The problems surrounding Deutsche Bank are front and center in investors' minds, especially with the uncertainty surrounding the bank's $14 billion settlement negotiations with the U.S. Department of Justice. But while it is still unclear if the ailing German lender will need state aid to sail through this crisis, there is a regulation that could stop the German government from ending the misery by injecting equity into the bank.
The Banking Recovery and Resolution Directive (BRRD), that came into force earlier this year - requires an 8 percent bail-in of a bank's creditors, including very large foreign banks and hedge funds — be applied before taxpayers get put on the hook. The directive has a well-laid out structure for resolving a troubled or failing European bank, irrespective of whether it is a small lender in Italy or a national champion in Germany.
"The German government knows this," Dhaval Joshi, Senior Vice-President at BCA Research told CNBC via email. "The good news is that an individual bank failure, however large, should no longer constitute a systemic risk. BRRD forces the ECB, the Eurosystem, and governments to prioritise the protection of banks' critical functions and stakeholders, specifically: payment systems, taxpayers and depositors."