This Is How Much Liquidity Deutsche Bank Has At This Moment, And What Happens Next

Tyler Durden's picture

It is not solvency, or the lack of capital - a vague, synthetic, and usually quite arbitrary concept, determined by regulators - that kills a bank; it is - as Dick Fuld will tell anyone who bothers to listen - the loss of (access to) liquidity: cold, hard, fungible (something Jon Corzine knew all too well when he commingled and was caught) cash, that pushes a bank into its grave, usually quite rapidly: recall that it took Lehman just a few days for its stock to plunge from the high double digits to zero.

It is also liquidity, or rather concerns about it, that sent Deutsche Bank stock crashing to new all time lows earlier today: after all, the investing world already knew for nearly two weeks that its capitalization is insufficient. As we reported earlier this week, it was a report by Citigroup, among many other, that found how badly undercapitalized the German lender is, noting that DB's "leverage ratio, at 3.4%, looks even worse relative to the 4.5% company target by 2018" and calculated that while he only models €2.9bn in litigation charges over 2H16-2017 - far less than the $14 billion settlement figure proposed by the DOJ - and includes a successful disposal of a 70% stake in Postbank at end-2017 for 0.4x book he still only reaches a CET 1 ratio of 11.6% by end-2018, meaning the bank would have a Tier 1 capital €3bn shortfall to the company target of 12.5%, and a leverage ratio of 3.9%, resulting in an €8bn shortfall to the target of 4.5%.

When Citi's note exposing DB's undercapitalization came out, it had precisely zero impact on the price of DB stock. Why? Because as we said above, capitalization - and solvency - tends to be a largely worthless, pro-forma concept. However, when Bloomberg reported today that select funds have withdrawn “some excess cash and positions held at the lender” the stock immediately plunged: the reason is that this had everything to do with not only DB's suddenly crashing liquidity, but the pernicious feedback loop, where once a source of liquidity leaves, the departure tends to spook other such sources, leading to an outward bound liquidity cascade. Again: just ask Lehman (and AIG) for the details.

Which then brings us to the $64 trillion (roughly the same amount as DB's gross notional derivative exposure) question: since DB is suddenly experiencing a sharp "liquidity event", how much liquidity does Deutsche Bank have access to as of this moment, to offset this event? The answer would allow us to calculate how long DB may have in a worst case scenario if we knew the rate of liquidity outflow.

For the answer, we go to a just released note by Goldman Sachs, which admits that it is now facing "crisis" questions from clients, among which “can a large European bank face a liquidity event” to wit"

Deutsche Bank stands at the center of the European financial system - it is a major counterpart of all relevant European banks, and broader. Recent reports of potential litigation hits have compounded capital concerns, and raised the overall level of market anxiety. “Crisis” questions are being asked: “is there risk of a financial crisis re-run” and “can a large European bank face a liquidity event”?

So what is the answer: how much liquidity does Deutsche Bank have access to? The answer is two fold, with the first part focusing on central bank, in this case ECB, backstops in both $ and €. 

Goldman starts with an overview of said back-stops, summarized below. These facilities are available to all Eurozone banks (and, naturally, also to Deutsche Bank) – they are generous in terms of volume (full allotment), price (fixed rate at 0%) and tenure (from short term, all the way to 4-years). These ECB facilities are key to ensuring the bank's long-term funding stability, in Goldman's view, and were put in place following the funding market fallout in 2007, in order to contain the effects from the Lehman crisis. They were further bolstered to contain the Eurozone sovereign crisis in 2011-12. All of the liquidity provisions remain in place, and broadly, they fall into the following two categories:

  1. Regular market operations: 1-week Main Refinancing Operations or “MRO” (priced @0%), and 3-month Long Term Refinancing Operations or “LTRO” (@0%);
  2. Non-standard measures, which split between € funding facilities with 4-year Targeted LTROs (@0%, with the option to fall to -0.4% if lending targets are met) and the emergency liquidity assistance to solvent financial institutions and a US$ funding facility: 1-week US$ MRO (@0.86%).

