On September 29th, financial market reports placed Deutsche Bank’s shares at a buying value of €10.9, compared to the €27 value reported approximately a year ago, inviting a reflection upon its stability and solvability. The bank’s shares were at their top value in 2007 when their price reached €146.52. Frankfurt-based Deutsche Bank is Germany’s leading bank, with a strong position in Europe and a significant presence in the Americas and Asia Pacific. Deutsche Bank provides banking services to corporations, governments, institutional investors, small and medium-sized businesses, and private individuals, with more than 100,000 workers operating in over 70 countries. In 2009, it was the world’s largest foreign exchange dealer.
In recent years, governments around the world have opted to bailout banks in similar situations, an example being the 2008 global financial crunch. Breaking with what may have become the expected government rescue-plan in this type of situation, Chancellor Merkel’s government might embrace a laissez-faire approach this time rather than intervene.
While an attempt to bail out Deutsche Bank may stabilise its share prices and calm the financial market, following a divergent course of action may give a strong impulse to the bank to find a bounce-up solution from within. Due to its size and importance, the current situation at Deutsche Bank as well as its future perspectives may impact other banks and firms it deals with, the political future of Chancellor Merkel and potentially extend its effects on the value of the euro. To further affirm this connection, following Mrs. Merkel’s declaration of potential government neutrality regarding the matter, the share prices of Deutsche Bank, as well as Britain’s Lloyds Banking Group Plc and BNP Paribas SA tumbled.
In an effort to increase its capital reserves, attempt to rebound from within, reassure investors and meet regulators’ demands, the bank started selling secondary assets and trimming its balance sheet; on September 29th, it sold its British insurance business Abbey Life to Phoenix Group Holdings.
Deutsche Bank is facing an additional challenge – paying off a $14 billion claim made by the US Department of Justice in relation to the sale of mortgage-backed securities. Mrs. Merkel communicated the government’s intention to stay neuter with regards to this matter as well rather than intervening on behalf of the bank in order to try to reduce the fine.
The current state of affairs at Deutsche Bank puts the European financial sector in the spotlight once more, inviting a reflection upon the situation at other banks with significant capital-market activities. This story is unfolding at a time of political change, both in Germany and at European level. The recent weeks may have been some of the most challenging for Angela Merkel’s political career. Following important elections in Berlin, the political party the Alternative for Germany over-passed in number of votes Mrs. Merkel’s party. Following the vote’s results Merkel declared she wished she was able “turn back time” on some of her recent political decisions, an admission which may demonstrate at times politicians change position based on circumstances and further developments, which may leave a window open for a governmental intervention in the matter of Deutsche Bank.
Whether the German Chancellor remains firm on her position regarding Deutsche Bank or sets up a rescue plan, this may be a time for lessons to be learned, for internal reforms within financial institutions with similar lending policies as Deutsche Bank, and even a chance for Merkel to rebound in the eyes of the German electorate and revive her leadership.
What financial policies may banks adopt in order to maintain a healthy cash flow?