DEUTSCHE BANK: CLOSE MONITORING AND CONTINUED SYSTEMIC RISK ANALYSIS BY AUTHORITIES IS WARRANTED

Deutsche Bank AG, historically one of the most respected banks in the world has a massive exposure to derivatives estimated at about $70 trillion or 13% of the total global amount. The total derivatives exposure equates to about 3,600 times the bank's market capitalization of $19.9 billion.

Deutsche Bank has suffered an avalanche of problems. Confidence in the bank is faltering after the revelation that it faces a $14 billion fine for allegedly mis-selling mortgage-backed securities in the US. In January 2016, it announced a record loss of more than $6 billion for 2015, a stunning reversal from a 2014 profit of $1.6 billion. In June 2016, the U.S. Federal Reserve Bank announced that Deutsche Bank had failed its stress test for the second year in a row. The bank was also hit by the Brexit decision, as it derived nearly 20% of its revenues from the United Kingdom.

Even a cursory glance at Deutsche Bank's financials shows discouraging figures. For example, its net margin is negative 23.6%, its return on equity (ROE) is negative 10.2% and its debt-to-equity (D/E) ratio of 2.3 is nearly twice the industry average of 1.5. Perhaps the biggest problem Deutsche Bank faces is excessive leverage on its balance sheet. Deutsche Bank faces insurmountable challenges from poor-performing core businesses and a lack of capital. The company ultimately must raise more equity capital to solve its leverage problems.

Deutsche Bank is the most important net contributor to systemic risks among the global systemically important banks . The German financial sector plays a key role in the global economy. According to the IMF, the German asset management market is the third-largest in Europe. Germany also has one of the world’s largest derivative exchanges, Eurex Exchange, as well as a multitude of smaller bank and financial companies. Deutsche Bank is linked with other publicly traded banks and insurance companies and could be a source of their financial contagion. Domestically, the largest German banks and insurance companies are highly interconnected. The highest degree of interconnectedness can be found between Allianz, Munich Re, Hannover Re, Deutsche Bank, Commerzbank and Aareal bank, with Allianz being the largest contributor to systemic risks among the publicly-traded German financials. Both Deutsche Bank and Commerzbank are the source of outward spillovers to most other publicly-listed banks and insurers.

If the situation in the German financial system deteriorates it is could very likely trigger a chain reaction and a global banking crisis

Globally Systemically Important Banks (GSIBs)

1. Deutsche Bank
2. JSBC
3. Credit Suisse
4. JPMorgan
5. Goldman Sachs
6. Bank of America
7. BNPParibas
8. Santander
9. Bank of NYMellon
10. Société Générale
11. Credit Agricole
12. WellsFargo
13. Citigroup
14. Nordea
15. Commerzbank
16. StateStreet
17. Unicredit
18. UBS
19. RBS
20. Mitsubishi
21. Barclays
22. StandardChartered
23. Sumitomo
24. China Construction Bank
25. KBC
26. Bank of China
27. INGBank
28. Mizuho