The New Banking Crisis — In Two Frightening Graphs

Systemic Risk Among Deutsche Bank and Global Systemically Important Banks (Source: IMF — “The blue, purple and green nodes denote European, US and Asian banks, respectively. The thickness of the arrows capture total linkages (both inward and outward), and the arrow captures the direction of net spillover. The size of the nodes reflects asset size.”)

Wall Street Mega Banks Are Highly Interconnected: Stock Symbols Are as Follows: C=Citigroup; MS=Morgan Stanley; JPM=JPMorgan Chase; GS=Goldman Sachs; BAC=Bank of America; WFC=Wells Fargo.

Wall Street Mega Banks Are Highly Interconnected: Stock Symbols Are as Follows: C=Citigroup; MS=Morgan Stanley; JPM=JPMorgan Chase; GS=Goldman Sachs; BAC=Bank of America; WFC=Wells Fargo.

 

By Pam Martens and Russ Martens of Wall Street on Parade

After repeated, but ignored, warnings over the past two years from researchers at the U.S. Treasury’s Office of Financial Research (OFR), the new banking crisis has arrived with a vengeance and at a most inopportune time – when confidence is already draining from the financial system because of two U.S. presidential candidates with the highest disapproval ratings in modern history. 

Yesterday, Germany’s largest financial institution, Deutsche Bank, lost 7.06 percent by the close of trading on the New York Stock Exchange. That plunge in one of the most globally-interconnected banks dragged down the shares of every major Wall Street bank yesterday: Bank of America lost 2.77 percent; Morgan Stanley declined by 2.76 percent; Citigroup lost 2.67 percent; Goldman Sachs shed 2.21 percent; and JPMorgan Chase closed down 2.19 percent. Deutsche Bank, whose shares traded at more than $120 pre-crisis in 2007, closed at $11.85 yesterday in New York and was down another 3 percent in overnight trading in Europe.

At yesterday’s close, Deutsche Bank had $16.344 billion in market value with a balance sheet of $1.9 trillion in assets as of the end of 2015. If that doesn’t sound like a replay of the Citigroup debacle that spiraled out of control in 2008 and took down other bank shares, we don’t know what does. But the big picture is actually worse than even this suggests. 

The first graph above comes from a report released in June of this year by the International Monetary Fund (IMF). The report singled out Deutsche Bank as “the most important net contributor to systemic risks.” The researchers wrote:

“Notwithstanding moderate cross-border exposures on aggregate, the banking sector is a potential source of outward spillovers. Network analysis suggests a higher degree of outward spillovers from the German banking sector than inward spillovers. In particular, Germany, France, the U.K. and the U.S. have the highest degree of outward spillovers as measured by the average percentage of capital loss of other banking systems due to banking sector shock in the source country…

“Among the G-SIBs [Global Systemically Important Banks], Deutsche Bank appears to be the most important net contributor to systemic risks, followed by HSBC and Credit Suisse…The relative importance of Deutsche Bank underscores the importance of risk management, intense supervision of G-SIBs and the close monitoring of their cross-border exposures, as well as rapidly completing capacity to implement the new resolution regime.”

Has there been “close monitoring” of the Global Systemically Important Banks by U.S. Federal regulators like the Federal Reserve and Office of the Comptroller of the Currency? Based on the reports released by the U.S. Treasury’s Office of Financial Research, the Federal regulators are just as asleep at the switch this time around as they were in the lead up to the Wall Street banking crash of 2008

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