September 30, 2016
Deutsche Bank is back at the top of the headlines today, after it became known that a number of hedge funds had withdrawn excess liquidity from its prime brokerage unit, which admitted "perception issues". Thank God it's Friday, and Monday is a bank holiday in Germany, because that will give Deutsche Bank a couple of days or three to work on those perceptions. That the holiday is celebrating German unification adds a further ironic twist to the narrative.
In what could be a very expensive disclosure of confidental client matters, "a person familiar with the situation who declined to be identified talking about confidential client matters" told Bloomberg that about ten hedge funds using Deutsche Bank as an intermediary had moved some of their holdings of listed derivatives to other firms. The Financial Times explains that these hedge funds have imposed position limits on their exposure to Deutsche Bank because of the recent negative news on the bank and its elevated credit risk as measured by credit default swaps. Although the German stock market was closed, trading on Deutsche Bank continued in American and Asian exchanges through depository receipts, which are securities backed by holdings of foreign shares. ADR closed under 7% down for the day in New York. US bank stocks were dragged down between 1% and 4% as a result.
How serious is the liquidity situation? We can't know the size of the withdrawals that have been made, but with this all over the financial news one could expect more hedge funds to follow suit. Deutsche Bank reported in its latest quarterly financial statements that its funding from "other customers" including prime brokerake added up to €71bn (net). The bank also reported a liquidity reserve of €223bn, including cash, highly liquid securities, and other central-bank eligible collateral. Its total external funding was €992bn, but it also reported a regulatory liquidity coverage ratio of 124%. This means Deutsche Bank has 24% more high quality liquid assets than it needs to meet its liquidity needs for 30 days, in a stressed scenario of lack of access to market liquidity.
Is this a new Lehman moment? There are a number of important differences between now and 2008. Derivative positions are generally backed by cash collateral these days. There is the requirement to hold high quality liquid assets with an ample liquidity coverage ratio, and central banks are ready to provide unlimited liquidity (against good collateral) as a matter of course and not as an emergency measure. But, like we said at the beginning, it would be a good thing if the long weekend of German unity were used to put to rest the perception issues surrounding Deutsche Bank since the $14bn figure for the DoJ fine was leaked.
We also have stories on Commerzbank laying off 10,000 staff; on Pedro Sanchez' future, or lack thereof; on a CDU revolt over Greece; on French budget promises; on what happened to Arnaud Montebourg's campaign; and on why a hard Brexit is far from inevitable.