Who’s the Systemic Risk Now?

Washington’s assault on Deutsche Bank imperils Europe’s economy.
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     Photo: Bloomberg News


Regulators like to bray about the dangers of systemic financial risk, but they seem not to care when they’re the source of the risk. Consider the U.S. assault on Deutsche Bank DB 3.19 % that has tanked European bank shares this week.

The German bank’s share price has fallen as much as 20% since a Sept. 15 Journal report that the U.S. Justice Department is seeking a fine of up to $14 billion for selling mortgage-backed securities between 2005 and 2007. That is well beyond Deutsche Bank’s ability to pay, given its $18 billion market capitalization before the story broke.

Deutsche Bank says it “has no intent to settle these potential civil claims anywhere near the number cited.” Markets are spooked anyway. A fine much above $3 billion would strain an institution that faces potential payouts in other regulatory cases, and the bank has already settled claims for billions of dollars for the likes of alleged interest-rate rigging. That includes Deutsche’s Bank’s $1.9 billion share of the 2013 settlement of the bizarre U.S. claim that numerous banks somehow deceived the sharks at Fannie Mae and Freddie Mac.
So it’s not crazy to think this fiasco could become a systemic crisis. With a €1.8 trillion ($2.022 trillion) balance sheet often criticized for its opacity, Deutsche Bank would struggle to replenish capital at today’s share price. Trouble at one of the European Union’s largest banks could trigger a new round of market fears over counterparty risk and political uncertainty.

Chancellor Angela Merkel’s government insists no bailout will be forthcoming, and Berlin may even mean it. New European Union rules make bailouts harder to execute, and Berlin blocked Italy’s attempts to rescue its struggling large banks earlier this year.

Most of the risks now cited to explain Deutsche Bank’s woes are well-known, including its long struggle to reorganize to boost profitability amid ultralow interest rates and sluggish global growth.

Markets concluded these risks are manageable, although at a large discount to the share price in 2014.

The bank’s results in the recent European Banking Authority stress test were in line with other large banks, and it has been working to increase capital.

The new imponderable is the U.S. settlement raid that’s among the largest it has demanded.

The huge fines rest on a dubious theory that government prosecutors know better than investors how assets ought to have been priced in a market mania 10 years ago. And with a handful of exceptions (none at Deutsche Bank), regulators haven’t found individual bank employees who committed prosecutable crimes in the mortgage mess. These bank robberies are political.

Some Europeans think the Deutsche Bank raid is American retaliation for the EU’s August ruling that Apple owes back taxes of €13 billion in Europe. But Washington doesn’t need that incentive. The Obama Administration has also been merrily plundering American banks to satisfy the retribution demands of the Bernie Sanders-Elizabeth Warren wing of the Democratic Party.

The evidence hardly matters because the cases never go to court because no bank can afford to resist the government’s orders in a post-Dodd-Frank regulatory world. This is the latest morality tale in modern systemic risk. Government caprice has become a major risk, and maybe the major risk, to the global financial system.

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