Deutsche Bank's Troubles Raise Worries About The Future Of The Euro Zone

Authored by Thorstein Polleit via The Mises Institute,

The euro banking sector is huge: In April 2018, its total balance sheet amounted to 30.9 trillion euro, accounting for 268 per cent of gross domestic product (GDP) in the euro area. Unfortunately, however, many euro banks are in lousy shape. They suffer from low profitability and carry an estimated total bad loan exposure of around 759 billion euro, which accounts for roughly 30 per cent of their equity capital.

Share price developments suggest that investors have lost quite some confidence in the viability of euro banks’ businesses: While US bank stocks are up 24 per cent since the beginning of 2006, the index for euro-area bank stocks is still down by around 70 per cent. Perhaps most notably, ’Germany’s two largest banks, Deutsche Bank and Commerzbank, have lost 85 and 94 per cent, respectively, of their market capitalization.

With a balance sheet of close to 1.5 trillion euro in March 2018, Deutsche Bank accounted for around 45 per cent of German GDP. In international comparison, this an enormous, downright frightening dimension. It is mostly the result of the bank still having an extensive (though not profitable) footprint in the international investment banking business. The bank has already started reducing its balance sheet, though.

Beware of big banks — this is what we could learn from the latest financial and economic crises 2008/2009. Big banks have the potential to take an entire economy hostage: When they get into trouble, they can drag everything down with them, especially the innocent bystanders – taxpayers and, if and when the central banks decide to bail them out, those holding fiat money and fixed income securities denominated in fiat money.

Banking Risks

For this reason, it makes sense to remind ourselves of the fundamental risks of banking – namely liquidity riskand solvency risk –, for if and when these risks materialise, monetary policy-makers can be expected to resort to inflationary actions. In fact, to fend off these risks from materialising, central banks have committed themselves to pursuing chronically inflationary policies.

Liquidity risk describes the risk that a bank might fail to meet its credit obligations in full. This is an inherent risk as most banks extend long-term loans and refinance themselves with short-term funds. As a result, they have to succeed in rolling-over maturing debt. In a situation in which investors are no longer willing to lend their money, the banks may not be able to obtain new funds and become illiquid.

However, in today’s fiat money system, central banks are in a position to print up any amount of base money at any given time, and they can lend this newly created money to ailing banks at their discretion. As a result, the liquidity risk can be, and actually is taken care of by central banks. A single bank may go under due to a lack of liquidity. But not the banking system as a whole, as in a liquidity crisis, central banks can, and do, decide to prop up the system.

Solvency risk means the risk that banks’ assets are not worth enough to service banks’ debts. It can strike if and when losses on loans make a bank’s incoming cash flow drop below its cash outflows. A bank may well continue to operate for quite a while despite being insolvent: It meets its daily payment requirements because cash outflows remain below the total that will become due at some point in time.

Keep the Fiat Money System Going

If and when insolvency makes liabilities exceed its assets, however, a bank’s equity capital is wiped out, and the bank may even default on its debt, and savers and investors lose their funds. While it is relatively easy for a central bank to prevent a liquidity crisis in the banking sector, it is quite another matter when it comes to an insolvency crisis: Once asset values start falling and losses are getting realized, problems reach a new dimension.

If banks in such a situation fail to raise new equity capital, the government – fearing a collapse of the banking system – typically steps in. It either uses taxpayers’ money to provide banks with new equity capital, or it can issue new debt, which is bought by the central bank against issuing newly created base money, with the latter being paid in as new bank equity capital – and the affected banks being taken over by the government.

In reality, central banks and governments have put a ‘safety net’ under the banking industry. Smaller banks may well go under, but a scenario in which the entire banking system goes belly up will be prevented for a simple reason: Politically speaking, the costs of a fiat money system collapse is simply too high and has to be prevented; no price is viewed as too costly to keep the fiat money system going.

A Vicious Circle

This is what sets a truly vicious circle into motion. For today’s fiat money causes booms which sooner or later must turn into a bust. The liquidity risk and especially the insolvency risk can be expected to hit the banking industry at some point. To prevent it from materializing, the central bank must keep expanding the quantity of (base) money and keep interest rates at artificially low levels, keeping the inflationary scheme going.

