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New York (CNN Business)Deutsche Bank, once a superstar in Europe, is now a disaster.
Germany’s biggest lender is rapidly slashing jobs, it’s losing a ton of money and the stock is trading near all-time lows.
Many of Deutsche Bank’s problems are self-inflicted. It’s been badly mismanaged. Deutsche Bank (countless legal black eyes haven’t helped matters.) never fully cleaned up its crisis-era balance sheet. Restructuring efforts fell short. And its
But Deutsche Bank’s struggles have also been amplified by something the 149-year-old lender never imagined, mostly because it had never happened before in modern history: negative interest rates.
In 2014, the European Central Bank wanted to boost the sluggish economy but interest rates were already at zero. The unconventional decision to take them into negative territory was aimed at encouraging growth and avoiding deflation, but it meant banks were charged a fee for parking their reserves with the central bank.
The ECB’s extreme policies may have injected some life into Europe’s sleepy economy, in turn giving Deutsche Bank and other lenders a boost. However, negative rates are also crushing the profitability of all banks, Deutsche Bank included. And this unorthodox policy — one that the ECB is on the verge of doubling down on — is making it awfully difficult to revive the champion of Germany’s banking system.
“Negative interest rates have been another nail in the coffin,” said Claus Vistesen, chief eurozone economist at Pantheon Macroeconomics.
Although all banks in the eurozone have been subject to the ECB’s extreme policies, Deutsche Bank’s business model, and precarious balance sheet, made it particularly susceptible to this pressure.
Negative rates didn’t cause Deutsche Bank’s troubles, Vistesen said, but they “absolutely” magnified them.
It’s no secret that negative rates are an outright tax on banks.
Under normal times, lenders earn interest when they keep excess reserves at the central bank. But under negative rates, it’s the opposite: The central bank charges banks interest for sitting on that cash. The goal is to encourage lending — but in practice it has squeezed lending profitability, also known as net interest income.
“The business model of running a bank with negative rates is very destructive,” said Jeffrey Sherman, co-portfolio manager of the DoubleLine Core Fixed Income Fund.