Deutsche Bank could find silver lining despite Basel capital hit

Bloomberg

Deutsche Bank AG’s big hit from stricter global capital standards may be softened by the small print. New rules give supervisors the option to exclude banks’ litigation payouts when calculating their so-called operational risk. If that happens, it would be a boon for Deutsche Bank and potentially improve returns for shareholders. The bank declined to comment specifically on the issue for this article.
The Frankfurt-based bank has racked up more than $16.3 billion of fines and legal settlements since 2008, the most of any European lender, leaving it one of the best placed firms to benefit from the supervisory discretion under Basel III. A top European banking regulator told Bloomberg that he favors using the option to lessen the impact on banks’ capital. He declined to be identified because he wasn’t authorized to speak publicly.
“This could be a real benefit to Deutsche Bank,” said Andreas Meyer, who helps manage more than 3.3 billion euros ($4.1 billion), including Deutsche Bank bonds, at Aramea Asset Management in Hamburg. “The bank hasn’t had much good news to communicate, and life is pretty difficult for them at the moment with fundamental problems in the trading business.”
The Basel Committee on Banking Supervision wrapped up changes to the Basel III capital rules late last year that are intended to stop firms gaming the system.
As of 2022, banks no longer have the option of using their own statistical models to drive down capital charges for operational risk, which covers losses from misconduct and systems failures. Still, while the rules force banks to measure operational risk using a standard formula, the ability of supervisors to factor out a firm’s losses means Deutsche Bank’s required capital for operational risk could actually go down.
“We expect the investment banks to be a beneficiary of national discretion to help prevent a sharp increase in capital requirements,” said Thomas Hallett, an analyst at Keefe, Bruyette & Woods in London.
If national discretion is applied, Deutsche Bank’s operational risk-weighted assets could decline by 20 percent to 73.7 billion euros, according to KBW. Without discretion, KBW’s estimate would increase by 52 percent, Hallett said.
Deutsche Bank Chief Executive Officer John Cryan said in mid-2016 that operational risk was the “ big issue” facing the lender in the Basel overhaul. The numbers show why. The bank had 92.7 billion euros of operational risk-weighted assets at the end of 2016, making it the second-biggest component of the calculation that underlies the company’s key capital ratio. Only credit, at 220 billion euros, accounted for a larger share.
The Basel deal would hand supervisors two ways to give banks a pass on operational risk. Firstly, they could approve requests to remove large individual losses from their risk calculations. Secondly, they could allow all banks under their jurisdiction to exclude all
historical losses.

MEASURING IMPACT
Measuring the impact of the revised Basel III rules on Deutsche Bank, which reports 2017 full-year earnings this week, or any other major lender in the European Union necessarily involves some educated guesses at this point. That’s in part because the standards only become binding when they’re converted into EU law, a process that could lead to alterations. A spokeswoman for the ECB declined to comment as did a spokeswoman for the European Commission, which initiates legislation in the EU.

‘ULTIMATE IMPACT’
When asked about the Basel III impact, a Deutsche Bank spokesman referred to comments published on Jan. 8, when the lender said it was “difficult to speculate at this stage on the ultimate impact” of the standards.