Keep Calm and Carry On: Post-Brexit Takeaways From UK Trip

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.



Chris Konstantinos is the Director of International Portfolio Management at RiverFront Investment Group, a participant in the ETF Strategist Channel.

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