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Deutsche Bank show of virility would lack punch

Deutsche Bank's shares have jumped after reports that it could buy back debt amid a wider market rout. The bank has declined to comment, and the actual amount CEO John Cryan could raise is limited. But he may not actually have to do much to improve Deutsche's situation.

Back in 2012, Cryan's predecessor Josef Ackermann claimed his lender didn't need to use the European Central Bank's crisis-fighting long-term refinancing operations. European Central Bank President Mario Draghi later criticised such protestations as a "show of virility".

Public displays of strength would help Deutsche right now, though. The bank's credit default swaps have rocketed, reaching similar levels to 2011 as investors panic over Deutsche's ability to service coupons on hybrid debt. The snag is that buying back debt may not make much money.

One constraint is forthcoming rules requiring banks to keep a minimum level of capital that can be used to absorb losses if a bank goes bust, dubbed total loss-absorbing capital. Deutsche had about euro 110 billion of TLAC-eligible debt as of September 2015, versus a requirement of euro 82 to 84 billion, making about euro 26 billion possible for a buyback. But Deutsche may not want to use this excess.

The most aggressive move would be to buy back the deeply distressed contingent capital securities, which are trading at 70 per cent of par. But banks are penalised for holding bank capital securities, and it may not make much sense to retire - and thus reduce - capital given economic uncertainty.

Deutsche could just buy its senior debt. But this is not trading at big discounts to face value, meaning gains of perhaps two per cent to five per cent of par, according to BNP Paribas estimates. That would mean a maximum gain of between euro 600 million and euro 1.3 billion. In reality, it probably would be much less: many investors would not want to sell, and Deutsche would not want to damage market trading for its bonds.

Still, economic gains aren't the point. Deutsche's 10-year credit default swaps have fallen over 40 basis points as talk of the buyback picked up. Draghi famously saved the euro zone in 2012 by pledging to buy bonds, without actually buying any. Cryan may be able to pull off the same trick.