Deutsche Curve Inverts As Bundesbank Dismisses State Support Of "Zombie" Banks

Deutsche Bank Sub CDS closed above 500bps for only the second day in its history (and the longer-term CDS curve inverted once again) as a bad day ended worse with Bundesbank member Andreas Dombret exclaimed "state support of banking sector must end," warning that it only "props up zombie banks." His pronouncements also pushed politicians to make the hard decisions and "tell banks they need structural reform."

As Bloomberg details, “Political support for the banking sector has to end at last,” Bundesbank board member Andreas Dombret says in text of speech in Vienna. “Unfortunately I’m only seeing this to a limited extent.”

  • “Without courageous realignment, banks won’t be able to permanently survive, except perhaps as zombie banks with the support of public authorities,” he says.
  • German and Austrian banks have to “adjust their business models so that they match the current environment,” he says.
  • The whole sector has to shrink, because the “systematic clean-up, inevitable after the bursting of the financial bubble, isn’t finished yet,” he says.
  • Discussion shouldn’t focus exclusively on “fewer banks, fewer branches,” he says, adding that the sector has to shrink to a sustainable size.
  • Market participants have to decide how to address overcapacities, Dombret says.
  • Basel III rules should be finalized by year-end and in the medium term the privileged treatment of sovereign bonds should be abolished.
  • Capital markets union should be advanced to strengthen capital markets as supplement to the banking system

And the credit market reacted badly with Sub CDS topping 500bps for only the 2nd day ever...

 

And more troubling, Deutsxche Bank's longer-term CDS curve has returned to inversion...

 

The Q&A added to the worrries:

  • EU “resolution regime, which started at the beginning of the year, hasn’t been tested,” ECB Supervisory Board member Andreas Dombret says in Q&A after speech in Vienna.
  • “The banking sector must be an industry where unsustainable business models mean market exit without causing a systemic crisis”
  • On negative rates: “If we reach the price-stability goal, we should get out of the low rate policy as soon as possible”

and Dombret's parting comments that

  • “We need to stick to the bail-in rules. If we now propose a ‘bail-in holiday’ we don’t have the resolution system anymore”

Explains why the Sub CoCo bonds are trading with a 30% haircut already...

 

This won't end well.