Harsh Times for Deutsche Bank

German Central Banker Andreas Dombret has compared the comet-smash and subsequent death of the dinosaurs to the current state of the banking industry.

“Some banks are already extinct and others are under great pressure to conform, and a lesson from the era of the dinosaurs is still true today: size is not a goal in itself, neither is the size of a single bank a guarantee of its survival,” he stated in a conference in Vienna. Dombret has also not expressed an expectation for the total destruction of the industry: “Of course we hope that neither the impact of the recent financial crisis will be felt for the next five million years, nor do we expect an impact that brings the whole banking system to the brink.”

The Bank’s stock has fallen by 50% since the start of the year, as its losses were raised in September. The Bank’s shares however edged higher by 14% on Friday after some released data implied that a settlement with US lawmakers is just around the corner. In addition to the Bank’s profitability challenges and its falling share price, the bank is also faced with some restructuring costs and litigation.

The International Monetary Fund however believes that it is the biggest net contributor to global systemic risk and for the second time this year Deutsche is causing market jitter. If it needs to tap investors or even the government for funds, there could be serious economic implications.

“There is a risk of knock-on effects on other banks, which could prompt a tightening of credit conditions and decline in lending that would hit credit-reliant small and medium-sized firms especially hard,” says Jennifer McKeown, at Capital Economics. “And if Deutsche Bank were unable to raise enough capital, was refused a state bail-out and had to bail in investors, the effects on the German economy and banking system would be worse still.” That would rapidly spread to the rest of the eurozone and eventually further afield – Deutsche is not only a European bank, it is a major player in US financial markets too.

The German government has ruled out providing aid to the bank, in part because it has insisted that other European countries adopt tough conditions to tackle their problem lenders. German Chancellor Angela Merkel has also promised taxpayers that bailouts are not on the agenda. Going back on her word now could be disastrous for her re-election bid next year as the ultra-right-wing AfD party continues to gain ground.

Deutsche Bank was in the news over the weekend when six current and former employees, along with former executives at Banca Monte dei Paschi di Siena and Nomura Holdings Inc., were charged in Milan for market manipulation falsifying accounts of Italy’s oldest lender.