden losses, Hoenig says, and he has floated a plan to raise the ratio to 10 percent. He said the 3 percent leverage hurdle under Basel was a "pretend number."


Opponents of using such a ratio say that it ignores the risk in a bank's loan books, and can make a bank with only healthy borrowers look equally risky as a bank whose clients are less likely to pay back their loans. It also fails to take into account how easily a bank can sell its assets - so-called liquidity - or whether it is hedged against risk.


Still, equity analysts said that while Deutsche Bank likely will meet regulatory capital requirements, its ratios look weak.

Ugh: terminology, ratios, numbers. It's gives a chap the belly-ache.

But just as we were about a year ahead with our warning of DB's "off the charts" leverage, so we wish to remind readers that some time around June 2014, the topic of Deutsche Bank's $72.8 trillion in derivatives, or about 21 times more than the GDP of Germany, will be the recurring news headline du jour.

Recall from April: "At $72.8 Trillion, Presenting The Bank With The Biggest Derivative Exposure In The World (Hint: Not JPMorgan)" which for those who missed it, we urge rereading:

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nope-1004's picture

Uh, what?  "They have no margin for error"?


WTF?  The entire Western banking system exists solely on lies and Federal cash infusions.  It's not that "there is no room for error", the whole fuckin gambit is one big error.

Call this shit what it is:  A failed growth experiment investing in nefarious "derivatives" (whatever the fuck that really is) at 100x plus leverage.

Now someone's gotta pay, and we all know who that will be.  Until that time the stupid lies and can kicking continues, ad nauseum, because the idiots in charge have no clue how to handle 'broke'.


Middle_Finger_Market's picture

Derivatives = financial instruments ;) yield??

THX 1178's picture

I'm confident the 55 trillion will be paid off and it'll be 1955 again in no time..

Ahmeexnal's picture

for maximum enjoyment, use a DB account to short DB.

NoDebt's picture

OK, so everyone has known this for a long time.  So what's up with a Fed president talking about it OPENLY in the press?  This sniffs all wrong.  Bankers don't do that to other bankers in the press.  I'm thinking maybe its a distraction from something else (yet to come, or just happened and we haven't heard about it yet). 

Love the ridiculously oversized bar graph, too.  That and the Swirlogram are definitely my favorite ZH graphics.

RockyRacoon's picture

This whole thing is a non-problem.  The U. S. subsidiary of DB (or whatever they do here, maybe a backroom accounting office in a pizza parlor) will be eligible for Fed "assistance" in case there is any blow-up.  They've been subsidizing foreign banks for years now.  The brouhaha is in actuality a brouhohum.

Bendromeda Strain's picture

I thought the brohohum was the birth certificate?

Quinvarius's picture

Deflecting eyes away from JPM.

garypaul's picture

funny but don't try it... you'll probably get a 'force majeure' or some BS

Caviar Emptor's picture

Derivatives: Banker chain letter whereby banker sells IOU paper to other bankers who sell to other bankers. At each step a fee is derived and the greater fool gets stuck with the worthless paper. This gives the semblance of doing lots of business and financializing the planet and all the little children

Colonel Klink's picture

Also known as a banker circle jerk.  We all know the public will get the face full.

CashCowEquity's picture

The wonderful world of negotiable instruments (promissory notes, bundled and sold at a discount for cash, transferring liability to a 3rd party)

What could go wrong?



supermaxedout's picture

Yes. And in the end they have all one last adress to forward to. The Fed.

Thats why Hoenig knows about DB numbers so good. Its all insured and hedged in the US, just like it was the case in AIG. And then the Fed has to print. That makes him so angry. He would like to have DB a burden for the ECB but unfortunately the Fed once more has to print for the sour bets, while the ECB can hold the Euro clean.

TeamDepends's picture

We are working 'round the clock in the lab in an attempt to discover a way to turn derivatives into a kind of tofu.

Things that go bump's picture

Thank God! We're saved! At least we won't starve to death if you are successful. There must be enough of those to not only feed the entire planet and save the whales, but provide enough clean energy to power us for the next 100 years.  

emersonreturn's picture

banks are the casino the bankocracy has set up, which flows directly to them, if there happens to be a problem with the flow to them they simply have the puppets elected or appointed to print.  it all works.  don't worry, just keep on using your plastic.

alphamentalist's picture

Basel risk weights are such a crock of crap. Especially in a world where sovereigns are broke. DB will die in flames. While the LEH of Europe will probably be French, DB will be the one that tips the globe over.

Everybodys All American's picture

No one is going to pay off on those derivatives when they go sour. We've seen that play already.

RockyRacoon's picture

Like playing hot potato.  Problem is, the tater is getting bigger and hotter with each toss.  Somebody's gonna fumble and it won't be a pretty sight.

FlipFlop's picture

Derivative exposure is nominal value?

I worked at Deutsche in risk management. They have a pretty advanced system to analyse counterparty risk and also means to to analyse respective derivative exposure. Usual mtm is a small fraction on nominal, which is netted out and depends on ability of various counterparties to honor collateral agreementa.

But yes. Number is horrible. His majesty Hugo Banziger is out.

