How risk could jump the Atlantic
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?” asked Simon Johnson at Bloomberg.com.
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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