Deutsche Bank’s Slow Motion Bank Run

Last month, I wrote about the problems at Deutsche Bank (DB) as the stock slumped and markets worried that this could be a European Lehman event given DB’s huge derivatives position and its critical role as counter-party in the EU banking system. See my post of September 28, 2016. But the world did not end immediately and the market went back to sleep. DB’s stock rose and that was the end of it, right? NOT.

After huge write downs, fines and operating losses, DB is seriously undercapitalized. The bank still has access to lots of liquidity, which at June 30 stood at €223 billion. But once a bank loses the confidence of the market, as we said, the skids are greased for liquidity to get up and walk away. And that is exactly what is happening.

According to the Q3 report released today, liquidity on hand at DB dropped by about 10% during the quarter to €200 billion. DB’s currently safe liquidity position is turning precarious. Why? The bank in large part is funded by deposits, the depositors are getting nervous and they are taking their money out. This is where Deutsche Bank is very different from Lehman, and far riskier. As of June 30, DB had €566 billion in total deposits, nearly half of its liabilities, of which €307 billion was in retail deposits. This is why it was so critical to halt the plunging stock price, an indicator to DB’s retail clients (not erroneously) of the bank’s viability. The lower the price dropped, the faster they might pull their deposits and the quicker DB’s liquidity would go to zero.

The Q3 report is troubling. Deutsche Bank reported that its total deposit base had shrunk by a very substantial 5%, sliding from €565,645 to €540.609. But even more concerning was the most liquid “sight deposit” category, which DB tracks as “interest-bearing demand deposits”. This liquid gold plunged by a whopping 13% from Q2 to Q3, sliding from €156.2 billion to €135.9 billion as of Sept. 30. This was the biggest drop ever recorded since the bank reorganized its various divisions and started breaking out demand deposits as a standalone category in its quarterly presentations. It was also the lowest amount of demand deposits on DB’s books going back to Q4 2014 and perhaps further.

deutsche-bank-interest-bearing-demand-deposits

On its face, this data means that, in the third quarter, DB’s depositors pulled a substantial amount of savings held at the bank. And since deposits declined, assets also had to fall, and sure enough, total cash and central bank balances declined from $123 billion to $108 billion.

We do not know if the deposit flight continued into the month of October, when DB’s problems became big news. But the markets now have something new to watch and it doesn’t look good.