The strength of the European banking system amidst Deutsche Bank's recent struggles

Overview

European banks have come under strong pressure in recent weeks and Deutsche Bank has been one of the latest victims of this climate of uncertainty. However, to assess the current situation of the German institution, it is possible to rely on three important financial indicators: CET1, Liquidity Coverage Ratio, and Net Stable Funding Ratio. CET1, the main indicator of financial solidity, stands at 13.4%, in line with the standards of other European banks (14.74%) and with what is established by the third Basel pillar (4.5%). Moreover, both Liquidity Coverage Ratio, a short-term liquidity indicator, and Net Stable Funding Ratio, a long-term liquidity indicator, far exceed the minimum required by the regulator, standing at 142% and 119% respectively. These data demonstrate Deutsche Bank's ability to maintain a solid balance between liquidity management and the solidity of its own capital. The bank seems to have rather solid balances, having reported profits of €5.7 billion in 2022 and announced its intention to prepay a Tier 2 subordinated bond of $1.5 billion issued in 2016. However, investors' concern about Deutsche Bank is not only related to revenue and profit expectations but also to the fact that some past scandals have not been completely forgotten by the market.
Deutsche Bank has been involved in multiple financial scandals, including interest rate manipulation, violation of US sanctions on countries including Iran and Russia, and the sale of subprime mortgage securities that led to the 2008 financial crisis. How Deutsche Bank's management has handled recent crises is well known to the market and perhaps this is one of the biggest sources of concern.

The effect of ECB policies

According to financial analysts, the current difficulties of the European banking system could be attributed to the moves of the ECB, which are generating deficits in the banking sector. The increase in interest rates can produce multiple repercussions, including slowing down the economy, increasing credit costs for debtors, and the possibility of an increase in bankruptcies. In addition, an increase in interest rates can impact the stock market, as investors may decide to sell bank stocks to invest in government bonds, which are considered safer and more profitable following the increase in rates. All these factors have contributed to a climate of volatility and concern for Deutsche Bank and many other financial institutions in recent weeks. In conclusion, the increase in interest rates could entail a higher risk of insolvency for debtors and an increase in costs associated with managing loans in difficulty for banks, with the possible consequence of an increase in non-performing loans and a decrease in bank profits. 

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