Stepping away from the ECB - because if Deutsche is forced to come crawling to Draghi and beg for central bank liquidity assistance to continue as a going concern, the outcome may be just as dire (recall the stigma associated with US banks using the Fed's Discount Window) especially since  unlike Lehman, DB has nearly €600 billion in deposits which are susceptible to a retail depositor run - what about Deutsche Bank's own liquidity position? It is this which appears to be concerning the market most, because as Goldman writes, following the Bloomberg report that hedge fund clients have pulled excess cash, the market has reacted aggressively (ADR down 6.7%), indicating concerns have moved from DBK’s equity to question the resilience of the banks’ funding position.

Below, Goldman provides an overview of DBK’s liquidity position, noting that its last reported liquidity reserve stood at €223 bn or ~20% of its total assets. DBK’s high quality liquid assets (or HQLA) balance stood at €196 bn or 16% of its total assets; its liquidity coverage ratio (“LCR”) stood at 124%. DBK’s LCR is above that of many largest European banks (BNP 112%), as well as US banks (Citigroup
121%).

Here is the breakdown:

  • Liquidity reserve: €223 bn, or ~20% of total assets. In total, DBK’s liquidity reserve stood at €223 bn, representing ~20% of the banks total net assets (where assets are US GAAP equivalent). The 2Q16 level of liquidity reserve compares to €65 bn in 2007, showing that DBK has grown its liquidity reserve by 3.4x from pre-crisis levels.
  • Cash: €125 bn. The liquidity reserve breaks down between €125 bn of cash and cash equivalents, and €98 bn of securities, available for use at the central banks. As highlighted in Exhibit 2, the € portion of the securities can be used to obtain liquidity of varied duration (between O/N to 4-years) at a cost of 0% (and as low as -40 bp, if lending benchmarks are met).
  • LCR: 124%. DBK’s Liquidity Coverage ratio stood at 124%, which is ~1.5x the current regulatory minimum, and a cut above the 2019 fully-loaded requirement of 100%. This compares favorably to, say, Citigroup (121%), BNP (112%). Other US banks (e.g. JPM, BofA) do not disclose their LCR other than to say that they are “compliant”, suggesting LCR is at or above 100%.

Where does this liquidity come from? Exhibit 3 above examines DBK’s funding composition – this is relevant in the context of media reports highlighting a decline in prime brokerage balances (Bloomberg, September 29). These include:

  • Lowest volatility funding: 57%. Lowest volatility sources of funding - retail deposits, transaction banking balances (corporate and institutional deposits from corporate banking relationships) and equity account for 57% of total funding. Over half of the groups’ funding therefore, stems from this source.
  • Low volatility funds: 15%. Debt securities in issue account for 14% of total funding. Together with the previous category, “lowest” and “low” volatility funding accounts for 72% of total funding.
  • Other customers – this includes prime brokerage cash balance – 7%. The total amount of “other customer” funds, which includes: fiduciary, self-funding structures (e.g. X-markets), margin/Prime Brokerage cash balances (shown on a net basis (see DBK 2015 annual report, p178). Importantly, this represents ~7% of total funding, and is 3.1x covered with the liquidity reserve.
  • Other parts of funding – unsecured wholesale, secured funding – account for the residual.

In other words, all else equal, even in a worst case Prime Brokerage situation, one where all €71 billion in "other customer" funds flee, DB should still have about €152 billion of the €223 billion in liquidity reserve as of June 30, once again assuming there have been no other changes. Stated simply, if the hedge fund outflow accelerates and depletes all the liquidity at the Prime Brokerage division, DB would part with about a third (just over  €70 billion) of its €220 billion liquidity reserve.

Some other observations: even if one assumes the full loss of PB balances, DB would still have a Liquidity coverage ratio (“LCR”) of 124%.  The LCR is equivalent to HQLA/net stressed outflows over 30 day period. This ratio shows the banks’ ability to meet stressed funding conditions over a period of 1 month. For Deutsche bank, the LCR stood at 124% with the ratio composed of:

