Deutsche Bank is under siege, and according to noted bank analyst Christopher Whalen of Kroll Bond Rating Agency, the fault lies with German Chancellor Angela Merkel.
“The problem with Deutsche Bank may be the end of Merkel’s career,” he told Business Insider over the phone. “The question is does she want to be remembered for doing the right thing — which is to provide support for the bank and diffuse the situation — or does she want to be remembered for standing by when one of the largest banks in Europe failed?”
Earlier this week Merkel said that she would not be providing aid to the struggling bank, or any other lenders in its position, like Italy’s Monte Paschi. It’s a politically popular position, as there’s little appetite among her constituents for a perceived bail out.
However, it set off a chain of events that Deutsche Bank’s CEO said in a letter to his staff has made the bank “subject to speculation.”
“It is our task now to prevent distorted perception from further interrupting our daily business,” CEO John Cryan said in the letter. “Trust is the foundation of banking. Some forces in the markets are currently trying to damage this trust.”
The bank’s stock fell almost 7% in the US on Thursday after a Bloomberg report suggesting that hedge funds may be ready to pull their money from the bank. It’s up about 7.5% on Friday during the US session.
To get investors in the game, you have to change the rules
Another major issue at play here is the fact that earlier this week the EU signalled that it will not follow the Basel Committee’s recommendations on capital requirements, credit and market risk rules for banks, finding them too onerous. The EU fears that the rules will stifle economic growth.
“When you combine those two [Basel and Merkel’s comments] investors have every reason to be concerned,” Whalen said. “Merkel has to realise the rule in place forbidding state aid is unworkable.”
What’s more, Whalen thinks that if Deutsche Bank is left to fend for itself, other banks will soon go down its same path. EU rules on how to mark assets haven’t properly quantified risk, and with banks working with a lot of leverage, that means the only players in this game able to save them are governments and investors.
However: “You can get investors in the game, that’s the point… they would love to get involved in this but they’re not going to do it if they don’t know what’s in front of them,” Whalen continued. “Investors don’t know what the net assets of the bank are… they have to write them down.”
And it has to be done over the weekend.
“Monday morning they have to have a plan,” he said.