Deutsche Bank Sees Capital Relief as Systemic Role Wanes

(Bloomberg) -- Deutsche Bank AG expects a global watchdog to loosen a key capital requirement after Chief Executive Officer Christian Sewing scaled back operations, reduced complex financial instruments and pulled out of some businesses.

Deutsche Bank said the Financial Stability Board may move it from the third-highest bucket for capital surcharges to the fourth, based on indicators used to track how important a bank is to the global financial system. Sewing, who took over a year ago, has accelerated cost reductions and last year made deep cuts to the U.S. rates sales and trading business and the corporate finance business in the U.S. and Asia.

Such a move by the FSB would help Deutsche Bank counter analysts who say it needs to raise fresh funds from investors to satisfy regulators. It could also allow Deutsche Bank to do more business while holding less capital, though Dixit Joshi, the bank’s treasurer, said on a conference call with investors that the bank for now has no plan to relax its own, higher target for the metric.

Shares of the lender erased losses on the news to trade little changed at 4:44 p.m. in Frankfurt. They were down as much as 1.9 percent earlier.

Should the FSB make the change, the amount of capital Deutsche Bank has to hold relative to assets could fall to 3.75 percent from 4 percent, starting in 2021. The measure, known as leverage ratio, stood at 3.9 percent at the end of March and the bank has set itself a target of 4.5 percent.

“Deutsche Bank still has a weak capital position,” Andrew Coombs, a Citigroup Inc. analyst said in a report on Monday, noting that capital accounted for less than 4 percent of assets at the end of March. “Deutsche Bank needs to improve its organic capital generation, or else we think that it could have to return to the market for yet another dilutive capital raise.”

Banks measure their financial strength with two key measures: one that takes account of the riskiness of their assets and one that is based on the balance sheet regardless of its quality. A change in the FSB’s classification would probably only bring relief on the latter because German watchdog BaFin has its own risk-based buffer.

The Citigroup analysts say tougher regulation that will start to be implemented in 2022 will hit Deutsche Bank’s risk-based capital ratios.

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