- Title: 2016: Europe banks' annus horribilis?
- Date: 29th December 2016
- Summary: ROME, ITALY, (FILE - 2016) (REUTERS) VARIOUS MONTE DEI PASCHI DI SIENA
- Embargoed: 13th January 2017 15:27
- Keywords: Banks Europe crisis Italy Deutsche Bank Monte dei Paschi RBS ECB
- Location: FRANKFURT, GERMANY + LONDON, ENGLAND, UK + ROME, ITAY
- City: FRANKFURT, GERMANY + LONDON, ENGLAND, UK + ROME, ITAY
- Country: Various
- Topics: Economic Events
- Reuters ID: LVA0035EXRXQL
- Aspect Ratio: 16:9
- Story Text: Deutsche Bank's pursuit of success on Wall Street has come at a high price, a $7 billion (5.71 billion pounds) plus penalty illustrating the extent of its decline since 2008 when its then chief executive claimed it was one of the "strongest banks in the world".
Expanding from its roots in Germany dating back to 1870, Deutsche transformed itself into a major player on Wall Street over the past two decades, often taking extravagant bets to do so. But it is now set to cut back its activities in the world's biggest economy after a penalty for the sale of toxic mortgage securities that contributed to the biggest economic crash in a generation.
"Like all these banks, because they are so complicated, at face value, you can't see the problems until you start lifting up the stones and then you can see what's happening," said Justin Urquhart-Stewart of Seven Investment Management. "And actually what you've got is a very risky organisation, which unfortunately, it was probably so complicated, no one actually understood how much risk was that."
The $7.2 billion penalty for the sale of toxic mortgage securities closes a sobering chapter in the bank's international drive, launched in 1989 by the then chief executive, Hilmar Kopper, when he bought lender Morgan Grenfell in London.
Kopper is remembered for his public description of a multi-million Deutsche mark sum as "peanuts" - opening a divide between an increasingly Anglo-Saxon bank and the prevailing frugal culture among ordinary Germans.
A decade later, Deutsche bought Bankers Trust, paying $10 billion for the American bank and an estimated severance of $100 million to its chief executive.
Management even discussed a takeover of Lehman Brothers, which later collapsed at the lowest point in the global financial crisis in 2008.
As the bank placed large trades at the end of 2011, its leverage ratio, which divides the value of assets by equity, reached around 21 - measured by U.S. accounting standards. As a rule of thumb, the higher this leverage, the steeper the risks. JPMorgan, a much larger bank, had a lower ratio of around 17.
There was another important difference between Deutsche and its U.S. rivals. They had been able to improve their capital with a compulsory $700 billion "Troubled Assets Relief Programme". Rivals JP Morgan Chase, Morgan Stanley, Goldman Sachs and Bank of America all took the money.
Meanwhile, Royal Bank of Scotland will cut costs and sell assets to boost capital, it said in November after failing its Bank of England stress test, with the central bank warning of a "challenging" outlook for Britain's financial system. State-backed RBS rushed out a statement after the test results to say it would take a range of actions to make up the capital shortfall identified, amounting to about 2 billion pounds.
Asset sales would avoid the embarrassment of a rights issue, that would force the government to put in even more taxpayer money, given that it owns the majority of the shares. RBS is expected to unveil a new cost-cutting plan at its full-year results in early 2017, which the source at the bank said is likely to include job cuts and branch closures, and analysts said the stress-test result would further delay RBS's ability to pay dividends.
Three days ago the European Central Bank told Monte dei Paschi it needs to plug a capital shortfall of 8.8 billion euros ($9.2 billion), higher than a previous 5 billion euro gap estimated by the bank, the lender said on Monday (December 26, 2016) confirming what sources told Reuters.
Last Friday the Italian government approved a decree to bail out Monte dei Paschi after Italy's No. 3 lender failed to win investor backing for a desperately needed 5 billion euro capital increase.
"The danger with the Italian banking system is that it becomes endemic throughout entire system. And then when one falls the rest of it starts collapsing," said Urquhart-Stewart.
"What you have to have here is the ECB has got to grow up and allow government intervention and let these banks go bust."
The bank's problems date back several years but successive Italian governments have failed to tackle the issue, which became a political taboo this year with new EU rules banning state bailouts unless private investors take losses first.
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