Central banks sow the seeds of crisis, and once the crisis unfolds, especially when it affects banks negatively, central banks run bailouts by injecting new money provided at artificially low interest rates, and the vicious cycle starts all over again. Needless to say that such a cycle causes economic and social problems on a grand scale. It makes the purchasing power of money drop. Only a few benefit, while the majority of the people is taken advantage of.

Given the problems of the euro area banking industry, we should indeed wonder what might happen next. The scenario that the euro area economies might grow out of their banking problems would undoubtedly be a rather convenient one, but it is fairly unlikely. Bailing out ailing banks with taxpayers’ money and an inflation-financed recapitalization of banks’ equity capital might be a much less pleasant scenario, but it appears to be more likely.

For one thing is indisputable: If an oversized banking apparatus starts to shrink, the outstanding stock of credit and money will decline. And as the quantity of money goes down, prices across the board trend downwards causing deflation. Needless to say that deflation is a nightmare for highly indebted economies: Falling prices increase the real debt burden, sending the financial and economic system into a cataclysmic downward spiral.

Inflation Is a Policy that Cannot Last

The current president of the European Central Bank (ECB), Mario Draghi, said in July 2012: “[T]he ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.” Taken at face value, these words suggest what the ECB is ready to do: to print up ever greater quantities of euro balances to prevent the euro currency from falling apart. Ironically, however, this is precisely what the ECB’s money printing scheme will bring about.

Ludwig von Mises (1881 – 1973) noted in this context wisely: “All governments are firmly committed to the policy of low interest rates, credit expansion, and inflation. When the unavoidable aftermath of these short-term policies comes to pass, they know only of one remedy — to continue their inflationary ventures.” These words capture pretty well what has been going on in the euro area.

Without the ECB’s overly generous issuing of fresh fiat money, the euro banking apparatus could not have reached its current size, its bloated dimension. And with its attempt to rectify its inflationary policies of the past – namely preventing the euro banking sector from collapsing, the ECB is about to pursue even more extensive inflationary policies. This doesn’t bode well for the euro’s purchasing power going forward.

The euro area provides a textbook example of a rather unholy alliance between the central bank and commercial banks: It has not only caused an inflationary boom and bust cycle that has resulted in a severe financial and economic crisis. The unholy alliance has also made possible an oversized (and poorly performing) banking industry, and the policy to keep it going will result in a rip off of the majority of the people on a truly grand scale.


Adolfsteinbergovitch Wed, 06/20/2018 - 05:01 Permalink

The power of the claw. 

Financial retaliation. 

This is what a dying empire does in its last days of shining glory to prevent vassals from leaving. 

But the clock is ticking anyway. 

Rapunzal Precious Hawk Wed, 06/20/2018 - 08:52 Permalink

They bankers all over the world know their are done. They probably already know when. But they still working feverishly on an excuse for the next collapse. Since all savings, pensions and currencies will fail, they know they need a great excuse and someone else to blame for the following misery. Depopulation is coming one way or another.

In reply to by Precious Hawk

new game Four Star Wed, 06/20/2018 - 05:43 Permalink

to BIG to fail. No, the reason they fail is because they became to big.

just like government and just about everything else in the universe.

unmanageable, takes on strange lives of its own, guided by corruption, greed and sociopathic tenancies by a few psychopathic individuals doing god work. they even tell us there mission. in my words-fuk as many as possible captivated by their institution

and the force to back it up-violence if neccesary

simple shit maynard.

yet, we as humans adore almost everything that is bigger, cause it must be better, cept asses, but not tits...

local and small is my deal. manageable.

size maters...

In reply to by Four Star

Froman TheSilentMajority Wed, 06/20/2018 - 09:33 Permalink

Scrap the financial institution changes that were made by Clinton and the bank lobbyists in the 1990s and revert back to Glass-Steagall where banks were banks, insurers were insurers, and brokerages were brokerages and employees at banks were not "sales people" they actually looked at financials on a potential loan and interpreted it for potential credit risk.  Now it is credit approval by committee after the relationship manager (salesman) has made the sale and pushing approval to get their commission.

In reply to by TheSilentMajority

Heros new game Wed, 06/20/2018 - 07:01 Permalink

DB will be bailed unless: Merkel was thrown out of power, Germany swung right, AdF stopped the invasion of "refugees", the German government endorsed BDS, the German government ramped up Nordstream II, the German government freed Ursula Haverbeck and Monika Schaefer.

