DB Deutsche Bank Aktiengesellschaft

By Georgi Kantchev 

Deutsche Bank AG this week endured questions about whether it would raise capital, whether the German government would come to its aid and whether it was losing the confidence of the market as some hedge funds dialed back their business with the bank. Its stock fell to fresh lows, only to rebound Friday to end the week up 1.4%. Its share-price decline of nearly 50% this year has rippled through financial markets and hit other European banks, already beset by the continent's weak economy and negative interest rates. Here's a look at the German bank's troubles.

Why is Deutsche Bank so important?

By many accounts, the bank is too big to fail. With EUR1.8 trillion ($2.02 trillion) in assets, Deutsche Bank is Germany's biggest bank and one of the world's largest lenders. It has more than 101,000 employees. The International Monetary Fund said in June that the bank is the biggest contributor to systemic risk among large lenders, because it is so connected to others.

What's the latest trouble?

Clients getting scared, and the potential for a fine from the U.S. Justice Department. The latest share-price volatility followed questions about the likelihood that Germany would help the bank as well as reports that clients, including several large hedge funds, have pulled billions of dollars from the bank. The scrutiny followed a Wall Street Journal report that the U.S. Justice Department could demand Deutsche Bank pay $14 billion to settle a series of high-profile mortgage-securities cases. The bank says it expects ultimately to pay far less, and the settlement might not be entirely a cash payment. Still, if Deutsche Bank has to write a big check to the U.S. government, that eats into its capital cushion.

Any other issues?

Yes, plenty. Europe is a difficult place for a bank these days. The European economy is sluggish and interest rates are painfully low, making it difficult to turn a profit on the core business of making loans. What's more, Germany is a fiercely competitive retail- and business-banking market. There is a proliferation of state savings banks that aren't as motivated by profit and thus push down prices for banking services. Deutsche Bank, of course, is also a global investment bank -- and it has faced stiff competition in core investment-banking businesses from American rivals. Earlier this year, Deutsche's U.S. banking unit failed the Federal Reserve's annual "stress tests," because of Fed concerns about its ability to measure risks. It was the second year in a row the German bank flunked.

How has the market reacted?

Badly. Deutsche Bank shares have dropped nearly 50% this year, about twice as much as the Stoxx Europe 600 Banks index. Debt issued by the bank has sold off while the cost to protect against a default by the bank, as measured by its five-year credit-default swaps, is hovering near its highest levels since the depth of the European debt crisis in 2011.

What's the solution?

That is the billion-dollar question. Deutsche Bank has plenty of cash to satisfy skittish customers who want to leave, and it has access to loads more through the European Central Bank, which offers loans on extremely permissive terms. But a stiff fine, or the prospect of more losses, could erode its capital and require it to seek more. The declining stock price makes raising capital more painful -- each new share you sell brings in less money. It is also not clear who would buy in to the bank at this point. The European Union has strict rules about state aid to companies. The bank, which has already fired thousands of employees, might need to cut some more costs and sell assets.

Is Deutsche Bank creating another Lehman moment?

Not yet. In 2008, Lehman Brothers failed in large part because panicked hedge funds pulled out their money, helping to trigger the worst financial crisis since the Great Depression. Unlike Lehman, Deutsche Bank has a far more diversified client base, spread among German retail banking and multiple institutional business lines. Perhaps most important, the Frankfurt-based lender also has access to the European Central Bank, which makes cheap loans available to banks and has provided them in copious amounts during and after the eurozone's debt crisis.

--Mike Bird contributed to this article.

(END) Dow Jones Newswires

September 30, 2016 16:51 ET (20:51 GMT)

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