  1. High Quality Liquid Assets (HQLAs) of €196 bn. These include Level 1 assets (the most liquid securities which include cash and equivalents, bonds issued or guaranteed by a government and certain covered bonds); Level 2A assets, which are subject to a haircut (third country government bonds, bonds issued by public entities, EU covered bonds, non-EU covered bonds, corporate bonds) and Level 2B assets (high quality securitisations, corporate bonds, other high quality covered bonds).
  2. The net stressed outflows: €158 bn as of 2Q16 (YE15 €161 bn). DBK’s net stressed outflows amounted to €161 bn at year-end 2015, and include an assumption of loss of prime brokerage deposits. As per Commission Delegated Regulation (EU) 2015/61 “Deposits arising out of a correspondent banking relationship or from the provision of prime brokerage services shall not be treated as an operational deposit and shall receive a 100 % outflow rate.”
  3. The minimum level is 100% (effective 2018) and is phased in gradually from 2015; the 2016 requirement is 70%.

Of course, the "stressed outflow over a 30 day period" is an assumption, one which can accelerate rapidly, especially if the stock price of DB continues to fall crushing what is any bank's most critical asset: counterparty confidence, either from retail investors or institutional peers.

Still, what the above calculations reveals is that the Bloomberg report suggest that while substantial, the Prime Brokerage outflow would not be, on its own, deadly.  But therein lies the rub: since any bank's collapse is a procyclical event in which liquidity flees in all directions, with a speed that is usually inversely proportional to the stock price, the lower the price of DB goes (and the higher its CDS), the more dire its liquidity situation.

However, as noted above, the biggest threat to DB is not so much its hedge fund client base, whose damage potential is limited, but the depositor base. Again: while Lehman failed, it did so as a result of its corporate counterparties suffocating the bank by rapidly pulling out their liquidity lines. Lehman, however, was lucky in that it didn't have retail depositors: it death would have likely come far faster as the capital panic was not limited to institutions but also included a retail depositor bank run.

This is where Deutsche Bank is very different from Lehman, and far riskier, because if the institutional panic spreads to the depositor base, which as the table below shows amounts to some €566 billion in total, and €307 billion in retail deposits...

 

... then all bets are off.

Which is why it is so critical for Angela Merkel to halt the plunging stock price, an indicator DB's retail clients, simplistically (and not erroneously) now equate with the bank's viability, and the lower the price drops, the faster they will pull their deposits, the quicker DB's liquidity hits zero, the faster the self-fulfilling prophecy of Deutsche Bank's death is confirmed.

Which ultimately means that DB really has four options: raise capital (sell equity, convert CoCos, which may results in an even bigger drop in the stock price due to dilution or concerns the liquidity raise may not be sufficient), approach the ECB for a liquidity bridge (this may also backfire as counterparties scramble to flee a central bank-backstopped institution), appeal for a state bailout (Merkel has so far said "Nein") or implement a bail-in, eliminating billions in unsecured claims (and deposits) and leading to a full-blown systemic bank run as depositors everywhere rush to withdraw their savings, leading to a collapse of the fractional reserve banking mode (in which there is only 10 cents in physical deliverable cash for every dollar in depositor claims). 

Which of the four choices Deutsche Bank will pick should become clear in the coming days. Until it does, it will keep the market on edge and quite volatile, because as Jeff Gundlach explained today, a "do nothing" scenario is no longer an option for CEO John Cryan as the market will keep pushing the price of DB lower until it either fails, or is bailed out.

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oops's picture

The SAUDIS are withdrawing following Congress's stupid Sept 11 Bill. America's banks are next.
https://goo.gl/oehIgG

lance-a-lot's picture
lance-a-lot (not verified) oops Sep 29, 2016 11:06 PM

BLOWBACK!

Manthong's picture

All Merkel (Hillary’s stated most admired leader) has to do is kick out all of the recent migrants and use the saved Euro-fiat  to re-cap the Douche bank to avoid a bail-in.

…but that would be like Obama kicking of all of his illegal aliens and migrants, killng the ACA and putting the Fed-fiat it back to restore Medicare and other programs for the Americans who have funded it all these years.  

TheReplacement's picture

When the big picture mechanics come into focus and you can see the treads of the global domination machine rolling over competing banks, countries, and continents it is quite overwhelming to consider what we face.  The machine builds them up and takes them down.  The hand in glove work between intel, mic, banking, media, and of course, smuggling operations is a thing of beauty really.  It kills a lot of people but it sure is good at what it does. 

