Since rumors of a much lower DOJ settlement went viral last week, Deutsche Bank stock has rebounded. From a low of $11.48 last Friday, the stock was trading today above $13. This isn’t, of course, indicative of an end to all woes for the German bank, merely the latest is a long line of temporary reprieves. The problem for Deutsche is not the US regulatory lawsuit specifically, but rather how that dispute and potential liability further emphasizes the bank’s weaknesses which are much more than just one bank no matter how big.

Banking in Europe is dying, slowly strangled by everything from regulations to monetary policy that both contains no money and is increasingly harmful to it. But even these are again symptoms to the overriding defect, namely that wholesale money is no longer a viable platform. Without it, banks especially in Europe are left with no options but to shrink – compelling only more trouble in wholesale categories, especially the eurodollar, which further raises the risks of ongoing participation and forcing even more shrinking. And on and on it goes, while the visible risks of being exposed to such a backward system visibly rise, hitting Germany’s banks especially hard.

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That is what the “rising dollar” actually is, not the exchange rate convoluted by its inclusion in whatever dollar index. The “rising dollar” is the expression of “dollar” shortage which is really contracting bank balance sheet capacity. It is not just German banks retreating or being preyed upon by “speculators.”

On Friday, unionized workers at ING Belgium are set to strike, pushed to that drastic retaliation by the Dutch bank’s announcement yesterday to cut 7,000 jobs, 12% of its workforce, with half of those being targeted to the firm’s operations in Belgium. To see it written about in the mainstream is to wonder what is going on; nobody seems to really know why it happens. ING’s CEO Ralph Hamers only made it worse by suggesting outwardly at least there was really no reason for restructuring at all:

We’re strong right now, we have good results, we are growing and then you have to do the repairs, and not when you don’t have any choice any more.

What repairs? In the few media stories that have been written surrounding ING they all refer to the same buzzwords, “ partly to combine technology platforms and risk-control centres, as well to help it to contend with regulatory burdens and low interest rates.” What is perhaps understandable from the union standpoint is how those four fuzzy notions add up to 12% of the workforce. There is “something” missing here, just as there was when Commerzbank took to the same action last week, or Morgan Stanley last year.

What’s missing is the eurodollar and its tailwind of growth, growth, and more growth. Without so much volume expansion for everyone, competition, regulation, and especially cost management become paramount. The entire banking industry is coming to terms with what is increasingly undeniable – it must undertake another radical evolution because all forms of “stimulus” have clearly failed to restore sufficient function (economic as well as financial or monetary) to make it all work again.

This is the legacy of the post-2011 global money era where responses to eurodollar decay have been progressively more drastic and real. The immediate aftermath (tied to 2008 as well as PIIGS) especially in Europe was mostly accounting fiction; banks rewrote their RWA models and calculations to boost capital ratios, making themselves appear to have become healthier. No bank was as aggressive in this phantom capacity as Deutsche Bank. As I wrote last week:

Deutsche Bank, for one, began immediately to correct the problem. Just a few months later in January 2013, Jain and his management team were pleased to announce that the bank had successfully cut €55 billion in RWA in the fourth quarter of 2012 alone. The effect was an immediate increase in the bank’s core capital ratio to 8% from less than 6% (and insufficient) at the end of 2011. Of that €55 billion “improvement”, €18 billion was derived from the “roll out of advanced models”, an additional €8 billion was due to “data improvement exercises”, and a further €15 billion from “portfolio optimization.” Deutsche never provided much detail about that last one apart from language indicating “optimizing risk mitigation” from which we can infer at least more hedging.

That was all well and good under conditions of predictable volatility as well as hedging capacity (systemically). What would happen to all that math should volatility “unexpectedly” break out while hedges both performed far outside modeled expectations while replacing them was increasingly not an option? The only functional answer to that hypothetical situation is to shrink – not changing some numbers to alter appearances to satisfy regulatory views on the idea of “safe”, but to actually shrink in operation as well as scope for any future business trajectory.

Applying that same kind of scenario to DB (or Commerzbank, perhaps Credit Suisse and others?) in 2016, an environment that is at least comparable to what JP Morgan was facing in 2011 and 2012 (and as far as possible hedging is concerned, likely significantly more troubling with regard to systemic capacity), we can reasonably infer especially for a bank heavily dependent on models for having “de-risked” that there is a high degree of actual risk unwinding some unknown but significant part of that process. That negative pressure would be further amplified by an environment where total offered balance sheet capacity is limited; meaning where DB’s ability to replace ineffective hedges with new ones might be constrained because the price or flexibility of what is currently offered is relatively uneconomical due to those systemic reductions in overall balance sheet capacity. We know without much doubt this is the case with systemic capacity since at least the middle of last year and remains ongoing by everything from negative swap spreads to hugely negative premiums on cross currency basis swaps.

Obviously, this is speculation on my part (and to be clear that hasn’t made me one of the “speculators” being blamed of late, I have no positions in any of these banks) for all these banks including the motivations of ING. It is interesting, however, the Dutch bank mentioned “risk control centres” as part of its streamlining approach, possibly signifying its perhaps stale reliance on too much math now no longer so predictable.

I get asked all the time how to quantify or even just define the loss of balance sheet capacity and the truth is you can’t – at least not directly. We know it from how things work (or really don’t work), as it is inferred from a comprehensive review of how the entire system is functioning or not. And like a repo rate that is suspiciously high days before a quarter end, lost balance sheet capacity will also manifest as any number of banks staring into the eurodollar abyss and finally deciding that they finally have to do something. Before 2007, as a global bank if you weren’t growing you were dead, expansion was everything; now, especially after money inflections in 2011 and then this “rising dollar”, you are dead if you aren’t shrinking even if nobody can seem to answer exactly why.

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