Middle_Finger_Market's picture

Poom = the sound of implosion. 

malek's picture

Notional becomes real value in case of default.

No more netting out. Does their model also (seriously) consider the implications of such a case?

FlipFlop's picture

No. Only mtm becomes effective and it is collateralized. Nominal values have very little to do with risk.

Nominal is just for calculating mtm exposure. With many big cps, trades go both ways. Therefore they get netted out. So nominal exposure in terms of notional may look big, but in reality risk is quite small.

Surprisingly small as I have seen myself. Numbers would disapponit if presented here.

But it is true, balance sheet is huge and it needs to be refinanced regularly. Especially since deutsche pissed off other banks by refusing any funding more than a week. So they are actually in very short end of funding curve.

I sometimes compared to deutsche funding to someone in a room running out of air, liquidity being the air to stay well for deutsche.

malek's picture

You're dancing around the elephant in the room. If Only mtm becomes effective, then how big does mtm become in case of default (of the underlying and/or the counterparty).

FlipFlop's picture

Mtm is exactly the same as before default. It depends on underlying, not cp. Underlying being fx, irs, equity etc, they are all covered by ISDA and get netted out.
Mtm has nothing to do with a default unless it is cds. But no one accepta cds on itself from issuing bank.


alphamentalist's picture

i think what they are driving at is what happens when big cps go tits up (think AIG without a bailout)? it sets off a daisychain of defaults, collateral calls, and funding issues. eventually a link in that collateral chain will break, which will break another, and another, etc.

i gamed this out a few years ago. a spanish default will smoke a french bank. which, in turn, will smoke a british bank. which, in turn, will smoke a--ahem--german bank. and that is just for cash exposures. when you pile on the derivatives the german default causes pain all the way in the good old US of A.

DB is a ticking bomb.  

Rick64's picture

 There are many different types of derivatives, its misleading to say that their total exposure is all risk. You would need to assesss the types and amounts of each catagory of derivatives. The banks aren't truthful about their risk and downplay their exposure as seen over and over throughout history. Lehman and Bear Stearns collapse was probably an attempt to balance out some of the other bank's derivative positions. IMO

Urban Redneck's picture

Unless the entire derivative book is made up of standardized contracts, a spreadsheet (or database) can't quantify risk properly because the power is hands of the lawyers, not the bean counters.  The gorilla (even though he didn't weigh 800lbs) had lots of spreadsheets to justify Lehman's positions but some his counterparties had heavier weight legal teams.

PontifexMaximus's picture

Exactly, who cares, ultra bullish, esp. because a "former" whatsoever and whosoever said so.....

StychoKiller's picture

They'll NEVER catch me, Bwahahahahaha!

JeremyWS's picture

lol at that bar chart. Gonna be fun.

kliguy38's picture

The problem is that only about 5% of the population understands this number mathematically.... 1.63%.....they've been purposely (and willfully) dumbed down to brain mush. Give them a joystick and put them in front of a drone monitor and tell them they're saving humanity.......



A top U.S. banking regulator called Deutsche Bank's capital levels "horrible" and said it is the worst on a list of global banks based on one measurement of leverage ratios. "It's horrible, I mean they're horribly undercapitalized," said Federal Deposit Insurance Corp Vice Chairman Thomas Hoenig in an interview. "They have no margin of error."  Deutsche's leverage ratio stood at 1.63 percent, according to Hoenig's numbers, which are based on European IFRS accounting rules as of the end of 2012.

James_Cole's picture

The amusing thing about this is Deutsche bank = the European union.

Anyway, the population understands what 60x leverage is I bet, but just what exactly does that mean to any of us really? So, they moved around a bunch of numbers on a computer (aka derivatives) and now they're hopelessly undercapitalized. We are supposed to obsess over this why?

It's like in the olden days when the king went deep into the red, end of the day population can't do much about it except foot the bill.

bank guy in Brussels's picture

Alfred Herrhausen, at the time head of Deutsche Bank, was killed by a car bomb in Frankfurt on 30 November 1989.

A couple of years ago, then Deutsche Bank head Josef Ackermann was asked about a possible 'debt jubilee' of haircuts to wipe out a lot of the bad debt in Europe, and Ackermann responded by 'joking' that if he came out publicly in favour of such debt write-offs, he might suffer the same fate as Herrhausen.

Even for the bankers, it is sometimes a life and death game

Rich and powerful, they yet face the question... Which is the deadlier risk

Too much corruption ... or too much 'truthiness' ?

ParkAveFlasher's picture

Fuck 'em.  If they didn't want pressure, they should have been ice cream men.  I'm sure monstrous payoffs wash their bitter pills down adequately.

kliguy38's picture

There were several options with Herrhausen offered as a solution. He decided his own fate and ultimately had to made an "example" of.......

Colonel Klink's picture

We can only hope that some motivated individuals help the bankster class see the light once again.

RaceToTheBottom's picture

What risk do Banksters have?  Why woul dthey be different than US Banksters who have far less career risk than public utilities, which is exactly what the scumbags should get paid like.

stinkhammer's picture

choom! they are all on drugs!!

DosZap's picture

Ya think?, Benny has already sent them a HUIGE amount of clownbux.(at least 2 yrs ago).