Can Russia stand up to them?  I hope so but really doubt they can pull it off short of nukes.

WWCD

What will China do?  Will China side with Russia against NATO and the Red Shields?  Only if it benefits China's elite.  I could just as easily see China taking the deal where they get the eastern half of Russia just for turning north and taking it.  I doubt Russia could withstand the combined power of ZATO and China without, again, nukes.

If China and Russia do stick together then what deal have they made?  Who would really want Europe but Russia is closest and always has to be the one to deal with it.  Africa is for China.  The middle east is nominally for Russia but what benefit is there once the petrodollar is gone?  South America seems to be in contention but leaning China.  North America, split?

TheReplacement's picture

We are witnessing consolidation.  It is our history and, to an extent, our future.  Personally, a big part of me believes we have been here and done this in various different formulations that always end up destroying themselves and nearly destroying the planet.  Moving on.  We've grown from small family units to tribes to nations to empires to grand coalitions of the willing and treaty alliances between continents.  There are really only three main players left and a lot of little bits of meat running around waiting to get eaten.  Will we see the heavyweights content to gobble up the also rans or any two of them be able to agree and cooperate to take the third out of the game?  Of course I am sure there is something in game theory or some other theory that says each of the two should be angling to not only take the third down but to do so in a way that will put the other partner at a disadvantage that can be capitalized upon.  So looking at it this way:

China comes out ahead is a dire outcome.

ZATO comes out ahead is the direst outcome.

Russia comes out ahead is a question mark.

Similarily, Gary Johnson, Hillary Clinton, and Trump are running for President.  The order is no mistake.  Dammit, I hate have to bet everything on the only option that isn't absolutely guaranteed to lose.

TheReplacement's picture

I apologize for the drink speak.  Somedays that's all we have.

Automatic Choke's picture

is this how Brexit will make the Brit's regret their hasty exit?

Squid-puppets a-go-go's picture

if the retail depositors render DB at greater peril than a Lehman model, then the elite will be loathe at any mention of Bail-ins.

Scuse me,

BAIL IN! BAIL IN! BAIL IN! BAIL IN! BAIL IN! BAIL IN! BAIL IN! BAIL IN! BAIL IN! BAIL IN! BAIL IN! BAIL IN! 

otschelnik's picture

If Angie can bail-in Douche Bank, why can't Matteo bail-in Monti Pastes di Sieskis?

samjam7's picture

SNB will come to the rescue and buy the shares back up into 'confidence zone' Don't you worry about that, if all it takes is to stabilize share prices nothing easier than that for the powers that be.

Tarzan's picture

The rumblings of world war,

Banker's war, for all to see,

yet so few dare imagine.

 

To the astonishment of almost everyone in the room, Angela Merkel began to cry.

 

Das ist nicht fair.” That is not fair, the German chancellor said angrily, tears welling in her eyes. “Ich bringe mich nicht selbst um.” I am not going to commit suicide.

 

For those who witnessed the breakdown in a small conference room in the French seaside resort of Cannes, it was shocking enough to watch Europe’s most powerful and emotionally controlled leader brought to tears.

 

But the scene was even more remarkable, those present said, for the two objects of her ire: the man sitting next to her, French President Nicolas Sarkozy, and the other across the table, US President Barack Obama.

 

...

 

The US president asked whether Ms Merkel could work it out with the Bundesbank by Monday. Mr Sarkozy suggested finance ministers meet to agree the details before the summit ended the next day. Perhaps something vague could be mentioned in the summit’s communiqué, Mr Obama suggested. No, said Mr Sarkozy, but we could meet again in the morning.

 

It was as if the two men had not heard her. She made the point again: “I’m not going to take such a big risk without getting anything from Italy. I’m not going to commit suicide.”

WordSmith2013's picture

Just like 2008 it's all a perfectly controlled demolition.

 

 

http://themillenniumreport.com/2016/09/the-controlled-demolition-of-deut...

 

The Controlled Demolition of Deutsche Bank And Financial Collapse Of Europe
VinceFostersGhost's picture

 

 

We paid the Iranians off......why not DB?

