Ever since the 2008 financial crisis, many experts have warned that the banking sector is still noticeably weak. Even larger players such as Deutsche Bank do not seem to be able to escape the repercussions felt nearly ten years ago. A recent report stated that this financial giant will face more than $14 billion dollars in fines as a result of mis-sold mortgages and securities during the height of the crisis (1). After shares tumbled nearly seven per cent (one of the largest drops associated with this bank), both Wall Street and the FTSE seem to have recovered. However, are we out of the woods yet?
Wary Hedge Fund Managers
One of the main reasons why such a precipitous fall in share prices occurred was that rumours had begun to spread in regards to hedge fund managers withdrawing their holdings from Deutsche Bank. This signalled that more speculative positions might no longer be viable and therefore, a slight market dip was seen. However, most worries were quelled when reports emerged that the bank had come to a potential agreement to pay approximately $5.4 billion dollars in fines (2).
A Mere Slap on the Wrist
We should note here that a reduced fine of “only” $5.4 billion dollars equates to nothing more than a slap on the wrist when we consider that Deutsche Bank draws in billions of dollars in revenues each and every year. This would be akin to a millionaire being forced to pay a parking ticket of $250 dollars.
So, it is no surprise that markets recovered swiftly and shares in the bank soon rebounded. Regardless of the fines, we must ask ourselves why these shares fell more than seven per cent during intraday trading to begin with. Does this possibly signal a less-than-favourable sentiment from those who are “in the know”?
The Issue with Modern Banks
As demonstrated by the financial crisis of 2008, banks have been less than forthcoming when asked to publicise their internal woes. In other words, they often choose to keep solvency issues behind the financial curtain. Investors are not likely to become aware of any major losses until well after they have already occurred. As a result, stockbrokers and other professional traders are understandably wary. This further underscores what can only be called an utter lack of confidence within the banking sector as a whole. So, how could this possibly affect the semi-professional stockbroker?
The Trickle-Down Effect
Although recent stress tests have shown that the majority of banks are equipped to handle another major crisis, the fact of the matter is that individual investors understand little in regards to the content of these tests and what is exactly measured. This is when knee-jerk reactions may occur.
Let us imagine that the recent deal between Deutsche Bank and various regulators falls through. Hedge fund managers will once again pull their holdings out of this sector and we could witness a knock-on effect within hours. This might not necessarily be classified as panic selling, but contagion could quickly spread into other speculative areas such as mortgage-backed securities and (especially) the real estate market.
Better Safe Than Sorry
There is no doubt that the scenario outlined above represents what could be termed a worst-case scenario. Still, this does not mean that it may not come to pass in the months ahead. This is the main reason why many individual stockbrokers are choosing to remain out of the banking sector in terms of investments. Considering the fragility of the EEC and Brexit concerns, this makes a great deal of sense. We should also note that some analysts are predicting a full-blown banking crisis within the next few years. Whether this amounts to speculation or fact, most traders simply do not wish to take any chances.
This level of prudence should then be combined with the use of the tools available at CMC Markets. From late-breaking banking news to sudden shifts in the price of a commodity, it pays to stay ahead of the curve. While it appears as if Deutsche Bank has escaped the proverbial silver bullet, we may not have seen the last of such troubles within this sector.