Monday, 19 May 2014

Deutsche Bank's latest capital raising won't end its problems

My latest post at Forbes looks at the troubled Deutsche Bank and its latest attempt to improve its capital ratio:
Deutsche Bank has finally admitted – to no-one’s surprise – that it needs more capital. It has announced plans to raise 8bn EUR of new Core Tier 1 equity capital (CET1).
Although everyone knew Deutsche Bank was short of capital, this admission is nevertheless somewhat embarrassing. Only last year, Deutsche Bank raised 3bn EUR with a rights issue and claimed that no further capital would be needed. Yet recently it announced plans to raise up to 1.5bn EUR of “additional capital” – debt which can convert to equity if CET1 falls below an agreed level. Now it seems even more of the best quality capital is needed as well. What on earth has gone wrong?
Find out here.


  1. > Frances.

    Why is Bank capital ratio ,and also Bank Leverage ratio, calculated as the ratio of the capital to the assets rather than the capital to the liabilities , as in the way that leverage is normally calculated. Why is it that the ratio is calculated by putting the assets in the denominator of the ratio rather than putting the liabilities in the denominator of the ratio.

    1. Hi Dinero,

      It's because for a bank, insolvency happens when the value of the asset base collapses and there is insufficient equity to absorb those losses. So what we really want to know is how much equity there is relative to the assets whose value might collapse, not relative to debt whose value is fixed.

  2. Two events of mid-2007 are typical of Deutsche’s behavior at the peak of the go-go times.

    1) IKB: this bank had become a major stuffee for sub-prime garbage. One of its major stuffers had been Deutsche. Deutsche was also a major funder of IKB in the German interbank market. On one Friday afternoon, Deutsche informed IKB that, coming the following Monday, interbank lines were no longer available. Parallel to that, Deutsche had the courtesy of informing the German banking supversion of their decision (claiming responsibility in the interbank market for doing that). Obviously, the following Monday, IKB was dead in the water.

    2) Deutsche was a major provider of back-up lines for ABCP issued by conduits. One of those conduits was the Canadian Coventree. When the ABCP market dried out, Coventree called the back-up line. Deutsche refused to provide liquidity stating: “We refer you to the definition of general market disruption; this element of the test has not been satisfied.” Much, much later, the Deutsche unit involved in this agreed to pay a compensation of 1 MUSD.

    I rest my case.