Have we fixed the real cause of the crisis?

Bankers behave recklessly. Things go wrong. Banks expect to be rescued. We forget to fix the system. Repeat.

“I don’t know whether I should laugh or cry now that the bank that has made speculating its business model is declaring itself a victim.”

Germany’s Vice Chancellor Sigmar Gabriel didn’t hold back when he commented on Deutsche Bank’s excuses for the sticky situation it finds itself in.

Deutsche recently recorded its lowest share price in three decades. One of its directors claimed speculators were to blame. It didn’t fool the German deputy PM.

The stock of Germany’s biggest bank has more than halved this year. Meantime Deutsche is caught up in a derivatives scandal in Italy while it faces an 11-figure fine in the US for dealings in mortgage-backed bonds.

Talk of Deutsche not being able to pay this $14 billion fine without raising cash has led to rumours the German government is drafting a bail-out programme behind the scenes.

Investors even feared Deutsche’s turmoil might spill over to other banks, causing a global banking crisis.

So soon after the last financial crash, is history about to repeat itself again?

Out of the woods? Hardly

To turn a phrase upside down, Deutsche Bank is very much in the woods.

While some commentators have been sounding alarm bells over Deutsche’s predicaments, others believe the threat is less severe.

Politico’s Francesco Guerrera argues the bank is in a considerably better position than banks like Lehman Brothers and Bear Stearns were before they collapsed.

“Deutsche has some €600 billion in customer deposit – a huge reserve against a cash crunch – more than €200 billion in liquid assets, and full access to the European Central Bank’s emergency loans. And it has a fraction of the debt Lehman carried on its balance sheet – a key factor in its demise.”

In that respect it would appear Deutsche still has a long way to go before it enters the bank graveyard.

But over at Zero Hedge, ‘Tyler Durden’ (it’s a pseudonym) warns it doesn’t take much for things to spiral out of control.

Deutsche’s liquidity is directly linked to its share price, meaning that if its stock continues to plummet, its liquid assets could quickly dry up.

Simply put, if Deutsche Bank’s position worsens and panic leads to it being locked out of the wholesale markets (the modern equivalent of a bank run), “then all bets are off”, Durden writes.

If Deutsche were to find itself on this path of doom, will the safeguards still have any effect or will all eyes turn to the German state?

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Forgetting to make sure it doesn’t happen again

Wall Street jumps in the Hudson
With gold in their bathing suits
Then we send in the miracle ferries
That’s all we do

American band The National described the global financial crisis most poetically in their song Sin-Eaters.

Banks behave recklessly. Things go wrong. Bankers expect to be rescued. And we forget to make sure it won’t happen again.

Eight years after the global financial system came within “a few millimetres of total implosion” as then European Council president Herman van Rompuy put it, the world of finance certainly doesn’t feel more robust.

Seeing headlines about bank crises and potential bail-outs all look a little too familiar. When the new safeguards were put in place after the crisis, nobody was hoping they’d be tested this soon.

Let’s zoom out of the individual Deutsche case, as it’s worth asking if anything has changed in banking land since the crisis.

Despite all the safeguards that have been put in place, changing the business culture of banks should be considered at least as important.

More than anything it was bankers’ mentality that got us into trouble. The disconnect between the people taking the risks (bankers) and the people bearing the risks (taxpayers) wasn’t handled responsibly.

‘Heads I win, tails you lose’ and ‘it’s only OPM (other people’s money)’ were the mantras of the day.

Did we remedy this?

“Despite talk of ‘cultural change’ the underlying structure of the financial world has largely stayed intact,” Joris Luyendijk writes in his book Swimming with Sharks for which he went undercover in the City.

“I am convinced that were we to pack off all the employees in the City to a deserted island and replace them with a quarter of a million new people, we would see in no time the same kind of abuse and dysfunctionality.

“The problem is the system, and rather than angrily blaming individual bankers for acting on their perverse incentives we should put our energies into removing these incentives.”

Luyendijk concludes nothing structural has been done to fix the sector. A claim seemingly supported by this week’s news about RBS.

The BBC reports that Royal Bank of Scotland exploited struggling businesses for its own gain. Leaked documents show “staff could boost their bonuses by finding firms which could be squeezed in what is called a “dash for cash”.

According to the whistle-blower RBS deliberately helped viable companies to go south in order to claim their assets at a bargain. RBS increased these practices after the financial crisis.

If this news story is even remotely representative for the banking industry then new stricter rules will have little effect. Bankers will keep finding ways around legislation in their pursuit of ever greater profit targets.

Deutsche Bank may well survive the current scares. But as long as the real cause of the crisis isn’t fixed I fear we’ll be dancing on a volcano.

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