Bank Reserves Appendix; One Additional Case Study

Early last month, Deutsche Bank replaced one CEO pledged with paring back the bank’s ailing franchise with another committed to doing the same thing only more quickly. As I wrote at the time, “Cryan isn’t being ousted because he was wrong, but because he was right.” In comes Christian Sewing whose plans are starting to come into focus.

It’s not good if you are one of the bank’s 10,000 or so US-based employees.

Late last month, 400 of them were dismissed, then early this month the firm announced plans to shutter its Houston office while also aiming for a total of 10% workforce reduction. Rumors this week pin the bogey at 20% layoffs and attrition, though a spokesman for the bank told Bloomberg there are “no such plans.”

DB’s ongoing saga and its US reductions are important in understanding what’s going on in the world as the global economy is anchored in chronic insufficiency by the eurodollar. As Bloomberg described it when the first announcements were made, “It’s the first concrete indication of how far Germany’s largest lender is planning to retreat from its past ambition to be a global investment bank, a goal it has pursued for some 20 years.”

There are two important cross-currents to understand about Deutsche’s fall. It is FICC that is bearing the brunt, meaning the bank is further committed to exiting the money dealing business even more so than it had been. As Sewing said in April, DB “will scale back activities in U.S. rates sales and trading, shrinking the balance sheet, leverage exposure and repo financing.” In other words, more of the imbalance in favor of useless bank reserves and less of the dynamism of balance sheet capacity that used to make the eurodollar system go.

As I stated a few days ago in examining bank reserves more closely:

If you don’t consider the crucial nature of balance sheet capacity within the global monetary system as it is, then eliminating a considerable portion of it thinking this was a good idea (on the individual bank level and then as a matter of policy) ends up with the contrary result. You are, like Bernanke, almost completely blind. It’s a hell of a destructive way to run a central bank, this policy of determined ignorance.