Banks across Europe have announced over 20,000 job cuts in recent days as they struggle to make profits. The focus is on German giant Deutsche Bank, whose share price has hit 30-year-lows after U.S. regulators announced they are seeking a $14 billion fine over a misselling scandal.
The U.S. Department of Justice accuses Deutsche Bank of misselling mortgage securities, residential loans repackaged as bonds and sold to investors, dating back to 2005.
Regulators have put the initial fine at $14 billion; Deutsche Bank insists that is just an "opening position." The final figure is likely to be negotiated down, says senior Europe analyst at London's Capital Economics, Jennifer McKeown.
“The big question is by how much, just how big it will end up being," said McKeown. "Deutsche Bank has suggested that it envisages a fine of between $3 billion and $5 billion, which would be just about affordable for Deutsche Bank. But in fact it seems it is likely to be quite a lot higher.”
If it is much higher, analysts say Deutsche Bank would have to raise fresh funds by tapping shareholders for cash.
If that failed, under new European rules major share and bond holders would have to cough-up in what is known as a "bail-in". The last resort would be a state rescue.
“I think that a state bailout is possible," said McKeown. "The German government is in a very good position to bail out the bank in terms of its public finances. Its debt is relatively low and it has no deficit. But the difficulty will be a political one. Germany after all has resisted similar bailouts in Italy very recently and in Greece before that.”
The German government and Deutsche Bank insist there has been no discussion of a state bailout.
Poor profits have hit other banks with Germany’s Commerzbank cutting one in five of its workforce, and Dutch giant ING shedding several thousand staff.
Several Italian banks are also on the brink of needing state help.
So is Europe headed for a repeat of 2008 and another banking crisis? Austria’s Finance Minister Hans Joerg Schelling said this week the necessary safeguards are in place.
Schelling said he is very convinced there is not a banking crisis, rather there is a profitability crisis in European banks.
Recent stress tests suggested the vast majority of European banks are strong enough to survive. But with little sign that interest rates will rise soon, the challenge to banks’ balance sheets is set to continue.
