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What's going on?
Deutsche Banks troubles continued on Monday as its shares fell more than 7% to their lowest level in decades! The catalyst this time? The head of the German government said it wouldnt provide aid to the bank ahead of German elections next year (according to a press report).
What does this mean?
Deutsche Bank has been generally struggling with the negative interest rate environment in Europe, which acts sort of like a tax on banks (because they are, effectively, charged to hold cash). More specifically, the banks stock has been under pressure since news leaked that the US government was seeking up to $14 billion in damages relating to Deutsche Banks alleged mis-selling of investments a far bigger amount than thought. All of this means the bank might have to try to raise new money from investors (which could, conceivably, require support from the German government).
Why should I care?
The bigger picture: Negative momentum like this can snowball – especially when a bank is involved.
Theres not necessarily any reason to think government support is necessary for Deutsche Bank. If it needs more money, it should be able to raise it from regular investors. Nevertheless, the fact that the German government is, reportedly, discussing government aid for Deutsche Bank feeds the perception that the bank is in a precarious position. Its worth noting that many still think the government would support Deutsche Bank if it really needed the help; the alternative would just be too disruptive to the financial system (also note, in any case, deposits up to 100,000 are backed by the government).
For the stock: Deutsche Bank says nothing to see here.
Deutsche Bank said on Monday that it will solve its own challenges and that the idea of government support was pure speculation. Furthermore, it said that it wouldnt have to raise new money from investors. But many investors clearly think otherwise: Deutsche Banks stock is down more than 50% this year (tweet this). That, at least partly, reflects a belief that investors think the bank will have to raise new investment, thus diluting the value of the stock owned by current shareholders.
Originally posted as part of the Finimize daily email.
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