We find it ironic that Germany, an outspoken critic of bank bailouts for countries like Italy, may be forced to witness one of their own making. Despite Deutsche Bank’s well-publicized failings in capital adequacy, we don’t believe that German banks will cause a systemic meltdown of the global financial system, a la Lehman Brothers in 2008. Why?
- European Central Bank (ECB) is now the banking regulator/lender of last resort, which was not the case during the global financial crisis. In our view, Deutsche Bank is likely too big to fail, so we believe the ECB would likely backstop.
- We believe, based on recent reports, that the US DOJ settlement for Deutsche Bank’s residential mortgage-backed securities lawsuit is likely to be significantly less than the $14 billion initial headline number (AFP report on Friday suggests a number more in the range of $5.4 billion, though this is not substantiated yet).
- Counterparty risk management processes have learned from the Lehman meltdown – collateral on derivatives are now standard operating procedure, so contagion risk from a global investment bank is likely lower, in our view.
- We predict that the German government is more likely to go for a “bail-in” (shielding depositors at the expense of shareholders and some bondholders) than a bail-out. The key here is preventing a run on consumer deposits.
APPENDIX: SIGNIFICANT MACRO COMMENTARY FROM MY MEETINGS
Important Disclosure Information
Investments in international and emerging markets securities include exposure to risks such as currency fluctuations, foreign taxes and regulations, and the potential for illiquid markets and political instability.
High-yield securities (including junk bonds) are subject to greater risk of loss of principal and interest, including default risk, than higher-rated securities. In a rising interest rate environment, the value of fixed-income securities generally declines.
Mortgage-backed securities are subject to prepayment and extension risk; as such, they react differently to changes in interest rates than other bonds. Small movements in interest rates may quickly and significantly reduce the value of certain mortgage backed securities.
Using a currency hedge or a currency hedged product does not insulate the portfolio against losses.
There are special risks associated with an investment in real estate and Real Estate Investment Trusts (REITs), including credit risk, interest rate fluctuations and the impact of varied economic conditions.
Technical analysis is based on the study of historical price movements and past trend patterns. There are no assurances that movements or trends can or will be duplicated in the future.
RiverFront Investment Group, LLC, is an investment adviser registered with the Securities Exchange Commission under the Investment Advisers Act of 1940. The company manages a variety of portfolios utilizing stocks, bonds, and exchange-traded funds (ETFs). RiverFront also serves as sub-advisor to a series of mutual funds and ETFs. Opinions expressed are current as of the date shown and are subject to change. They are not intended as investment recommendations. Copyright ©2016 RiverFront Investment Group. All rights reserved.