Deutsche Bank's failure could shake the European banking system, analyst warns

While Deutsche Bank has made great strides to rebuild its credibility, Germany's biggest bank has still got mountains to climb, a senior director at Blackrock Investment Institute told CNBC.

"If Deutsche Bank doesn't make it, forget European banks as a whole," Blackrock's Ewen Cameron Watt said on Tuesday.

"I think if you look at Deutsche Bank, what John Cryan (CEO, Deutsche Bank) is doing is trying to lead a very long march back to a sustainable model. They have got through a lot of harder stuff but there are still many mountains ahead."

A man walks past Deutsche Bank offices.
Luke MacGregor | Reuters

The German lender is currently facing a fine of $14 billion from the U.S. Department of Justice (DOJ) for the mis-selling of residential mortgage-backed securities (RMBS) in the run-up to the financial crisis of 2008.

While the bank's stock has taken a hammering– Deutsche Bank shares are down 21 percent since the start of the year– a settlement between the bank and the DOJ has been dragging on.

However, Deutsche Bank could agree on a deal with the DOJ and there may be an announcement as early as Wednesday, according to Reuters, citing a source who was quoted as saying, "there is a good chance the case will be off the table before Christmas,"

Investors and analysts across the world have been waiting for months for this uncertainty to end. In October, German markets news publication Der Platow Brief reported that Deutsche Bank was looking at a settlement with the DOJ of between $4 billion and $5 billion. The newsletter also said that the bank was considering scrapping bonuses and raising fresh capital but it did not cite sources.

But while markets wait for an agreement to be reached, shares of Deutsche Bank have been on a roller coaster ride on speculation about the settlement figure.

"The length of negotiations suggests that Deutsche Bank must be struggling to reduce any penalty to an amount that would not jeopardize its solvency position," Bronka Rzepkowski, lead global strategist at Oxford Economics, earlier told CNBC via email.

European banks are struggling to make profits due to massive fines, weak earnings and a low-interest rate environment. While governments and central banks around the world are ready to inject more capital if needed, the foundations of the banking system continue to remain shaky.

"If the bank can remain solvent and the bail-in is not too severe then it is a bit like someone having a heart attack and the defibrillator is put on them and they recover,"Blackrock's Watt said.

"They are not well but the proportion between the moment when things are applied to them and their recovery is a big change for the individual."

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