COVID-19 crisis threatens Deutsche Bank's 'bad bank' Unwind

The German bank, still considered by regulators to be one of world’s the most important in terms of financial market stability, is trying to recover after five consecutive years of losses totalling more than 15 billion euros (13 billion pounds).

Crucial to the bank’s recovery is its efforts to shed 44 billion euros worth of complex assets held in a so-called “capital release unit” or “bad bank” that have plagued its balance sheet for years.

But the coronavirus crisis is gumming up the market for the types of exotic derivatives Deutsche Bank is trying to sell, which means the biggest threat to the lender’s capital levels is likely to come from its bad bank, analysts, derivatives experts and sources within the bank said.

Last year, Chief Executive Christian Sewing unveiled a plan to return the bank to profitability, shrinking its investment bank and axing 18,000 jobs globally, but the virus now threatens to delay his ability to execute it.

The bad bank is central to Sewing’s plan, enabling Deutsche Bank to shed unwanted assets such as risky and illiquid derivatives and delinquent loans that have been a drain on its balance sheet for years and free up capital to support its core businesses.

Deutsche said its plan to offload most of the assets within the bad bank by 2022 was on track.

The bank said it “continues to see active participation in its disposal programme” in the second quarter.

“Thus far we do not see the current market conditions as a major impediment to our plans,” it said in an emailed statement.

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