Seven years after the global financial crisis, a crackdown by regulators on the banks that caused the collapse is far from over. Deutsche Bank and its European partners could feel the brunt.
Global regulators, in a coordinated effort through a process known as Basel III, are looking to tighten the screws on the world’s largest banks in particular – those most likely to need a bailout in another financial crisis. These big players are being required to hold more cash in reserve than smaller banks that could more easily be allowed to fail.
In Germany, this affects Deutsche Bank above all, and it could hardly come at a worse time. The country’s largest financial firm is in the middle of perhaps the biggest internal restructuring in its history. Regulators could force the bank to shed one third of its business.
To add fuel to the fire, Deutsche Bank says European banks are being put at a massive disadvantage compared to major banks in the United States. The reason is different accounting standards that they argue favor institutions across the Atlantic.
“Our capital needs would in the worst case rise by 50 percent. Or one would have to shrink the balance sheet by about one third.”
According to an internal Deutsche Bank document seen by Handelsblatt, the new rules could force banks in the euro currency zone to raise as much as €360 billion in additional reserves over the next five years. U.S. banks will have to raise nothing.
Such dire forecasts have left the bank’s management board preparing for the worst. The bank has been running through various scenarios for tightened capital requirements, all of which could have a major impact on the strategic discussions led by co-chief executives Anshu Jain and Jürgen Fitschen.
The focus of the bank’s worries is on the leverage ratio, a measure of a bank’s total assets compared to its equity. Regulators now regard it as one of the most promising indicators to prevent a recurrence of the 2008 financial meltdown. Many banks held far too few reserves against supposedly safe assets, such as home loans.
Insiders fear that regulators may be preparing to double the minimum leverage ratio for the world’s largest banks. That would mean Deutsche Bank and others may need a leverage ratio of 5 or 6 percent by 2020, above the 3 percent ratio that other banks have to reach by 2018. That would require major cutbacks.
“Our capital needs would in the worst case rise by 50 percent. Or one would have to shrink the balance sheet by about one third,” said one bank insider, who refused to be named.
Deutsche Bank has made some progress here over the past year. Its leverage ratio currently stands at 3.5 percent. The board reckons it can reach 4 percent without a problem.
But the idea that they will need even more reserves hangs like a cloud over all of the bank’s strategic discussions. Internally, the bank is already preparing for a leverage ratio of at least 5 percent, according to one non-executive board member.
“With that kind of requirement, it will be hard for a number of investment banking businesses to earn money,” said the insider, pointing to the capital-intensive bond-trading business as one example.
The fear of tougher capital requirements also explains why the bank might be considering selling its retail banking subsidiary Postbank, or spinning the bank off into a separately listed institution. That could cut Deutsche Bank’s balance sheet by about 10 percent in one strike.
Europe’s banks believe they are being unfairly targeted, and could be put at a major disadvantage compared to U.S. banks. That’s because European banks go by a broader measure of assets than banks in the United States – an issue that has yet to be fully resolved by global regulators.
Deutsche Bank doesn’t really consider this fair. In an internal paper from its government and regulatory affairs department, the bank argues the march towards a 6-percent leverage ratio would put European firms at a major competitive disadvantage to the United States.
For the largest banks in the euro currency zone – those considered “systemically relevant” by global regulators – this would mean raising as much as €360 billion in additional capital. Banks in Britain, Switzerland, and Sweden’s Nordea bank could be required to raise as much as €100 billion.
Deutsche Bank argues that this will leave banks in the United States laughing all the way to the bank. Their additional capital needs under the new rules would be precisely zero, according to the bank’s calculations.
But this is primarily due to accounting tricks on derivatives and mortgage loans, the bank argues. U.S. banks have long been able to report net derivatives exposure, while European banks have not. That means European bank balance sheets are typically larger than their U.S. counterparts – meaning they have to hold more money in reserve to have the same leverage ratio.