For nearly 150 years, the Deutsche Bank in Germany has been trusted throughout Europe. However, in recent months, the bank has instead become the riskiest financial institution in the world, according to the International Monetary Fund.

Continual Financial Downturn

Deutsche Bank AG’s share prices have decreased dramatically this year, dropping over 50%. In fact, the institution has been experiencing a steady downturn for quite a while, having dropped in value by 90% since its peak in 2007. Then in July, the bank in fact reached record lows, due at least in part to the UK’s Brexit vote, which has had a negative effect on the global economy that will likely be felt over a long period.

But the IMF’s main worry is that Deutsche Bank is over-leveraged. They’ve made a number of risky investments that could easily go bad, proving detrimental not only for them and their customers, but for the global economy in general. In the past, Germany’s financial state has had among the most significant ripple effects in Europe, with losses in German banks leading to significant losses all over. So the fear is that the current problems with Deutsche Bank could spread to other financial institutions and have a significant impact on the rest of Europe.

 

Jeffrey Gundlach - Bank Of America vs Deutsche Bank
And the IMF isn’t the only one who’s worried. Stoxx 50, Europe’s index of the top 50 blue chip companies, has voted to remove Deutsche Bank AG from its ranks on August 8th, along with another ailing financial institution, the Credit Suisse Group AG. These decisions aren’t made lightly, either. Normally changes to the index are made only once a year, but if a company in the top 50 is ranked 75 or below for two straight months, it can be removed immediately, before the annual evaluation.

A Positive Outlook?

In spite of its problems, some believe that Deutsche Bank’s financial hardships are only superficial. Even though they’re out of the Stoxx 50, they remain in Europe’s main index, the Stoxx 600. And while it’s true that the bank is on a downturn, so are many financial institutions in Europe, particularly in the wake of Brexit.

Others are citing the results of the European Union’s recent “stress test” as evidence of Deutsche Bank AG’s financial viability. Testing 51 different European banks in July, the EU sought to determine the overall resilience of its banking institutions in the event of a hypothetical economic disaster. When the results were released, Deutsche Bank performed slightly better than expected, and significantly better than some other participants, such as BMPS and Austria’s RaiffeisenLandesbanken.

A Lot of Work to Do

Still, “better” doesn’t equate to “good,” and Deutsche Bank ranked fairly low compared to many other European banks. The risks in its current investments were a large part of why the bank did poorly. This type of over-leveraging was one of the main causes of the 2007-2009 economic crash, so financial experts are understandably worried to see Deutsche Bank making the same mistakes.

The bank’s size works against it as well. It’s one of the largest financial institutions in Europe, and its reach and influence extends to a variety of other banks and organizations all over the world. If Deutsche Bank fails, the IMF worries that it could easily take these other institutions with it.

Most importantly, things have been on a steady decline for quite a while for Deutsche Bank—a factor which the stress test didn’t take into consideration. Many financial experts agree that things remain bad for European banks in general, and the European Banking Association reminds us that even for the ones who scored well, there’s still a lot of work to do across the board.