Deutsche Bank’s share price has partially bounced back from its lows of last week, but there’s no end to the analysis of its ‘issues.’ In the breathing space granted by Friday’s revelation that the D.O.J. fine might be a lot lower than the $14bn originally touted, attention has turned to Deutsche’s Level 3 assets: these, not the bank’s overall level of capital, are now deemed to be the source of the stench.
The problem with Deutsche Bank is the sheer quantity of Level 3 assets on its books. The Wall Street Journal points out that Deutsche’s €28.8bn of Level 3 assets amount to 72% its Tier One assets. At 12 other big banks, that proportion averages just 38%.
Who cares about the Level 3s? Investors, seemingly. The Financial Times points out that because Level 3 assets are, by definition, illiquid, no one knows exactly how much they’re worth. Deutsche doesn’t give much information about what its Level 3 assets are comprised of, but they’re usually a concoction of fairly unsellable long-dated interest rate swaps, equity stakes in companies and exotic sovereign debt, priced using banks’ own valuation models.
Herein lies the problem. As history has shown, banks’ own valuation models can be fallible. If the assumptions underlying the models change, so do Level 3 assets’ value. This is a problem for a Deutsche, where Level 3 assets are high relative to Tier One Assets. ‘A more realistic valuation approach could be enough to “wipe out anywhere between a quarter and 30 per cent of their [Deutsche’s] book capital,” says an analyst in the FT. Investors are trying to price in the worst.
So, what’s Deutsche to do? Short of raising more Tier One capital or selling some of its unsellable Level 3 assets, its options look limited. It could always offer greater disclosure on its Level 3 assets, but maybe that would fuel the fear rather than strengthen the faith.
There is some good news though: figures have also been bandied around with regards to Deutsche’s exposure to the derivatives market. At €41.940 trillion in 2015, this is huge – particularly when set next to German GDP of €3.032 trillion. The FT, however, points out that this is exaggerated. It suggests Deutsche might want to draw investors’ attention to a neglected presentation in which the German bank explained that if were allowed to use so-called the ‘master netting agreements’ which U.S. banks use to offset derivative assets against derivative liabilities, its exposure to the derivatives market wouldn’t look as extreme. The use of netting would, for example, reduce the €615bn of total derivative assets on Deutsche’s balance sheet to a mere €41bn, says the FT. Deutsche’s derivative liabilities would fall by a similar amount after netting. As a result, the bank’s net assets would be unchanged but its overall derivatives exposure would look smaller.
It’s not surprising investors are confused.
Separately, an MD in investment banking at Morgan Stanley has written a book. Jim Runde, whom Morgan Stanley describes as one of its “top investment bankers” has penned a volume titled ‘UnEQualed’ about the emotional topography of the investment banking mind. You basically need three things, says Runde: adaptability, collegiality and empathy, and with those things you will go a long way. You also need to know how to manage your superiors. “Senior managers don’t always clarify deadlines, so junior bankers have to ask for them and manage expectations.”
The OTC derivatives market is moving away from banks: “Initially, it will be electronic firms like Citadel, Virtu, DRW and many other names. The number of these firms is going to increase dramatically in the next couple of years. Lots of people are leaving banks to set up independent trading outfits. This trend is not going to stop.” (Financial Times)
When Alan Howard of Brevan Howard concedes mortality: “With the benefit of hindsight, that was the wrong size for the markets we have our primary focus in.” (Financial Times)
You don’t want to work for Goldman Sachs in Asia: ‘In the six months to June 30, Goldman in Asia (including Australia and New Zealand) posted net revenues of less than half the level they were a year earlier; pre-tax earnings from the region dropped 71%, and accounted for only 10% of group earnings, compared with 25% a year earlier.’ (Euromoney)
Paris wants London’s fintech firms: “Relocating a bank can take a century. Relocating a start-up takes a few clicks.” (BBC)
French banker who left Morgan Stanley is now suing the bank for his withheld deferred bonuses. “He resigned to join his best client…Now, he wants €1.35m ($1.5m).” (Bloomberg)
At Barclays: “The bank let me down entirely and I have been thrown to the wolves… I was dismissed for behavior that was standard practice in the global FX market.” (Bloomberg)
Barclays banker who killed his wife after quitting his job with a £670k mortgage says the pressure became too much and that he snapped when she asked for a divorce. (Daily Mail)
Men like to tell themselves they’re more attractive than they really are. (NCBI)