The Banking Crisis Just Got Worse

US stocks have dropped sharply after new concerns over Germany's Deutsche Bank. Investors continue to worry about the health of the global banking system. Banking is a nightmare; they can cause a lot of carnage when things go wrong.

What's up, guys? It's Floating Ahead here because I'm wearing a black shirt today, and apparently, the banking system is getting a lot worse. Just two weeks after the collapse of several major banks, another is now rumored to be in the chopping block. Except this time, it's one of the largest banks in the world.

In this case, Deutsche Bank holds three times more money than Credit Suisse at 1.6 trillion dollars. They're also listed as a systemically important financial institution that's too big to fail. Just like Credit Suisse, they've also been involved in quite a lot of controversy, leaving some investors to believe that they could be next. That's why we got at this, guys, exactly what's going on, why the banking crisis does not seem to be getting any better despite continuous rescue efforts, and what you could potentially do about this to save money.

On this episode of "Be Careful Around Sloths, Because They Will Bite," although before we begin, there's a lot of research that goes into making a video like this. So if you want to be kept up to date, feel free to subscribe and check out my newsletter down below in the description because I'm able to include a lot more information there than I could usually include in the video. So enjoy, thank you so much, and now let's begin.

To start, we gotta talk about Deutsche Bank. For those unaware, this is a more than 150-year-old, multi-generational German bank with offices throughout the entire world, 82,000 employees, and billions of dollars in income. In fact, they're one of the largest banks in existence, which is where things take a slightly different turn.

Look, on the surface, all of this begins with what's known as the banking crisis, which I'll do my best to explain on a really basic level in under a minute. See, throughout 2020 and 2021, interest rates were held at zero percent as a way to incentivize the entire economy to continue growing and spending. This allowed people to borrow a lot of money, and as you would expect, a lot of that money flowed back into the banking system, which would be a reasonable move for people to make.

However, when a bank takes your deposit, they don't just let it sit idle in a vault. Instead, they lend and invest it with the expectation of growing that money and giving some of it back to you as a reward for keeping your money with the bank. In this case, though, U.S. banks had so much money and interest rates were so low that a large chunk of their deposits went into buying low-yield U.S. Treasuries, which plummeted in value once the Fed began rapidly raising their rates.

Now, in a normal market, this wouldn't be that big of a deal since technically the bank still has access to their money. But Silicon Valley Bank was the exception, and when their customers began withdrawing their money at the exact same time, that caused a liquidity crisis, which eventually resulted in three banks completely collapsing.

What does that have to do with Deutsche Bank, you might ask? Well, shortly after a brief U.S. banking panic, the international Credit Suisse began experiencing similar difficulties after customers began withdrawing billions of dollars from the bank, contributing to the bank's biggest annual loss since the financial crisis in 2008.

The bank then admitted that they had found material weaknesses in its financial reporting over the past two years because of ineffective internal controls. And when one of the world's largest banks says this, a lot of their customers begin to panic, causing them to continue falling until eventually, UBS stepped in to buy them for pennies on the dollar. However, what people found the most remarkable was that just prior, Credit Suisse had received a clean bill of health from regulators, and then took less than a week to completely implode, leaving everybody to wonder, "Who's next?" Apparently, people now think it's Deutsche Bank, and it's easy to see why.

For example, in 2007, they were fined 7.2 billion dollars for misleading investors with irresponsibly issued mortgages. In 2009, the bank admitted it engaged in covert espionage, and its critics from 2001 to 2007 directed by its corporate security department. In 2015, they were forced to pay 2.5 billion dollars for rigging interest rates, and from there, they faced a variety of legal battles from tax evasion, sanctions violations, and money laundering.

In fact, it is said that by 2016, the bank had been involved in some 7,800 legal disputes and calculated 5.4 billion dollars in litigation services. And that doesn't even count the Epstein vine of 150 million dollars or the 2018 money laundering scandal; the bribery fine of 2021 where they spoofed precious metals futures, or their most recent strip club scandal where their employees attempted to comp the nights out as a business visit.

They also failed the Federal Reserve stress test in 2018, with the concerns including material weaknesses in the firm's data capabilities and controls supporting its capital planning process, as well as weaknesses in its approaches and assumptions used to forecast revenues and losses under stress.

