Deutsche Bank again in the middle of the US-EU economic skirmishes

Deutsche Bank Towers – Headquarters in Frankfurt am Main, Germany. Taking a look into the lobby. (Deutsche Bank Audiovisual Service).

The US government is reacting in many ways against the fine in back taxes of €13 billion which the European Commission imposed on Apple. Firstly, Jack Lew, the American Secretary of the Treasury, accused the EU of grabbing tax incomes which belong to the US. On 31st August he said, “What’s not appropriate is for, in the name of state aid, Europe to be rewriting tax law retroactively, reaching into a tax base that properly should be a U.S. tax base, because it’s U.S. income, and doing it in a way that I think ultimately will hurt the business environment because it’s going to create uncertainty in Europe.”

Lew went on to threaten the European Union through a very strong answer to EU Competition Commissioner Margrethe Vestager‘s comments. She said that she is just making sure each of the 28 member states gets equal treatment in the EU. Her EU Commission department is responsible for the huge tax penalty on Apple. According to Reuters, “Jack Lew urged her to reconsider her investigations because they risked creating disturbing precedents”. It seems that the Americans are now realizing those threats.

Deutsche Bank Again

Last Friday, the US Department of Justice asked the American subsidiary of the largest German lender, Deutsche Bank, to pay a colossal fine of $14 billion. Allegedly, the bank was wrongfully implicated in the 2008 breakdown of the US financial markets, which triggered the then world crisis. Of course, this is just the opening bit of the US Department of Justice and Deutsche Bank is expected to come up with a proposal. According to sources, the lender expected a settlement between $2bn to 3bn.

Quite possibly, the size of the opening fine by the US Department of Justice precludes a settlement as low as the Bank expects. In the case of J.P.Morgan and the Bank of America, the Department opened the negotiations with a penalty of $20bn on each one. The final settlement was reached at $13bn for the former and $17bn for the latter bank. This means Deutsche will probably be pressed to go very close to or possibly above a double digit figure.

Can it pay?

In view of all that, the German lender has set aside around $5bn to pay for possible litigations. Apparently, the US Department of Justice is not the only case that Deutsche has problems with. Simple arithmetic tells us then that the bank will find itself in a very difficult situation, if the Americans continue pressing hard over the size of the fine. Under this light, it will be rather clear if the US wants to really engage the EU in a farfetched economic confrontation or not.

At this point, it must be reminded that last year, the French mammoth bank BNP Paribas was forced by the American authorities to pay a fine of $9.5bn. This was about alleged dealings with Iran and Cuba at the time when such transactions were illegal in the US. A few months later, the US started lifting the embargo on Iran and restored diplomatic relations with Cuba.

More EU banks to be fined

In any case, according to US mainstream financial media, Deutsche is not the last European bank being investigated and surely to be penalized. The list comprises the Royal Bank of Scotland, Union de Banques Suisses (UBS), Credit Swiss and Barclays. If this is so, the largest European banks will be held accountable in the US, on grounds that are yet to be known.

A capital issue

Coming back to Deutsche Bank, this last hideously oversized penalty in the US my cause a lot of pain not only to this bank, but to the entire EU. For months now this German lender has been targeted by the American authorities with leaks to the press ‘revealing’ the weak points of the bank, mainly regarding capitalization. The worst blow came from the Washington based International Monetary Fund, which called Deutsche the biggest risk in the global financial system.

In this way, the Americans have blocked the ability of the bank to increase its capital in the market. It seems the situation is rather desperate, to the extent that some weeks ago, Deutsche’s chief economist, David Folkerts-Landau, said that the Eurozone banks need €150bn in total from taxpayers to adequately recapitalize. What he must have in mind, without mentioning it, is that a good part of this huge amount has to be directed to the coffers of his employer.

Eurozone banks need more

It’s a fact then that the euro area banks are very poorly, if not dangerously inadequately capitalized. On top of that, it’s rather impossible to mobilize enough investors in the open market, to risk their money with them. Obviously, the Americans are currently trying, if not take full advantage of the difficulties of the European banks, at least to exploit this problem for their own interests. In this context comes the long studied Brussels initiative to corner some more US giants like Google, Amazon and McDonald’s on accounts ranging from tax avoidance to exploitation of dominant market position.

Undoubtedly, the US-EU confrontation has just started and it is not clear where it will end up. The determinant of that will be the progress of the much advertised trade deal between the two sides, the, by now infamous, Transatlantic Trade and Investment Partnership (TTIP). If the Americans sense that the deal is going to die, they will be a lot more aggressive than currently. This is an indirect proof that the TTIP will be to the detriment of Europeans and is to help only the multinationals, of which he US has the lion’s share.