IMF Head Advises DB to Reform Its Business Model
According to the International Monetary Fund (IMF), time is short for Germany’s largest lender, Deutsche Bank AG, to reach a deal with the U.S. authorities. This is after investors punished its Deutsche Bank AG (USA) (NYSE: DB) stock on speculation that the company would struggle to fund a massive fine the U.S. Department of Justice is seeking for the bank’s role in the subprime crisis.
IMF Managing Director Christine Lagarde advised the bank to reform its business model and to quickly reach a deal with U.S. regulators over a potentially huge fine to calm investors, according to a report by Reuters news agency.
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Deutsche Bank poses a bigger potential risk to the financial system than any other global bank at a time when interest rates are too low, according to the Washington-based IMF. (Source: “IMF chief gives Deutsche Bank tough advice, says need deal on fine,” Reuters News, October 6, 2016).
“Deutsche Bank, like many other banks, has to look at its business model,” Lagarde was cited as saying in the report. “It has to look at its long-term profitability – given the lower-bound interest rates we have around the world and probably for longer than many expect – and decide what size it wants to have and how it wants to strengthen its whole balance sheet.” (Source: Ibid.)
Investors sold DB stock during recent trading sessions on concerns that the bank’s tight financial situation would stop it from absorbing a $14.0-billion fine that the U.S. Department of Justice is seeking for Deutsche Bank’s role in the subprime debt crisis of 2008. In a reply to the U.S. Department of Justice’s claim, Deutsche Bank said it expects to renegotiate a lower settlement with the U.S. government.
The biggest fear on investors’ minds is that DB problems will spread over to the global financial system and we may see a repeat of a Lehman Brothers-type scenario, which triggered the last financial crisis in global capital markets. The German government, seen as lender of last resort to DB, has refused to bail out the bank in case it was unable to fund its obligations.
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According to the Reuters report, Deutsche Bank has already spent 12 billion euros (USD$13.4 billion) on litigation since 2012, and has put aside 5.5 billion euros for its expected legal bill.
