ECB fears for withdrawal of €1.1TRILLION Deutsche Bank – and impact on the global economy

The ECB has made Deutsche the first bank under its supervision to report on the cost and consequences of its investment bank’s exit from the global markets.

The ECB’s concern stems from the collapse of Lehman Brothers in 2008, and regulators are known to scrutinise large, struggling institutions like Deutsche Bank over their potential to destabilise global markets.

Lehman’s sudden and shocking fall intensified the 2008 crisis and wiped $10 trillion from global markets. Although a Deutsche Bank source confirmed to the Financial Times that other Eurozone banks would also be tested, the ECB’s scrutiny comes amid speculation as to the future of Deutsche’s UK-based investment bank.

After failing to recover from the crisis caused, in part, by Lehman Brothers’ demise, the beleaguered financial institution has paid out an approximate £12billion ($17bn) in fines and damages for misconduct since the start of 2008, according to company filings compiled by Bloomberg.

Deutsche is already in the middle of a global review of the investment bank, known internally as Project Colombo, to determine the way forward as revenues shrink and clients look for profit elsewhere.

Scrutiny has fallen on the bank’s determination to join the big boys in global investment, and its subsequent troubles. A leading finance consultant has described Deutsche’s move into the big bad world of investment banking as “emotional” and “ugly.”

Octavio Marenzi, CEO of consultancy Opimas said that the struggle of their investment arms is, “an emotional issue for them.”

He said: “They’ve had to come around and painfully admit their investment banking baby is quite ugly.”

As concern mounts over the effect of Deutsche’s change of heart, officials from the bank’s supervision wing, the Single Supervisory Mechanism, have told Germany’s largest bank that it will need to make clear exactly how much damage its exit would do to global financial stability.

Deutsche Bank has called the ECB’s concern a part of, “common industry practice”.

A statement said: “We regularly estimate for regulators the capital, liquidity and cost consequences of an orderly wind down of the positions of trading books.”

James von Moltke, chief financial officer at Deutsche Bank said: “We think we are first in the queue here because we are the largest capital markets bank in the ECB’s supervision.”

Deutsche Bank has said that it “routinely” calculates the consequences of an orderly winding-down of positions in trading books for regulators, and new CEO Christian Sewing has already warned staff that he will be forced to make a number of tough decisions.

Mr Sewing told staff in a letter: “The time pressure is on and the expectations are high from all sides.”