Squid-puppets a-go-go's picture

because the moment ANY national govt of europe bails in ANYTHING, it means the death of the Euro , because they are all supposed to be deferring the the EU for these actions, and if one breaks away they all break away. Because they cant send their taxpayer credits to a EU that has members spending profligately in breach of the agreed 'austerity' and restraint.

BennyBoy's picture

 

"...there is only 10 cents in physical deliverable cash for every dollar in depositor claims"

HAHAHAHAHAHAHAHAHA! I bet they have less than 3 cents.

Time for another secret FED liquidity bridge.

Withdrawn Sanction's picture

"I bet they have less than 3 cents."

Maybe not that low, but certainly lower than 10cents.  The US system as a whole has roughly 6 to 7 cents of ready cash backing its deposits.  

Part of the reason for this is only the demand deposit liabilities are s/t reserve in the US.  Time and other deposits carry no reserve requirement at all.  Secondly, the US uses a 3-tier rule to calculate reserves that benefits the smaller banks.  They get to "exempt" a part of demand deposits from any reserve, and then a second tier (tranche) gets reserved at 3%, and then the remainder is reserved at 10% (a rule only a lawyer could love).  

So even w/required reserves, we're woefully short of even 10% coverage (and the US is one of the few countries to still employ formal reserve requirements as a matter of law, rather than prudential bank practice).  

fattail's picture

Retail depositors are historically very loyal and very sticky.  I assume they have some kind of deposit insurance in Germany, and if so that will provide a huge buffer and confidence to the non- hedgey crowd.  Lehman had no retail deposits and no buffer so it was dependent on all the same group of vultures to fund it.  If DB goes down why would there be any confidence in the spanish or italian banking system?  It would all come down, especally with the derivatives.  The ECB has so many rules they can change, (i.e. increase the deposit insurance, guaranty MMDA, straight up new issuance to selected oligarchs or sovereigns), that will kick this can down the road for some time.   

Which is why DB will survive.  At least for awhile longer.

Sirius Wonderblast's picture

Are you seriously suggesting you would like to be part of that clusterfuck? Brexit was and is the only sane route.

 

RockySpears's picture

 

  I keep re reading this comment, can't work out if it is sarcasm or not.

This is ZH, so I will assume /s

 

  DB going down will take so much with it that even had we Brexited years ago we will still be trashed by it,

 

RS

DavidC's picture

Not this Brit.

The plural doesn't normally have an apostrophe, it's Brits, not Brit's (which is the singular possessive).

DavidC

HedgeJunkie's picture

Tomorrow's payday.  Every bit of excess cash will be transferred to the Bank of Certa.  In rapid time that cash will be converted into hard currency.

Food check

Water check

Fuel check

Power check

Arms/Ammo check

Shitpot of Silver check

A lot of other preps  check

I'm good, I'll sit and watch this with the the thirty pounds of pistacios we got last week end (I don't do popcorn).

I find the timing too good to be true.  It's Friday, we've got a collapsing national bank right in front of a long holiday weekend, we're on the brink of WW3, are about to punge into the Greater Depression (effectively recognized, again, in October) and we're about to witness the Grand Reset of a former World Reserve Currency. 

This has been orchestrated beyond belief.

RockySpears's picture

 

  30lb ?  How will they last?  5 years?  You must expecting a real slow crash,

 

RS

HedgeJunkie's picture

I live in the Mohave Desert.  I can put this bag on the shelf and, fighting the mice off, have pistachios for the next year.  They dry nicely.

Tarzan's picture

I don't know how you do it.  I thought Florida's muggy heat was the worst, until one day when driving from Flagstaff to Las Vegas we took a wrong turn and ended up driving through a corner of the Mojave Desert.  It was late Sept, 130 deg with a stiff 20 mph wind.  It was Unbelievable, like walking around with a hair dryer, set on high, in your face all day!

I'll take the swamps of Florida, with the bugs and snakes, any day over that!

SumTing Wong's picture

My family could take down 30 lbs of those things in one month. Probably in one week. Good choice over popcorn.

mvsjcl's picture

Work on that water supply, HJ.

Tarzan's picture

I couldn't agree more, so contrived...

 

Increasingly I'm convinced, "they're" screwing it up on purpose, not blooming idiots, hoping for a bloody purge, a reset, to hide their plunder, and are amazed, laughing out loud at us, saying rebel already!

