FX liquidity contraction on the horizon due to ailing interbank FX dealer Deutsche Bank

FX liquidity contraction on the horizon due to ailing interbank FX dealer Deutsche Bank: Germany cannot bail it out

Andrew Saks

Germany’s government may well be duty bound not to offer state assistance to Deutsche Bank, one of the world”s largest FX dealers, therefore if it goes to the wall, a liquidity contraction could occur

Ailing financial institution Deutsche Bank is not only a German institution whose operations in its home territory are dominated by retail and corporate traditional banking.

Far from it in fact.

Deutsche Bank’s real revenue driving division is its interbank FX and electronic trading section, based in London.

Fiscal and operational difficulties on Deutsche Bank’s home soil have created a situation in which the bank has been the subject of government discussion for almost a year now, ever since the firm began reporting grave losses. Indeed, Germany’s finance minister Wolfgang Schaeuble even issued a public statement in the spring this year that there was ‘nothing to worry about’ in order to sweep Deutsche Bank’s grave position under the carpet.

A series of plummeting share price episodes has once again emerged this week, and today an even more precarious position has been demonstrated in that Germany’s government has stated that it would not be prepared to provide any form of state funded bail out for the bank should it eventually hit the buffers.

The company’s litany of regulatory fines for malpractices in specific core areas has not enamoured the government either, the most recent example being a $14 billion fine from the US Department of Justice for mis-selling mortgage backed securities. LIBOR and FX benchmark manipulation has also cost the bank gravely.

Now, despite the German government’s lack of will to prop up Deutsche Bank, a further difficulty has emerged, that being that it has now become somewhat apparent that Germany could not provide emergency capital to the bank even if it wanted to, meaning that any lobbyists from important financial markets regions such as London would find it difficult to put pressure on the German government in order to maintain Deutsche Bank’s prominent position in the electronic trading world.

The Frankfurter Allgemeine stated that if Chancellor Angela Merkel were to offer state assistance to Deutsche Bank, it would not sit comfortably with the hard line stance she took against a not dissimilar rescue package proposed for Italy’s impoverishe banks during the summer of this year.

As the bank’s share prices dip below 10 euros, a record low has been reached and taxpayers in Germany would likely vote against the incumbent government if it burdened them with having to bail out the bank.

Back in October 2015, FinanceFeeds first reported way ahead of the mainstream media that the interbank FX giant had estimated a third quarter loss of £4.4 billion, with sentiment from within the FX industry, especially surrounding the circumstance in which the loss of approximately 5.8 billion Euro was contrary to the forecast of 1 billion Euro profit.

Deutsche Bank was the second largest interbank FX dealer in the world with 14.54% of global market share in 2014 however this reduced to 7.4% by 2015.

Germany is deeply ensconced in socialist Europe, with its ailing and non-productive economies, lack of modern infrastructure and outmoded business practices, whereas Britain is the world’s leader in terms of financial markets on the global stage as well as the institutional technology that supports and provides it. Deutsche Bank’s London operations means that from just one office, the bank can provide the lion’s share of its commercial revenue.

This must not be overlooked, and it is becoming apparent that if Deutsche Bank remains a unified entity rather than operates its London operations separately, one of the world’s largest FX dealers could disappear, meaning that the liquidity availability may contract.

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