Why is Deutsche Bank called the riskiest bank on the planet? Is the bank over leveraged? Deutsche Bank is facing 1000s of lawsuits will all the legal issues cause the bank to collapse?

Duur: 9:29

Video transcription
are all in some way interconnected as well but in june $YEAR the IMF did a financial stability report and they looked at the different countries and when they got to Germany they said that Deutsche Bank appears to be the most important net contributor to systemic risks ok so of all the banks on the planet deutsche bank is the riskiest a couple days later the Fed the Federal Reserve came out within stress tests now you have to understand that the whole point of the stress test is for you to have confidence in the bank see they pass these little test so these tests were created to be reasonably easily passed and they failed again so now you have the risk is bank that has had trouble not once but twice passing the stress tests what could go wrong but it should be clear that they are the biggest threat to the global financial system now we need to see why the IMF and the Federal Reserve is designating deutsche bank as the risk is bank on the planet so let’s go right to the horse’s mouth their most current annual financial statement and I say this in all honesty let us pray before we begin to it though it is really important for you to understand what leverages and you know who hasn’t at Christmastime who hasn’t watched it’s a wonderful life and you remember when George Bailey was on his way to his honeymoon and the bank there was a run on the bank and he uses honeymoon money to recapitalize the bag and reduce its leverage and that’s because the normal way the banks make their profit is the difference between what they pay their depositors are actually loading that money and what they get in interest from the loans they make from those depositors we are in a fractional reserve system so long as not everybody wants their money back at the same time this is not a problem ok now normal leverage at that point was ten to one so for every one dollar that they took in they could loan ten times that amount out okay really simply put that’s leverage now let’s look at how deutsche bank is leveraged all right now the leverage ratio indicates a level of vulnerability the lower the ratio the higher the leverage now when i first looked at this I mean it doesn’t look that bad they have a 3.5 leverage ratio that seems like it’s pretty low but i remembered them discussing the fact that Deutsche Bank was as leverages Lehman was or near there when they went out so i dug around and I found the formula to translate the leverage ratio into the leverage rate and let me show you that a 3.5 leverage ratio is a 29 2 1 leverage rate and what that really means is that they went out and borrow twenty nine dollars to generate one dollar in equity capital so they borrowed and they bought real estate or derivatives or whatever it is that they bought 29 to generate one that’s a lot but beyond that prior to $MONTH 2004 regulations mandated in the u.s. that the maximum leverage rate was 12 to one of course then city Goldman JPMorgan all these guys went in and they negotiated a loosening up of those leverage rates and this is not really a problem as long as the assets continue to appreciate and your income increases to cover all of the new depths of their taking on but what happens when your income drops well you take on even more debt to make up for that shortfall ok well what happens when prices drop well the 29 2 1 leverage rate a three to four percent decline in asset prices room it wipes out all equity and you are insolvent when your debt levels exceed your equity and frankly you know this could be a very good reason why it’s so important for this set one of the reasons that the central bankers need to keep the stock market the bond market in the real estate market elevated because deutsche bank is not alone in this leverage we’re just looking at them specifically but how about that income to cover all the new debts that they’ve taken on well this is out of the annual report it goes back to $MONTH 2011 and the trend of their income should be pretty apparent from that ok well how about currently now this is out of their annual report and i quote second-quarter net income fell ninety-eight percent from a year earlier