Friday, October 07, 2016

The Math Behind Deutsche Bank
"Because of the practice of fractional reserve banking, Deutsche Bank has managed to maneuver itself into a position where the leverage ratio is 3.5%. What this means is that, effectively, Deutsche Bank only has enough high quality assets to cover 3.5% of their liabilities. From a pure depositor standpoint, the FY2015 Annual Report shows that there are 567 billion Euros deposited in Deutsche Bank accounts but just 97 billion Euros of cash and central bank deposits to cover this. If .. just 18% of the deposits to be withdrawn, this would effectively cripple Deutsche Bank. Depositors aren’t the only risk, either, as hedge funds are also asking the bank to return their assets. Roughly 1.3 trillion Euros of assets is tied up in various loans, derivatives and investments. What this essentially means is that Deutsche Bank has only 97 billion in Euros as cash to cover 1.8 trillion Euros of promises to various entities. To put this in perspective, the entire GDP of Germany is 3.8 trillion Euros. On top of this, those existing revenue-generating assets are insufficient to cover the operating costs of the bank, so the justice Department’s fine creates a financial double-whammy that will almost certainly cause its collapse in the absence of some sort of bailout .. Given Deutsche Bank’s major role in financing fragile Southern European nations and is considered so systematically important, some are speculating that a Deutsche Bank failure would lead to the total collapse of the Euro as a currency and with it, the Euro Zone itself .. The entire Deutsche Bank fiasco is fully avoidable. The government facilitated the widespread use of fractional reserve banking, attempted to regulate the inevitable instability then contributed to the instability through various actions such as destroying bank profitability through artificially low interest rates and then pushing banks into financial collapse through devastating fines, which are the only tool governments utilize to enforce regulatory decrees on organizations .. Banks, and the politicians who created the regulatory and policy morass who truly caused the mess, are not only insulated from the pain but also are able to twist it to their favor by promoting further regulatory action and claim a moral high ground. This cycle will continue until the entire central banking edifice is unwound. This is not a painless or even remotely easy path, but it is the only one to avoid the perpetual cycle of fines, collapses and bailouts which accomplish little more than siphoning money off the general public and into the hands of public coffers and special interests."
- Justin Murray in The Mises Institute essay
link here to the essay
link here to the source

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