Deutsche Bak Case Study

Deutsche bank is one of the world’s leading bank, located in Germany it exhibits a strong position among European , American and Asian Pacific banks. Deutsche bank offers business services to individuals, corporate organisations, institutions and governments under a global environment. After World War One, Deutsche failed to achieve its global plan due to the ineffectual payback from borrowers and had to sell parts of its capitals in order to survive. At that time, Germany was under the pressure due to after war reparations and inflation. To recover, Deutsche shifted its business model to investment banking. 70% of its earnings comes from investment, so its main investment tools are stocks, bonds, exchange rate, bulk commodities and a large number of financial derivative assets. However, financial asset are fundamentally a risky kind of assets, which means the concentration of Deutsche’s business model leads to its high risk possibility.

According to the data provided in the case, Deutsche increases its profits through a massive growth on leverage ratio. It reached 71.3, which was almost twice higher than other competitors in the industry at the peak time of 2007. This can also be seen in both ROA and ROE. ROA and ROE are both used to measure the operating ability of enterprises, however the main differences are in the calculation of debts and the usage of financial leverages. Deutsche was almost 800 points higher in ROE than its competitor JP Morgan while its ROA was only half. In other words, Deutsche increased its profit only through increasing the amount of leverage. Until 2016, Deutsche’s total asset is 1.64 trillion euros, total liabilities is 1.58 trillion euro, its asset-liability ratio even reached 96%. Highly levered debt financing increased the financial risk of Deutsche.

The main purpose of renewing Basel Commitment is to reduce the risk of financial system on a macro level and stabilise the economy, on the other hand, to reduce the bank self-risk on a micro level. The minimum Tier1 requirement increased from 4% to between 9.5% and 13.5%.  Moreover, the proportion of risk weighted assets increased to focus on the quality of Tier 1 capital, not like before, only focusing on the ratio. Basel3 changed its capital regulation policy to monitor common equity. From this perspective, it shows that Basel3 shrinks risk weighted assets through higher standard of capital definition. This change is going to decrease Deutsche’s ROE sharply and Deutsche is going to experience a hard time raising its capital assets. Under these circumstances of the euro zone crisis, enterprises have been in low demand of credit loans. The European central bank used radical monetary policy to stimulate the economic growth, as a consequence, negative interests rates have been appearing and it have greatly reduced the profitability of banks.