Deutsche Bank has extensively granted loans for the construction of AI data centers. If not just a single borrower, but the entire industry gets into payment difficulties, this could hit the bank hard. The industry is currently investing hundreds of billions of euros in new data centers, whose computers are likely to become technically obsolete soon. Furthermore, it is unclear who will ultimately bear the costs. Therefore, lenders are looking for ways to reduce their financial risks.

As the Financial Times (FT) reports, Deutsche Bank managers are considering betting on falling stock prices of AI companies. This is because falling prices could be an indication of financial difficulties in the industry. If this happens, the bank could offset some loan losses with speculative gains. One method of betting on falling prices is short selling, which the bank managers have reportedly discussed specifically according to the FT.

In such financial transactions, the short seller sells securities that do not belong to them but which they have merely borrowed from third parties for a certain period. By the end of this period, they must buy back the securities to return them to the lender; if the stock price has fallen meanwhile, the short seller makes a profit because they sold them for more than they bought them back for. In the opposite case, they incur a loss, which can theoretically be unlimited. As long as the stock prices of AI companies tend to rise, short selling is particularly risky.

Synthetic Risk Transfer

Furthermore, Deutsche Bank officials are reportedly considering bringing a type of insurance transaction for outstanding loans to market, the FT has learned: so-called synthetic risk transfer (SRT). In this process, third parties assume part of the credit risk. They buy SRT securities related to specific loans and thereby provide money to the lender. In return, they receive comparatively high-interest rates. If the underlying loan is serviced correctly, the SRT buyer also receives the invested amount back.

If the loan is not serviced correctly, the lender instead draws on the SRT funds, and the SRT buyer incurs a loss. Therefore, SRT buyers prefer diversified credit portfolios; they also do not want to put all their eggs in one basket. Deutsche Bank would therefore have to either include completely different loans or offer higher interest rates to sell the SRT securities.

The advantage of SRTs compared to traditional insurance policies is that the bank receives money immediately, not just in the event of a claim. This money replaces the equity capital tied up for the outstanding loans. In other words, it frees up capital at the bank that it can use as collateral for granting new loans.

The bank declined to comment on the FT’s report. The magazine recalls that asset manager DWS is currently preparing to sell its majority stake in data center operator NorthC. The sale is expected to generate more than two billion euros. DWS is approximately eighty percent owned by Deutsche Bank.

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This article was originally published in German. It was translated with technical assistance and editorially reviewed before publication.