The pressure is building for Deutsche Bank. Germany’s largest and most financially leveraged bank continues to see its stock price languish as other firms distance themselves from the beleaguered financial institution.
Indications that the bank may pay billions of dollars to the US government in order to settle charges related to mortgage lending practices have sent markets reeling amidst an environment already on the edge.
Should the bank fail, it could have devastating implications for the financial services industry.
And, since market participants have often flocked to bitcoin in times of market distress, turmoil of this magnitude could prove highly bullish for the digital currency.
“The capital markets have awakened to bitcoin as a disaster hedge,” analyst Chris Burniske told CoinDesk. The digital currency doesn’t correlate with other asset classes, an aspect that may make it more attractive in times of uncertainty, said Burniske, blockchain products lead for investment manager ARK Invest.
“Depending on how people feel about Deutsche Bank’s future prospects, they may choose to hedge themselves from the more traditional markets by using bitcoin,” he went on to say.
Potential bailout
Safe haven assets like bitcoin may come in handy soon enough, as Deutsche Bank’s rapidly deteriorating situation has many wondering whether the financial institution will need a bailout from the German government or the European Central Bank.
The company has been been on rocky ground for some time, and if they don’t do something to fix it, Deutsche Bank could go belly up, economist Chris Martenson told CoinDesk.
“The DOJ is coming after them for $14b, and if they pay even $3b or $4b, it will still be too much for them to bear,” he said.
While securing a bailout may prove unpopular, the political pressure to make this happen could be enormous. Discussions involving the possibility of a obtaining such financial assistance intensified on 29th September, when certain hedge funds cut their derivatives exposure to Deutsche Bank and the major financial institution’s shares fell more than 6.5%, CNBC reported.
Deutsche Bank would go on to release a statement assuring global market participants of its financial stability, but the numbers remain a grim reminder about the hurdles the bank faces.
It has roughly $16b in equity compared to $160b in debt, according to a separate CNBC report. Company shares have dropped upwards of 70% since July 2015, falling from a highly of roughly $35 to approximately $11.50 on September 29, Google Finance data reveals.
Possible ‘global contagion’
Should the organization’s financial position continue to deteriorate, a failure to secure a bailout could “spark global contagion,” stated Arthur Hayes, co-founder and CEO of leveraged bitcoin trading platform BitMEX. More specifically, a situation of unchecked financial weakness could result in numerous consequences, including depositor flight and the collapse of credit lines, he told CoinDesk.
Deutsche Bank is the largest derivatives counterparty in the world. The financial institution has been offloading some of these contracts, selling roughly two-thirds of a portfolio of uncleared credit default swaps.
Because Deutsche Bank has derivatives contracts with so many institutions, any bank it owes money to will be affected, noted Hayes. While the magnitude of the fallout from Deutsche Bank’s failure remains unknown until it happens, contagion could result in central banks around the world being forces to shore up vulnerable financial institutions.
Market expert Petar Zivkovksi told CoinDesk that, should Deutsche Bank fail, it could impact “dozens of systemically important banks around Europe and the globe.” He also spoke to the key role played by the DOJ fine, emphasizing that the final amount Deutsche Bank would pay was thus far undetermined.
“The US justice department fine tipped the situation into a crisis, although recent news indicates that fine may be reduced to allow Deutsche Bank to find a way to restructure and save itself,” said Zivkovksi, director of operations for leveraged bitcoin trading platform Whaleclub, highlighting the reluctance thus far of the German government to step in.
Impact on bitcoin
Bitcoin’s price and volatility could be impacted by the Deutsche Bank situation, depending on how the situation plays out – and how markets react accordingly.
Volatility was been very low in September, with The BitMEX 30 day Historical Volatility Index measuring 24.72% during the first 29 days of the month, down from 49.97% in August and 69.42% in July.
“Bitcoin prices may be impacted as the situation unfolds, but I believe only an extremely negative resolution, such as a domino-effect euro bank failure, could bring high volatility back to BTC prices,” Zivkovski speculated, adding that it would take an extreme case scenario to spark a major flight to cryptocurrencies.
“The world is not quite ready yet to pour large amounts into cryptocurrencies in times of fiat distress,” he added.
Hayes offered a different point of view, asserting that central banks will engage in robust money printing whether Deutsche Bank receives a bailout or not.
Any such money printing will provide tailwinds for bitcoin and “result in more financial repression as central banks once again must prevent assets from fleeing the banking system”, he said – a situation that might ultimately favor currencies like bitcoin.
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