FDIC Flags Deutsche Bank's Wild Leverage Ratio—But It's Not the Only One
Sept. 22, 2016 (EIRNS)—Deutsche Bank was fingered again as the riskiest bank in the world, in data released Tuesday by the Federal Deposit Insurance Corporation (FDIC). According to the FDIC's calculation (using the International Financial Reporting Standards or IFRS), Deutsche Bank's leverage ratio—a lender's equity capital measured against its assets—is the lowest of the rest of the world's "Global Systemically Important Banks" (G-SIB's). The FDIC includes the amount of derivatives which banks have on their books in its calculations of a leverage ratio, which shows how much equity capital a lender has against assets such as loans.
A low ratio means that a bank has less of a cushion if a crisis arises. DB's leverage was estimated at a miniscule 2.68% as of June 30. That means DB has leveraged its capital 37:1 with debt, a slightly worse leverage position than that of Lehman Brothers in mid-2008 before its bankruptcy.
The risks of Deutsche "Bunk," as Lyndon LaRouche has dubbed it, were the subject of a closed session of German Social Democratic lawmakers on Tuesday, Bloomberg reported today, citing reports from two unnamed "people familiar with the matter." Few details were reported, other than that partipants discussed the coming U.S. Department of Justice fine and the bank's financial reserves. Bloomberg contrasted that discussion, however, with the public silence maintained by the Merkel government on this looming blowout; Bloomberg's sources say the topic was not raised at a closed-door session of the German parliament's Finance Committee with Finance Minister Wolfgang Schaeuble the same day.
DB may be the worst—and the International Monetary Fund has called it the most dangerous spreader of bank risk in the world when it does blow up. But it is not the only "G-SIB" without much "cushion," FDIC figures showed. Banco Santander of Spain, France's BNP Paribas and Société Générale, Sweden's Nordea Bank, Switzerland's UBS, and Italy's UniCredit were all under 4%—i.e., debt-leveraged by more than 25:1—and Goldman Sachs was only a hair over, at 4.14%.
FDIC Vice Chairman Thomas Hoenig warned, in releasing the FDIC'S Semi-Annual Update of the Global Capital Index, that "the degree of leverage within the global financial system increased in the first half of 2016," as a whole. He made clear that U.S. big banks are included in that increased leverage—i.e., speculation.
"Although equity capital increased for U.S. G-SIBs in the first half of the year, assets increased more than proportionately, including a significant expansion of their derivatives books. The net effect was an increase in their overall leverage position,"
"Thus, as markets have recovered as central banks around the world continue quantitative easing programs, the incentives for increasing financial leverage have intensified."