Deutsche Bank troubles raise fear of global shock

Germany's largest bank appears in danger, sending stock markets worldwide on a wild ride. Yet the biggest source of worry is less about its finances than a vast tangle of unknowns - not least, whether Europe can muster the will to mount a rescue in the event of an emergency.

In short, fears that Europe lacks the cohesion to avoid a financial crisis may be enhancing the threat of one.

The immediate source of alarm is the health of Deutsche Bank, whose vast and sprawling operations are entangled with the fates of investment houses from Tokyo to London to New York.

Deutsche is staring at a multibillion-dollar fine from the Justice Department for its participation in Wall Street's festival of toxic mortgage products in the years leading up to financial crisis of 2008. Given Deutsche's myriad other troubles - a role in the manipulation of a financial benchmark, claims of trades that violated Russian sanctions and a generalised sense of confusion about its mission - the American pursuit of a stiff penalty comes at an inopportune time.

It heightens the sense that Deutsche - whose shares have lost more than half their value this year - needs to secure additional investment, lest it leave itself vulnerable to some new crisis.

The biggest worries centre on what happens if Deutsche falls apart to the point that it threatens the globe with a financial shock - and whether new rules and buffers put in place since the last crisis will keep the pain from spreading.

Regulations that took effect this year in the European Union standardise how member countries are supposed to handle the potential implosion of a large financial institution. Banks, too, have put aside more money to deal with potential losses.

Deutsche could pose the first test of the new arrangement. Recent challenges have underscored concerns about the limits of solidarity in Europe.

From the chaos of the sovereign debt crisis to the acrimony over an influx of refugees, European authorities have proved something less than an exemplar of coordinated government action. The European Union has become a focus of populist anger, further constraining options.

All of which adds to worries that Deutsche amounts to a fire burning, one that might yet become an inferno, while the fire department is consumed with existential arguments over its purpose. If the alarm sounds, no one can be sure what, if anything, will happen.

In the worst case - now highly unlikely - the bank could collapse, inciting a scramble to pull money from markets around the globe. Institutions that trade with Deutsche would feel an urge to collect their cash immediately. Given the scale of the bank's balance sheet - ^1.8 trillion, or more than $2 trillion - that inclination is likely to spread to every crevice of finance. Economies would grind to a halt. Jobs and fortunes would disappear.

Despite murmurings in pundit quarters that this sort of situation may be unfolding, provoking comparisons with the catastrophic bankruptcy of the American investment banking giant Lehman Brothers eight years ago, most economists dismiss such talk as overwrought and overblown.

Deutsche is sitting on cash reserves worth €240 billion, or about $269 billion. It has sold bonds that can be converted to equity should the need arise. The Justice Department's proposed fine of $14 billion is viewed as the opening of a negotiation that could cost Deutsche a fraction of that amount - thinking that sent the stock surging on Friday.

© 2016 The New York Times News Service