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Could Deutsche Bank become Europe's Lehman Brothers?

Last updated: 02:41 02 Oct 2016 EDT, First published: 10:10 27 Sep 2016 EDT

Deutsche Bank's London headquarters
Deutsche Bank denied approaching Berlin for help and said it had no plans to raise capital

Fears are growing that Deutsche Bank AG (NYSE:DB) could become Europe’s answer to Lehman Brothers amid concerns about a possible £11bn fine for alleged US mortgage mis-selling.

The affair has sparked fears about Deutsche’s ability to pay the fine and speculation that it may need a taxpayer bailout from Berlin.

Shares in Royal Bank of Scotland Group plc (LON:RBS) have also come under pressure as investors fretted that it may also face a penalty of as much as £9bn ahead of settlement talks over issues similar to those involving Deutsche.

RBS itself remains state-owned after British taxpayers rescued it in the financial crisis and is struggling to offload 300 branches that it must sell to meet state aid rules governing the bailout.

Analysts said the issues had echoes of the collapse of Lehman Brothers in 2008, which filed for bankruptcy after writing down US$5.6bn on toxic home loans.

They warned that the problems at Deutsche could have a knock-on effect on global rivals, given the interconnected nature of the banking industry.

Chief trader at Ayondo Markets, Jordan Hiscott, said: "Previously regarded as the premier bank of Europe , shares of Deutsche Bank are down 53% on this year alone, which is remarkable given that over the same period the DAX has dropped by just 1.4%.

"This is beginning to feel like a crescendo period and if they are having funding and capital requirement issues, this could have major consequences for various Spanish and Italian banks. The question on many people’s lips now is: could this be the next Lehman Brothers?

“A rights issue is one tool which could be used to increase capital requirements, however given the performance of its shares this year, I suspect this would need to be deeply discounted to be successfully completed.”

Analyst Jasper Lawler at CMC Markets said: “There is a fear that Deutsche Bank is setting up as Europe’s Lehman Brothers moment.

“US banks have been taking advantage of the difficulties in the European banking sector by taking market share, but trouble at a multinational with a big presence in US capital markets like Deutsche Bank carries huge counterparty risk.”

Shares in Deutsche threatened to drop below €10 for the first time in about 30 years as investors worried that the bank may have to go cap in hand to them.

German chancellor Angela Merkel has reportedly ruled out intervening in the bank’s row with the US Justice Department, particularly ahead of Germany’s national polls next year.

But Deutsche insisted it had not approached Berlin for help and had no plans for a capital increase.

A spokesman for the bank said it was meeting regulatory capital requirements to protect against shocks and would have time to do so even if its position deteriorated.

Deutsche is contesting the fine, which is more than twice the £4.8bn that it has set aside in legal costs and about 80% of its stock market value.

But some analysts said they believed Berlin would step in if Deutsche appeared on the brink of collapse because the bank is too important to the health of Germany’s economy.

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