In September 2008, Lehman Brothers failed and ultimately went bankrupt, leading to a worldwide recession, the wounds of which are still fresh. Eight years into the present, we have another situation brewing in Germany. The flag-bearer of the German and the European economy, Deutsche Bank is in trouble, to say the least.
Deutsche Bank's balance sheet and quality of assets have been under question over the past two years. It has failed the stress-test carried out by the Federal Reserve again this year due to "broad and substantial weaknesses across their capital planning processes," as stated by the Fed.
The recent punch has been dealt by the American Justice Department, which has imposed a fine of $14 billion on Deutsche Bank to settle many of its mortgage-securities cases dating back to 2008 during the financial crisis. The fine is way above what the market, investors, and the bank itself was expecting.
As the news came out, the stock price of not only Deutsche Bank fell sharply but it also took the entire DAX (German Stock Exchange) with it as well. Financial stocks in the developed markets took a severe beating.
Additionally, some of the top hedge funds announced that they are pulling their money out of the bank and there was a panic amongst the general public as well.
However, currently Deutsche Bank does have the cash reserve to cater to jittery customers but if this pressure continues then experts believe that this could trigger global fallout. German citizens are also angered and have voted against any government help that might be given to the bank.
To make matters worse, the European economy is not what it once used to be. The Euro has lost its strength and banks around the whole continent are in very bad shape. Whatever growth or good business Deutsche Bank was getting, it was from the other side of the Atlantic.
Similar events post-financial crisis have resulted in governments bailing out their top banks by reasoning that they are too big to fail. But it would be difficult to gather support as most right-leaning Germans believe that every company should deal with business risks from their own pocket and hard-earned tax-payer money should not be used.
It is too early to call this as a Lehman moment but the damage done by the previous crises gets everyone on the edge of their seats when they read comparable headlines.
The financial markets have eased up a bit, showing trust in the regulators and stakeholders to manage this situation; but that was also the case back in 2008. Investors should pay heed to this event and hedge themselves accordingly.
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