Deutsche Bank and the Road to Basel III

Case Analysis： DEUTSCHE BANK AND THE ROAD TO BASEL III

YebingZeng

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From the article, we can see Deutsche is one special Germany bank, which provide both investment and commercial bank function. Unfortunately, War II and I, bring a huge difficulty to Germany economics such as high inflation rates and financial deficit. It causes DEUSTSCHE BANK hard to pay back foreign debts. Therefor DEUTSCHE split during post War II. Nearly 10 years later, four of them merged together to new DEUTSCHE bank. After merging, the bank grown very fast, especially in investment bank activities.

We can find that DEUTSCHE bank’s earning per share increased to EUR13.05 from EUR0.63 during 2002 to 2008, which is a dramatic growth in EPS. The question is how does the growth come from? From the figures, we can find that 62 percent of revenue came from investment bank activity. And Deutsche Bank increased its asset form EUR 640B to EUR 1860B. And we also can find the ROA is much lower than ROE in DUETSCHE BANK’s operations. Therefore, the growth of EPS came from leverage not assets. Too much high leverage can cause huge potential risk in debt crisis.

During late 2009, European sovereign debts crisis happened. Many bank closed down due the depressed economics and European sovereign debts crisis. In order to improve short come of high leverage, BASEL III was introduced in 2009, which increase Minimum Capital Ratios as % of Risk‐Weighted Assets from 4% to 9.5%-13.5%, and also set up a maximum leverage ratio based on total assets. In a world, Basel III regulates a guideline for DEUTSCHE BANK to keep a balance between ROE and ROA. In order to deal this problem, finding a new form of financing would be a good way such as convertible bond.

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