Bank Run: Deutsche Bank Clients Are Pulling $1 Billion A Day

Two related articles on the Deutsche Bank topic (both from Steve).  The first one is  dated 7/16/19 and the second is from April 2019.

by Tyler Durden

There is a reason James Simons’ RenTec is the world’s best performing hedge fund – it spots trends (even if they are glaringly obvious) well ahead of almost everyone else, and certainly long before the consensus.

That’s what happened with Deutsche Bank, when as we reported two weeks ago, the quant fund pulled its cash from Deutsche Bank as a result of soaring counterparty risk, just days before the full – and to many, devastating – extent of the German lender’s historic restructuring was disclosed, and would result in a bank that is radically different from what Deutsche Bank was previously (see “The Deutsche Bank As You Know It Is No More“).

In any case, now that RenTec is long gone, and questions about the viability of Deutsche Bank are swirling – yes, it won’t be insolvent overnight, but like the world’s biggest melting ice cube, there is simply no equity value there any more – everyone else has decided to cut their counterparty risk with the bank with the €45 trillion in derivatives, and according to Bloomberg Deutsche Bank clients, mostly hedge funds, have started a “bank run” which has culminated with about $1 billion per day being pulled from the bank.

As a result of the modern version of this “bank run”, where it’s not depositors but counterparties that are pulling their liquid exposure from DB on fears another Lehman-style lock up could freeze their funds indefinitely, Deutsche Bank is considering how to transfer some €150 billion ($168 billion) of balances held in it prime-brokerage unit – along with technology and potentially hundreds of staff – to French banking giant BNP Paribas.

One problem, as Bloomberg notes, is that such a forced attempt to change prime-broker counterparties, would be like herding cats, as the clients had already decided they have no intention of sticking with Deutsche Bank, and would certainly prefer to pick their own PB counterparty than be assigned one by the Frankfurt-based bank. Alas, the problem for DB is that with the bank run accelerating, pressure on the bank to complete a deal soon is soaring.

Here are the dynamics in a nutshell, (via Bloomberg): Deutsche Bank CEO Christian Sewing is pulling back from catering to risky hedge-fund clients, i.e. running a prime brokerage, as he attempts to radically overhaul the troubled German lender while BNP CEO Jean-Laurent Bonnafe wants to expand in the industry. A deal of this magnitude would be a stark example of the German firm’s retreat from global investment banking while potentially transforming its French rival from a small player in the so-called prime-brokerage industry to one of Europe’s biggest.

Of course, publicly telegraphing that DB is in dire liquidity straits and needs an in-kind transfer of its prime brokerage book would spark an outright panic, and so instead the story has been spun far more palatably, i.e., “BNP is providing “continuity of service” to Deutsche Bank’s prime-brokerage and electronic-equity clients as the two companies discuss transferring over technology and staff“, according to a July 7 statement. The ultimate goal of the talks is for BNP to take over the vast majority of client balances, which are slightly less than $200 billion currently.

There is just one problem: nothing is preventing those clients who would be forcibly moved from a German banking giant to a French banking giant from redeeming their funds. And that’s just what they are doing. Or rather, nothing is preventing them from moving their exposure for now, which is why they are suddenly scrambling to do it before they are suddenly gated.

Which is why the final shape of the deal remains, pardon the pun, fluid, and it is unclear how it will proceed, facing a multitude of complexities, including departing clients.

In an attempt to stop the bank run, BNP executives are meeting with U.S. hedge-fund clients this week to convince them to stay following similar sit-downs with European funds last week, Bloomberg sources said.

However, if this gambit fails, and hedge funds keep moving their business elsewhere, officials at the German bank may just relegate its assets tied to the prime finance division into the newly formed Capital Release Unit, i.e. the infamous “bad bank” which is winding down unwanted assets totaling 288 billion euros ($324 billion) of leverage exposure, and the prime brokerage is responsible for much of the 170 billion euros of leverage exposure that’s coming from the equities division into the division, also known as CRU a presentation shows.

It also means that countless hegde funds are suddenly at risk of being gated on whatever liquid exposure they have toward Deutsche Bank.