Any one, or combination, of these could set off a scenario where DB is faced with a run.  Just a last year DB was fined 10 billion:…


In reply to by new game

HRH of Aquitaine 2.0 Wed, 06/20/2018 - 05:06 Permalink

"The unholy alliance has also made possible an oversized (and poorly performing) banking industry, and the policy to keep it going will result in a rip off of the majority of the people on a truly grand scale."

Wasn't this their goal, all along?

JohnGaltUk Wed, 06/20/2018 - 05:37 Permalink

Try and look on the bright side. When all this collapses, when folks lose their jobs, when they lose their houses, when they see their pensions go to zero,  when the NHS collapses, do you think they will allow the state to tax them for anything? When this collapses and the water goes out and we really see the amount of dead bodies at the bottom, people will reject socialism in any form. The left always destroy themselves, unfortunately they take us all down. 

whatisthat Wed, 06/20/2018 - 05:40 Permalink

I would observe there is no simpathy for Deutsche bank market manipulation and corruption - let the bank fail and prosecute and imprison those individuals who are responsible for the condition of Deutsche bank.

overmedicatedu… Wed, 06/20/2018 - 05:51 Permalink

the last 10 yrs have seen real living standards slipping downward in those western countries who bailed out the banksters in 2008..

TBTF..along with stupid trade and immigration policy..however we have the elite living much there is that.

NoWayJose Wed, 06/20/2018 - 06:02 Permalink

DB is not related to the future of the Euro Zone - unless you think both are infested with greed, bribery, manipulation, lawlessness, cronyism, ...

Never mind...

Paul Morphy Wed, 06/20/2018 - 06:12 Permalink

DB is literally too big to be permitted to fail.


A rescue of DB could be as costly as allowing it to fail. 

The "system" can't afford to rescue DB, nor can it not afford to rescue DB. This is where we are at.

Let it Go Wed, 06/20/2018 - 06:21 Permalink

While the US and the UK were mired in political chaos during 2017 the EU claimed it was experiencing improved economic conditions. It appears this did little to move Europe in the direction of implementing long-needed EU and eurozone reforms.

Until the EU is prepared to do “whatever is necessary,” to paraphrase ECB chief Mario Draghi, in order to protect retail bank depositors, the EU will remain far from being a united political economy. More on this subject in the article below.

 http://EU Banks Remain Massive Problem.html

Expat Wed, 06/20/2018 - 07:01 Permalink

DB too big to fail.  So what?  Oh, right.  In the US you let banks and other corporations fail when they fuck up.  Sorry, I forgot.  Sooo capitalist, so honest.



#Asshole Trumpturds

Calculus99 Wed, 06/20/2018 - 07:58 Permalink

The 2 most dangerous words the head of a bank can say -

"get aggressive". 

Sure, it works brilliantly for a time, often years, but then at some stage it all comes tumbling down. 

Case in point - Douche Bank. 

hooligan2009 Wed, 06/20/2018 - 08:17 Permalink

the libtard socialist demoNrat plan is to force all banks into collapse and have the ECB operate as a utility, paying no interest, but turning the Euro into a crypto currency - yanno, so that all transactions are traceable to any source or involvement.

wonger Wed, 06/20/2018 - 08:19 Permalink

Mario Draghi also proposed in November 2017 to remove the deposit protection scheme on savings, you will have access to your money within 5 working days for daily living expenses, if you still have savings in the bank, i suggest you have a think and a drink! 

Zhaupka Wed, 06/20/2018 - 10:51 Permalink

PSYOPS: In the United States tantalizing images are offered the populace of fabulous wealth; the populace and the Vast Human Herds outside the United States having succumbed to the belief that they could better themselves financially when, in fact, the majority of the human herds in the United States are born to die within the same economic class making their generational offspring give homage (again) to the next generation of children of inherited fabulous unimaginable wealth.

This ZH thread of thoughts shall drift down, down, down deep into an electronic storage disk that is located next to a whizzing fan in a rack mounted computer server labeled ZH-[IP addr here] among a maze of rack mounted whizzing computers located in an air-conditioned room in a building in a country maintained by a technician making the rounds to check the lights on the thing to make sure the power is on thereby allowing thoughts to continue to pour in and be recorded on the electronic storage disk array until these thoughts in this thread deep in the disk array are eventually: DELETED.

Meme. Propaganda. Cognitive Dissonance.

---- sent from mygs650