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For both institutional and contextual reasons, Deutsche Bank is unlikely to provoke the 2016 version of a Lehman moment.
Yes, there are questions about the bank's balance sheets, including the complicated valuations of "level 3" assets. But Deutsche Bank's sources of funding are much more diversified and its balance sheet is significantly more robust than Lehman's ever was. Also unlike Lehman, Deutsche Bank has access to emergency funding at a central bank, in this case, the European Central Bank.
And it has internal means of generating capital (including through asset disposals and even a rights issue), even though the more such methods are used, the less attractive they are to management and existing shareholders. Moreover, given its accumulated litigation reserves, the pressures would also lessen if, as was hinted at in some news reports at the end of last week, the bank reached a settlement with the U.S. Justice Department that required it to pay far less than the original fine of $14 billion.
The environment is quite different, too. Deutsche Bank is not part of a growing storm making its way through the global financial system. Although some European banks remain fragile, others around the world have notably strengthened their capital cushions, are deploying more prudent liquidity-management approaches, and have made significant progress in cleaning up their liabilities. Importantly in terms of systemic effects, this is particularly the case for U.S. banks.
But even if Deutsche Bank doesn't threaten a Lehman moment, that doesn't mean its troubles couldn't have any systemic effects. There are at least four factors that should be kept in mind.
By Mohamed A. El-Erian, originally published in Bloomberg View on 10/03/16. Reprinted with permission. The opinions expressed are those of the author.
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