Deutsche Bank is planning a bad bank. That’s what the Financial Times writes. And that’s how numerous media are currently taking it over. Deutsche Bank itself has not yet issued an official statement. Bank boss Sewing is supposed to say something about it in July. But what is this really about?
Would this really be a Bad Bank? Mainly long-dated derivatives are to be transferred to this special unit of the bank. Why derivatives? Well, they seem to be unprofitable for Deutsche Bank. And more importantly, new regulations in recent years have increased the capital requirements for high-risk positions. As a result, they demand more capital backing. So the bank wants to get rid of little profitable and constricting assets?
Really a “bad bank” for Deutsche Bank?
Well, what does a bad bank do? It is actually there for a bank on the brink of collapse to outsource junk so that a healthy core bank can continue to operate in the future. t The construct can just work at all if the state gets into the bad bank and uses taxpayers’ money to buy the broken assets out of the healthy bank (here’s a good example from HSH Nordbank). But it is hardly conceivable that the German state would provide money only so that Deutsche Bank could slightly improve its profitability and capital base.
The name Bad Bank was brought up by FT, not Deutsche Bank itself. We should call it that way. Deutsche Bank will probably (if the report is correct) transfer derivatives to a separate business unit where they will be settled over the years. They can transfer them so often into external companies. As long as no external money flows, it remains an internal problem for Deutsche Bank.
Or should external professional investors buy derivatives out of DB for values below the official market value? Then DB would have to accept losses. So, no matter how we look at it. As long as the bank is not on the verge of total collapse, the impending construct is more likely to be a spin-off into an in-house separate business unit. In this way unloved assets can be optically more clearly separated from the future core business and processed. But this will hardly be a “bad bank” in the classical sense.
Will this really help the bank? It would probably be a certain optical help for the internal processes, because it is clear which business is only managed and processed and which is still actively operated.