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Wednesday, August 10, 2016

Deutsche Bank Unexpectedly Found To Have Massive Capital Gap, Larger Than Its Entire Market Cap

After the ECB concluded its latest annual stress test, which as expected found no problems with Europe's largest banks instead scapegoating Italy's well-known troubled banks in results that were widely discredited by the market, yesterday in an unexpected outcome, German economic research institute ZEW found that Germany's largest bank, Deutsche Bank, had the highest potential capital shortfall, as much as €19 billion in a study of 51 European banks using U.S. Federal Reserve stress test methods.The capital gap is greater than DB's entire market cap. 
Using the Fed's approach, and thus a far more credible approach than that proposed by the ECB, the 51 European banks showed a total capital shortfall of 123 billion euros, with the largest gaps at Deutsche Bank, Societe Generale (13 billion euros) and BNP Paribas (10 billion euros).
"European banks lack sufficient capital to offset the losses expected in the case of another financial crisis," the ZEW said in a statement on Tuesday, cited by Reuters. ZEW Finance Professor Sascha Steffen worked with New York University Stern School of Business and the University of Lausanne researchers to run stress tests used by the Fed in 2016 and the European Banking Authority (EBA) in 2014 to compare capital needs and leverage.
While Societe Generale and BNP have market capitalisations of 26 billion euros and 55 billion euros, respectively, well above the study's theoretical capital gap, Deutsche Bank would find itself in trouble if the ZEW calculation is correct as it has a market capitalisation of less than €17 billion.
Which is why it promptly disagreed with ZEW's calculation. "There is an official EBA stress test that checked the capital backing against very tough and adverse conditions and this showed there was no acute capital need at Deutsche Bank," the bank said in a statement in response to the study.

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