To be sure, Deutsche Bank’s hedge fund balances have been declining throughout the year as speculation swirled around Sewing’s intentions for the prime brokerage, but the rate of redemptions was far lower than $1 billion per day. Now that the bank jog has become a bank run, the next question is how much liquidity reserves does DB really have and what happen if hedge funds clients – suddenly spooked they will be the last bagholders standing – pull the remaining €150 billion all at once.

We are confident we will get the answer in a few days if not hours, until then please enjoy this chart which compares DB’s stock decline to that of another bank which was gripped by a historic liquidity run in its last days too…

Here is an article that explains the fact that Deutsche Bank underwrites loans in the US.  Now, some of that article is puffing their performance on the debt portfolio, as it is aimed at attracting depositors, but it does none the less point out that it is backing loans in other countries.  The other article I sent out, where the bank is coming unraveled affects those loans, because the financial instruments that DB sold as under writing suddenly is no good anymore, those banks who are using DB’s underwriting are now exposed to being under capitalized and thus being closed down by US banking regulators.


Deutsche Bank makes strides in US leveraged lending

Jonathan Schwarzberg, Loan Pricing Corporation

NEW YORK, April 4 (LPC) – Deutsche Bank was the biggest mover among the league tables for investment banks underwriting leveraged loans during the first quarter of the year, according to data from LPC, a unit of Refinitiv, despite turbulence in the debt and equity markets that slowed lending in December and into January.

The German bank jumped to fourth place among investment banks for overall leveraged underwriting during the first quarter of 2019, taking a 4.6% share of the market. The bank came in eighth place overall for 2018 with a 4.5% market share.

“Leveraged finance has long been a strength of Deutsche Bank’s. We have stayed active in the market throughout turbulent times and remain committed today,” said Sandeep Desai, co-head of leveraged debt capital markets at Deutsche Bank.

The leap comes as Deutsche Bank and Commerzbank have begun discussions over combining the two largest banks in Germany, as reported by Reuters. Deutsche Bank’s stock price has fallen from almost US$30 per share in 2015 to US$7.65 per share on Wednesday amid litigation and regulatory woes, as reported by Reuters.

The bank’s leveraged finance business distanced itself from those concerns moving above Citigroup, Goldman Sachs, Credit Suisse and Barclays in claiming the fourth spot.

Bank of America Merrill Lynch came in first with a 13.1% market share, JP Morgan came in second with 9.8% and Wells Fargo was third with 9%. The top three banks during the first quarter were also the top three banks during the full year of 2018 in the same places.

Leveraged loan volume hit a three-year low at US$152bn during the first quarter as volatility in both the equity and credit markets at the end of 2018 slowed business amid fears of a global economic slowdown.

Secondary loan prices sank to 94.57 on LPC’s index of heavily traded loans, marking a multi-year low on December 28, 2018. This level has since risen to 97.5 as of Wednesday. The recovery allowed banks committed to underwriting during the volatility to capture additional market share.

In 2017, Deutsche Bank’s CFO James von Moltke said the bank had decided to cut its leveraged finance activity due to its credit risk appetite. The CFO in February said the firm’s portfolio had performed well during 2018 and saw no provision for credit losses in the fourth quarter during the height of volatility.

Leveraged finance currently makes up just 1% of the bank’s loan portfolio, according to comments from von Moltke at a conference call discussing the bank’s 2018 financial results, which showcases Deutsche’s sheer size.

“Ultimately the business is an originate and distribute business, and so for us we focus on the underwriting quality of the origination in the business, but then on how it’s risk managed in terms of managing de-risking trajectories, which we’ve done frankly very well on,” von Moltke said during the bank’s February conference call.

New money issuance was also noteworthy during the quarter as volume overall in leveraged finance was down across the board. The lower secondary prices caused repricing activity to vanish and reserved refinancing opportunities to the most qualified issuers.

Bank of America led this sector in addition to the overall standings, followed by JP Morgan, Wells Fargo, Credit Suisse and Barclays. This group of five also led new money deals for the entire year in 2018. Deutsche Bank was just 1bp behind Barclays though with 5.13% market share for new money versus 5.14%.
(Reporting by Jonathan Schwarzberg. Editing buy Michelle Sierra and Jon Methven)

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