Of course, practically every bank of that size is going to be subject to controversy, lawsuits, and fines; it's just inevitable. But in this case, their share price has taken a similar hit to that of Credit Suisse, having fallen 92 percent from its high in 2007 after a series of poorly timed investments and buyouts. Now, concerns are growing again about the bank's future and whether or not they can make it through.

Now, in terms of what's happening today, look no further than credit default swaps. I've explained this one before, but for those unaware, anytime a bank issues a loan, they have the option to purchase what's called a credit default swap, which acts kind of like insurance in the event the bank or the borrower doesn't pay them back.

In this case, one bank is able to transfer the risk to another bank for a small fee, and then that second bank takes on all the risk. Now, in the event that the second bank has to pay back the first bank, they aren't completely out of luck because they'd assume the rights of the underlying investment, and they'd be collecting enough of a premium from other credit default swaps to offset the risk.

Basically, just think of this like the insurance that you pay to cover the losses if a bank were to go under, and the price of that insurance is dictated by the likelihood that investors think the bank will actually go under. In this case, when it comes to Deutsche Bank, their credit default swap spiked in a similar fashion to what we saw with Credit Suisse right before they were bought out, signaling that investors think there's a high likelihood that potentially something could happen.

Or I guess, more simply put, people are drawing a lot of comparisons between what happened with Credit Suisse and what is beginning to happen now with Deutsche Bank, and that's scaring a lot of investors into panicking. But is that actually the case? I mean, on the one hand, there's an element to the banking failure that's simply caused by people believing there to be a problem. Like, even if a bank is perfectly fine, all it takes is a certain percentage of their customers to begin withdrawing their money all at the exact same time, and before you know it, they're looking to the Federal Reserve to bail them out.

Typically, this is usually worsened by other systemic issues like falling bond prices, a depletion of deposits, and slowing revenue. But at the end of the day, company belief goes a long way, and sometimes that fear can self-perpetuate into a real problem very quickly.

Now, in this case, analysts are saying that Deutsche Bank is not the next one to fail. They explain this bank now operates way more efficiently after a massive restructuring. Their net income was up 159 in the last year, and the German Chancellor said that there's no reason to worry. A finance professor also just recently said that the bank was a natural candidate for a market sell-off because of its previous troubles, large sometimes complex holdings, and market skepticism about its future profits.

So what we're seeing right now is simply a panic and lack of trust in the markets that is driven completely by emotion. Personally, the way I see it, Deutsche Bank does look to be in a very strong position, and if anything were to get too bad, I would not be surprised if they get bailed out just like every other bank before them. However, I also wouldn't discount panicked emotions turning into a very serious concern because ultimately, that could lead to quite a lot happening, especially when it comes to investor confidence.

So in terms of what all of this means for you, your money, and the markets, here's what you need to know. My initial thought seems to be that this sounds overblown, even though investors are justified based on the sudden collapse of other banks, which also sounded overblown. But regardless, in terms of the average person here in the U.S., it's probably nothing to worry about, especially if you're not holding millions of dollars in cash in a bank or putting your life savings into banking stocks.

Now sure, something could absolutely happen, and at this point, nothing surprises me anymore. But at the end of the day, this is a perfect example of why you always try to stay under FDIC limits, stick with money market funds with large banks that you trust, or look into government-backed treasuries, which won't be at the whims of a bank. In fact, your sponsorepublic.com allows you to buy treasuries directly within the app, and you could get a free stock worth all the way up to a thousand dollars when you use the link down below in the description with the code when you make a deposit. So enjoy!

Point being, there are plenty of safe places to store your cash just in case something were to happen. But for Deutsche Bank, it seems to be the equivalent of yelling fire in a crowded movie theater, where people are panicking because people are panicking again. There's certainly the possibility that there are much deeper issues than we're currently being made aware of, and that might explain why Janet Yellen had an emergency meeting Friday morning. But only time will tell.

So with all of that said, let me know what you guys think down below in the comment section. If you think this is a big deal, if this is something to worry about, or if this is absolutely nothing and the headlines are getting ahead of themselves. Thank you again for watching. As always, reminder to subscribe, hit the like button, comment for the YouTube algorithm, feel free to add me on Instagram. Thank you again, and until next time.