Deutsche Bank and the Road to Basel III

1.  Deutsche Bank was steadily expanding into international market in the 90’s but nearly fell into obsolescence after dismantlement post World War II. When Germany regained economic footing in the late 50’s, the bank began to issue foreign-currency bonds for the first time in 44 years. The next 30 years Deutsche Bank expanded to twelve different countries on four continents. The bank developed global reach and began living up to its founding objective, “to promote and facilitate trade relations between Germany, other European countries and overseas markets.” In the 2000’s Deutsche Bank expanded to over seventy countries through a series of acquisitions and began shifting more resources from traditional retail and commercial banking services into investment banking services. Investment banking provided a greater return for Deutsche, but also brought with it a greater level of risk. By 2007, 62% of the bank’s revenues were derived from investment banking activities because of the growth of the internet in the late 1990s and international demand for “one-stop shop” banking. Deutsche benefited from the economies of scale from reaching new international markets. We see risk in this strategy, as the transition into a majority of activity in investment banking Deutsche bank failed to diversify which put them at greater risk when the recession hit.

2. When comparing JPMorgan Chase’s ROE & ROA to Deutsche Banks, we can see that the ROA of Deutsche Bank was lower on average than that of JPMorgan Chase; however, the ROE for both companies was much more comparable. It can also be noted that Deutsche Bank was hit much harder by the financial crisis than JPMorgan, with ROE falling to -12.91% in 2008 as opposed to JPMorgan who had an ROE of 4.22%, then followed by a steady increase back to normal rates. This represents a more structural stability in JPMorgan that allowed the bank to more easily recover from the crisis. In comparison with industry peers through June of 2012, Deutsche Bank had an ROE of .13% versus an industry average of .41% and an ROA of 5.7% versus an industry average of 7.7%. These average figures exemplify the results of the financial crisis and show how profitability dropped for Deutsche.

3.  There are several concerns as to whether or not Deutsche Bank will be able to comply fully with Basel III. Following the 2009 European Sovereign Debt Crisis, many banks were struggling with profitability, and Deutsche Bank was one of them. Basel III was introduced to help improve the regulatory standards for global banks. Basel III projected, the bank’s core Tier 1 ratio would be 7.2% in 2013. This figure is relatively far off from the minimum requirement of 9.5% under the fully implemented standards. Deutsche Bank could either reduce its risk weighted assets or increase capital to meet such standards. One way the bank was able to raise capital was by increasing its stake in Postbank from 50.2% to 93.7%. Additionally, the new leverage ratio requirement under Basel III will also improve the firm’s liquidity and further prevent it from becoming too leveraged. Despite the past  economic downturn, the company has gained market share compared to its competitors by strengthening its retail and investment banking businesses. Deutsche Bank is taking steps in the right direction to comply with Basel III, but we will have to be observant of whether or not these changes will be sufficient enough.