German Government Has Ruled Out Taking Stake in Deutsche Bank
Officials told lawmakers last week state support for lender was ‘inconceivable’
BERLIN—Aides to German Chancellor Angela Merkel have told lawmakers the state wouldn’t take a stake in Deutsche Bank AG if it were to issue new stock to shore up its thin capital cushion, one person who attended the briefing said.
The fact that Berlin appears to have ruled out any aid for the embattled lender as both unnecessary and politically unfeasible could put Deutsche Bank under renewed pressure as it works to stabilize its share price and stay out of the news while negotiating an acceptable settlement in a U.S. misconduct investigation.
In a closed-door briefing with a small group of lawmakers last week, Chancellery aides and senior Finance Ministry officials said it was “inconceivable for the state to take a stake in Deutsche Bank,” said one person who declined to be named because the briefing was confidential.
“We have a different bank resolution system than in 2009 and this must apply to us in Germany too,” the government officials said according to this person. This referred to recent legal changes that now force European governments to bail-in creditors—and in some cases depositors—before they shore up a struggling bank with taxpayer money.
Deutsche Bank is currently negotiating with the U.S. Justice Department to bring down a settlement in several investigations over the mis-selling of mortgage-backed securities. Last month, The Wall Street Journal reported that U.S. authorities had floated a $14 billion amount as an opening bid, sparking a rout in the bank’s share price. The bank has said it would not pay anywhere near this amount, which would wipe out nearly all of its existing capital.
It is still unclear whether Deutsche Bank will need to increase capital and, if it does, whether it would need the government to pitch in. But the fact that Ms. Merkel’s government has ruled out any aid for the bank will come as a negative surprise to investors, given widespread expectations in the market that the state would offer some form of last-resort assistance given the scale of Deutsche Bank and the shock its failure could inflict on Europe’s financial system.
“It would be amazing of the German government to let the (world’s) fourth most systemic bank collapse,” said one London-based analyst, who declined to be named because of compliance reasons. “All investors I talked to are of the view that one minute to midnight the German government would step in and support Deutsche Bank in some way.”
But others expect the private-sector solution is the more realistic outcome.
“It is inconceivable that Germany’s largest bank will be allowed to fail, but, even with the U.S. fine at the high end of expectations, we think a private sector solution combining disposals and a deeply discounted capital raise is more likely than state aid,” said Jonathan Peace, analyst with Credit Suisse.
Government officials told lawmakers the political fallout of any state involvement in a capital increase would outweigh the benefits and said they would favor Deutsche Bank raising whatever capital it may need from private investors.
It would be legally possible for Berlin to participate in a capital increase at the bank without bailing in creditors as long as it did so under market conditions—for instance by participating alongside private-sector investors. But such a move could be unpopular at home less than a year before a general election and expose Berlin to accusations of double standards after it campaigned for years to end state-financed bank bailouts in Europe.
The Chancellery and Finance Ministry declined to comment. The government has said in the past it wasn’t working on a state rescue for Deutsche Bank. A Deutsche Bank spokeswoman declined to comment. The bank said last month it hadn’t asked for help and didn’t need a capital increase.
Concerns that Deutsche Bank might need fresh capital pushed the shares to a low of €9.90 ($10.94) on Sept. 30, down 56% this year. Prices have recovered somewhat since and closed at €12.24 on Friday.
Late last month, Deutsche Bank sought to silence speculation about its future by appealing to lawmakers to tone down their public comments on the lender.
“Deutsche Bank lobbyists visited me…and stated clearly that Deutsche Bank can handle on its own what needs to be done,” Lothar Binding, a lawmaker with the Social Democrats and the party’s financial expert, told The Wall Street Journal.
The government has also sought to keep a low profile and deflect attention from the bank.
“There is far too much talk,” Finance Minister Wolfgang Schäuble told a press conference in Washington last weekend. When asked about Deutsche Bank by German lawmakers during the trip, Mr. Schäuble also refused to comment, a person familiar with the talks said.