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As the banking crisis unfolds, major central banks worldwide are totally losing control and the world economy is wandering around without any hope or direction. From 2006 up until now, major central banks, as the Fed, ECB, BOJ & PBOC, have expanded their balance sheets from $5 trillion to $25.5 trillion, and the biggest share of the extra $20t that was created has been destined to prop up the financial system.
To simply put, central banks are recklessly and endlessly creating money out of thin air, which means, in real terms, that this money doesn’t have any value. Even with these extra $20t, the world economy keeps crumbling down. and to make it worse, the global debt has massively increased from $125t in 2006 to $280t today.
The 15 largest US banks have so far set aside $76b to cover bad debts and the 32 biggest European banks €56b. This is the highest loan provision since the 2006-9 crisis which brought down Lehman and Bear Stearns. The consultants Accenture estimates that losses from bad debts could rise to $880b by the end of 2022. That would be 2.5x the 2009 loan provisions. But I doubt that banks have realized the magnitude of the current economic problems. Central banks clearly see the risks. Otherwise, they wouldn’t have panicked back in August 2019.”
Part of that panic has been boosted by the Deutsche Bank situation. The bank is going through a very strict austerity program to try to balance accounting after several years of losses. Their total assets are of €1.3t and equity of €62b, accordingly, the equity is 4.7% of their total assets. Consequently, loan losses of 5% would wipe out their capital, but strategists have been discussing that the coming loan losses of Deutsche bank could top 25%. So, adding the gross derivatives exposure of $50t, a 0.1% loss would be enough to bankrupt Deutsche Bank. Even though some may say that gross exposure should be reduced to a much lower net figure, during times of crisis when the counterparties fail, the gross exposure remains gross.
Furthermore, being one of Europe’s largest banks, Deutsche Bank has shown its crashing conditions by asking hundreds of its managers to voluntarily renounce receiving their monthly salaries to try to save their own jobs, as a part of its cost reduction program. The bank also plans to lay off around 18,000 employees by the end of 2022.
Nevertheless, despite its fragility and financial hardships, Deutsche Bank is the main maintainer of European economies, and it has many bonuses from Italy, Spain, Portugal, and other European countries, which fear for the advance of the economic deterioration that could lead to bankruptcy, which would make the bank to be forced to sell these values at low prices in order to pay off its debts, breaking or deeply hurting a number of European economies.
The Financial Stability Board has released a report listing the financial institutions whose size and power are so great that their bankruptcy could influence in a systematic global crisis, what they referred to as “too big to fail”, meaning that the failure of one of these institutions could cause unprecedented consequences and endanger the survival of the whole financial system.
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