How risk could jump the Atlantic

last updated 8 January 2015

Simon Johnson

Bloomberg.com

“You’ve probably never heard of Taunus Corp.,” said Simon Johnson. But as the U.S. subsidiary of Germany’s Deutsche Bank, it’s a window into how financial contagion could cross the Atlantic. Deutsche “is a giant,” the world’s second-biggest bank, with more than $3 trillion in assets. But that’s 44 times more than it holds in actual capital, making it more highly leveraged than the Franco-Belgian bank Dexia was before it collapsed. What’s more, Deutsche has on its books a disconcertingly high amount of risky European sovereign debt and U.S. mortgage-backed securities. And Taunus is even more leveraged than its parent, at “an eye-popping” ratio of 78 to 1.

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Why would the Fed let such a thinly capitalized bank operate in the U.S. despite its “risk to the rest of the financial system?” Perhaps it thinks Deutsche can help Taunus in a pinch. But given the shakiness of European bonds and U.S. mortgages, “such a presumption now seems questionable, at best.” Our regulators should demand higher capital ratios for Taunus. In times like these, “allowing business as usual is asking for trouble.”

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