Deutsche Bank Undercapitalized?

In a statement everyone ought to be aware of if they are not, about two weeks ago U.S. Federal Deposit Insurance Corp. Vice-Chair Thomas Hoenig was reported as saying that:

• Germany's Deutsche Bank is "horribly undercapitalized" and has "no margin of error"; and,

• the Basel III global capital rules (known as the Basil III Accord) allow lenders to appear well capitalized when they aren't.

Needless to say, Deutsche Bank's CFO Stefan Krause is reported as having said in response to Mr. Hoenig's statements that "To say we (Deutsche Bank) is undercapitalized is inaccurate because if you look at the Basel framework, we're now one of the best capitalized banks in the world after our capital raise".

What else would Mr. Krause say? Imagine the consequence of Mr. Krause saying something along the lines of: 'As much as we don't want to admit it Mr. Hoenig is absolutely right'.

The real question is, is Mr. Hoenig correct in his view with respect to the Basil III Accord. If he is, perhaps Mr. Krause is also right but may simply be saying: 'All banks are sinking boats, the hole in ours simply isn't as big as is the holes in the boats other banks currently are travelling in".

When writing this commentary I reviewed the wording adopted in the Basil III Accord. As best I can tell, that Accord drives all bank ratio relationships from audited financial statements. Given that 'mark-to-market' accounting rules have not been enforced for banks since 2008 - 2009, I for one do not place a great deal of credibility on bank ratio analysis driven after September 2008 from audited bank financial statements. See my reasoning in Mark-to-Market Again, a commentary I published in this Newsletter on March 1, 2012.

Interestingly,the U.S. Federal Reserve is reported as having adopted the Basil III bank capitalization rules yesterday. See Fed pledges to get tough on Wall Street as adopts Basil rules.

Exclusive: Deutsche Bank 'horribly undercapitalized' - U.S. regulator - reading time 3 minutes (Reuters).

Fed pledges to get tough on Wall Street as adopts Basil rules - reading time 3 minutes (Reuters).

Italy Headed For Bail-out?

Italy's second largest bank (MedioBanca) was reported last week as saying that Italy might need a 'Greece-style bailout' within six months. Mediobanca is reported as having said in a confidential client note that:

• "time is running out fast";

• "The Italian macro situation has not improved over the last quarter, rather the contrary. Some 160 large corporates in Italy are now in special crisis administration."; and,

• Italy will "inevitably end up in an EU bail-out request" over the next six months, unless it can count on low borrowing costs and a broader recovery.

Comments like these have to exacerbate eurozone and world economic concerns - and yet they seem to be generally viewed as 'same old', 'same old' by the financial markets.

Is Italy headed for a Greece-style bailout? - reading time 1 minute (Marketplace).

Italy Faces Huge Losses on Derivatives Restructured in Eurozone Crisis - reading time 2 minutes (Mish's Global Economic Trend Analysis).