Deutsche Bank Crisis

Group 1
Palash Gaunekar (1501088)
Nishant Shah (1501104)

Aroop Sanyal (1501074)

Sumitro Ghosh (1501108)

Deutsche Bank on the Verge of Collapse, TBTF nature compelling enough for German Govt. & Lenders

Trigger

Historic Events
Early Events

08 Financial Crisis Aftermath pushed

interest rates in negative territory

Reducing profitability, lower volumes

and high fixed cost crippled Deutsche

Cash cow IB division generated 85% of

the revenues, but lost pace post the
LIBOR scandal

Retail presence meant applicability of

Basel 3 norms which pulled entire
profitability into generating reserve

Magnitude of Current Situation

Share price has fallen from $100 in

2008 to $30 in 2014 to $10-$14 range

6.8 billion Euro loss in FY16

Failed a stress test in June 16

Situational

US Department of Justice fined Deutsche

Bank for mis-selling Mortgage Backed
Securities a decade ago.

Reasons to worry for Germany

The quantum of fine amounts to USD 14

billion which would mean raising USD 9
billion in additional equity during times of
increasing cost of capital.

German Lenders /Govt.s current stand

Asset Book stands at $1.8 trillion

which is half of Germanys GDP
Lenders / Govt. against providing any
bailout for Deutsche

Equity Price
Decline

Lenders/ Govt.s Response

Game Explanation

Payoffs

Solution

Conclusion

Mixed Strategy game with probabilities for seeking bailout and providing one by German Lenders/Govt.

Players

Deutsche Bank

German Lenders/ Government

k
See

Do
N
See ot
k

Moves available to Deutsche

Seek Bailout

Do not seek bailout

*Payoffs in subsequent slide

German Govt.
Bailout

Bailout

No Bailout

Situational

Deutsche
Bank

Moves available to German Govt.

Game Explanation

Payoffs

No
Bailout

Seek
Dont
Seek

Solution

Conclusion

Payoffs contingent on collapse of Deutsche and subsequent bailout by German Lenders/ Govt.
(-225,252)
k
See

(-566,437)
(-85,100)

Do
N
See ot
k

(-75,-20)

Payoff Calculation
In case Deutsche seeks bailout
If Germany provides bailout

Deutsche incurs loss for half a decade

as well repays the principal of package

Germany suffers from the lost interest

on the bailout as well as the
opportunity cost

If Germany doesnt provide bailout

Deutsche bank loses its non-financial

assets (fin-assets up for negligible fire
sale)

Germany loses deposits and lenders

principal/ interest

Assumptions

Bailout does not represent grant but a loan

German Govt. may prefer to act directly or indirectly

Trading/ Financial assets are prone to market risk and cannot be pledged as
collateral

Situational

Game Explanation

Payoffs

In case of Deutsche not seeking bailout

Lenders may or may not pump in funds

Deutsches payoff through losses if it

gets the

Solution

Conclusion

Very high probability of external assistance for deutsche bank to survive

Bailout

No
Bailout

Seek

25%

5.22%

Not Seek

57.73%

12.08%

Seek

Deutsche
Not Seek
Bank

No
Bailout

-225,-252

-566,-437

-85,-100

-75,-20

Pure Strategy
Game

Bailout

No
Bailout

Seek

-225,-252

-566,-437

Not Seek

-85,-100

-75,-20

Situational

1-p

p = 82.69%

q = 30.18%

1-q

German Lenders/ Govt.

Deutsche
Bank

Probabilities

Bailout

Game Explanation

Market Scenario

Normal Form

German Lenders/ Govt.

Payoffs

Reverse calculating
probability of default for
deutsche bank bonds
reveals a probability of
default of 39%

Solution

Conclusion

Asymmetric information and lack of bailout guarantee driving Deutsches restructuring program

Implications
Even though the probability of external assistance directly/ indirectly remains high (83%), it is not certain
The payoffs show that if it knows that there is a bailout coming through, deutsche could stop its restructuring program and
not seek bailout
In a pure strategy game if not seeking bailout and withstanding losses would have been the Nash equilibrium but Deutsches
collapse is subject to market risk and we have a mixed strategy

Moral Hazard
TBTF nature of Deutsche Bank and its global linkages entail huge systematic risk and an imminent threat of recession
If Deutsche was guaranteed survival, we could have had a moral hazard problem wherein Credit Suisse and Barclays could
take a cue and stop being diligent
To avoid such a scenario the German Govt. has rejected any bailout suspicions for Deutsche Bank

Situational

Game Explanation

Payoffs

Solution

Conclusion