While we take take another bite of our hot dog, at the game, BITCHEZ!

joe6px's picture

Any nation must mobilise its people.  That holds for China, Russia, and the US.  In a catastrophic situation the US still has a global reach, while both China and Russia have minimal expeditionary ability.  I'm not all rah-rah US, but the actual sea and air lift capability of an invading army vs. the indigenous ability to fight is what will eventually need to happen.  To take real resources requires physical presence.  Without nukes it is a zero sum (or worse) for an invasion of the US.  Doom porn all you want about breaking up N. America from the outside.  The Balkanization of the US happens from the inside.  Even then the ability to move an overwhelming force into the US is not possible by either RU or China without masking the initial stages as "humanitarian relief".  Then there is terrain.  

Bottom line- prepare yourself and your community.  Disregard D.C. as much as possible.  Make local everything and prepare for all-commers.

wally_12's picture

Three hypothesis and one outcome. Can someone do a Bayes probability analysis to give us an answer?

American Psycho's picture

Gap up or Gap down tomorrow morning?

weburke's picture

all will be driven to imf sdr.  damn them. 

Squid-puppets a-go-go's picture

and if SDRs arent backed by anything substantive, its just another can-kick

new game's picture

liquidity my ass. print da shit and trade paper -iou's backed by future growth/taxation of serfs. liquidity problems  solved. what part of TBTF does it take to understand? just another doom porn woody event...

beijing expat's picture

China has been around 5000 years. They never attack anyone.

Why invade Siberia? That border has been stable for 400 years. The Russians are always happy to sell.

The problem with the Russians is that they expect to be paid. That's why we must destroy them.

China knows that after Russia it's their turn.

Mempo of Twilight's picture

"The never attack anyone."

Are you saying that all the land that they have right now belonged to them the moment China was first created all those years ago? Or are you suggesting that the tibetans and others all willingly gave up their land and asked to be part of China?

 

TripleX's picture

China never attacks... whatabout Tibet? 

EddieLomax's picture

As a Euopean I can say I don't want any overlords here, certainly not China or Russia.  The US would be the ideal ally since countries like someone strong, but distant enough to not meddle, well the meddling has gotten worse and Europe has as a whole created an self inflicted wound by aping the US's multicultural model.

In the future barring a major war it is clear that Europe needs to save itself and run itself, relying on another country to provide your defence comes at too high a national cost.

Offthebeach's picture

World elite wanted no nations, but thst proved difficult, so plan B was mix up the peoples and kill, one by one,national idenity.

In American football it would be called flooding the zone.

Anyway, elites get cheap subservient labor, to ignorent and dependent. The licals get taxed and impoverished, too much to resist.

sessinpo's picture

China already answered that question when obama visited.

Holding Cowfield's picture

Merkel is also Trump's most admired leader, as he stated today. Bill Weld likewise. Gary Johnson still hasn't come up with anyone and Jill Stein's is probably Idi Amin. Obama's is, of course, himself. What's the relevance of that? I suppose it's the same purpose as appending "fiat" to currency names. 

Migrants in Germany will have no impact on what Merkel does. They're a tiny expense compared to what's needed to defuse the DeutscheBomb. And she won't have any difficulty getting political support to keep $1/2 Trillion in German's savings from dissapearing. The real quesiton is whether she can get the Germans to be good Germans and leave their money where it is rather than stuffing (even more) cash under the mattress. 

Mustafa Kemal's picture

"Gary Johnson still hasn't come up with anyone "

It didnt look like he couldnt come up with his most admired leader, it looked like he didnt know the name of any leader.

Automatic Choke's picture

yes.....<sigh>..... I'm busy scraping Johnson/Weld bumper stickers off my cars.   now gonna vote for the giant meteor.

JackT's picture

At least tomorrow is Friday..right? DB *might* open on Tuesday. I'm guessing if they don't, others won't be either...soon after.

PirateOfBaltimore's picture

Speaking of Friday's, who is ready for the next Friday afternoon FBI Hillary document dump?

Fiji's picture

Frau Merkel is too stupid and arrogant... she wont do anything