Deutsche Bank and the Road to Basel III

Adharsh R
Deutsche bank was founded in Germany. The objective was to promote trade relations between Germany
and rest of the world. It was established as a universal bank providing both investment banking and
commercial banking. After the World War I, German economy inflation rates were higher. Deutsche Bank
lost most of its foreign assets and borrowers failed to pay back debts. During the depression the Germans
invaded countries and by the end of World War II, Deutsche bank had transferred money and holdings
from Jews to the German Government. Post World War II, Deutsche bank was split into ten different
banks, however 10 years later 4 parts of Deutsche Bank were merged and allowed to operate under the
name of Deutsche Bank.
With the recovery of financial situations in Germany and across the world, Deutsche Bank started
expanding into new territories and by 2001 it was operating in 70 countries. Deutsche Bank increased
their focus on investment banking activities and commercial banking took a back seat. Around 62% of
total revenue was contributed by Investment banking activities in 2007 hence the bank was focused on
increasing its asset base dedicated to investment banking activities.
By the end of 2002, Deutsche Bank derived a significant portion of its revenues from Investment Banking
activities. Revenues from sales and trading increased from 30%-42% of total revenues between 20022007. Between 2002-2012, Deutsche Bank had significantly increased its assets dedicated to Investment
Banking activities from EUR 640 billion at year end 2002 to EUR 1860 billion. Until 2008, Deutsche
Bank achieved remarkable growth in per share earnings, from EUR 0.63 to EUR 13.05 from 2002-07 83% annual growth rate. Deutsche Banks increased profits came from increased leverage and not from
productive assets.
To improve the regulatory framework for banks, Basel III was introduced in 2009 as per which the banks
were required to increase minimum Tier 1 equity capital from 4% of risk weighted assets to 9.5% - 13.5%
of risk weighted assets. Also, the risk weights assigned to certain classes of assets were required to be
increased as per Basel III. The banks have to gradually start abiding by Basel III norms from 2013 and
have to comply with it mandatorily by 2019.
To finance asset growth on balance sheet, banks primarily use one of the following methods: 1. Use
profits used in the previous years, 2. issue new equity capital thereby diluting the equity value of the
existing shareholders, 3. borrow debt capital thereby increasing leverage. In 2012, Deutsche bank had risk
weighted assets around EUR488 billion and core tier 1 ratio of 7.2%. To, comply with Basel III norms,
Deutsche Bank can go ahead by issuing hybrid securities like convertible bonds or warrants and reducing
the asset base in order to maintain a balance between ROE and ROA and provide a realistic picture to its
investors and customers.