Deutsche Bank Scores Poorly On Leverage Ratio Front

Deutsche Bank Scores Poorly On Leverage Ratio Front
By Deutsche Bank AG (GIF format logo) [Public domain], via Wikimedia Commons

Deutsche Bank AG (NYSE:DB) (ETR:DBK)  tops the list of poorly capitalized banks from leverage ratio perspective, according to a top U.S. banking regulator.

Deutsche Bank Scores Poorly On Leverage Ratio Front

“Deutsche Bank is horribly undercapitalized” remarked Federal Deposit Insurance Corporation Vice Chairman Thomas Hoening, in an interview.

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Emily Stephenson and Douwe Miedema of Reuters in their report indicated that Deutsche Bank AG (NYSE:DB) (ETR:DBK) raised 5 billion euros ($6.67 billion) in new debt and equity to boost its core capital ratio to around 9.5 percent. The bank’s Chief Financial Officer Stefan Krause told Reuters in an interview that the bank’s high capital ratio makes it one of the best-capitalized banks among its peers.

However, FDIC’s Hoening said global capital rules, popularly called Basel III accord, facilitate lenders to appear well-capitalized, though they are not so well-capitalized. He feels the capital rules permit banks to adopt complicated processes to determine capital required to support their risky loans.

Instead, Hoening suggests a tougher leverage ratio to measure banks’ ability to absorb sudden losses. The leverage ratio compares a bank’s shareholder equity to its total assets without using risk-weightings.

FDIC’s vice chairman floated a plan to raise the ratio to 10 percent, as he feels the 3 percent leverage hurdle under Basel was a pretend number.

FDIC guarantees deposits at U.S. banks. Hoening feels had banks use the tougher leverage ratio measurement, their picture would be completely different.

Deutsche Bank’s Leverage Ratio

Deutsche Bank AG (NYSE:DB) (ETR:DBK)’s leverage ratio stood at 1.63 percent as at the end of 2012 when measured using European IFRS accounting rules, according to Hoening.

However, the bank’s chief financial officer feels the bank’s leverage ratio now stands at 2.1 percent and sports a comfortable 4.5 percent when measured using U.S. Generally Accepted Accounting Principles. The difference in the two measurements can be ascribed to way derivatives on a bank’s books are measured.

According to Hoening, other banks sporting a low leverage ratio include: UBS AG (ADR) (NYSE:UBS) at 2.52 percent, Morgan Stanley (NYSE:MS) at 2.55 percent, Credit Agricole  (BIT:ACA) at 2.72 percent and Societe Generale (BIT:GLE) at 2.84 percent.

FDIC’s vice chairman Thomas Hoening is known for its frank views on Basel III rules. He feels the risk measurement rules for banks introduced soon after the global economic crisis don’t do much to reduce the size of the riskiest banks. Banks in the U.S. are expected to adopt the Basel III rules in the next few months, though the January deadline for adoption agreed to by banks across the globe has already expired.

Some of the opponents to leverage ratio feel the ratio ignores the risk in a bank’s loan books. For instance, the ratio rates banks having only healthy borrowers along the same line as those having risky borrowers. Besides, the ratio fails to consider the liquidity aspect of selling assets quickly in the event of default.

An analyst at Berenberg Bank in his last week note expressed concern at Deutsche Bank AG (NYSE:DB) (ETR:DBK)’s leverage ratio. The analyst feels to achieve the 3 percent level of leverage ratio mandated by Basel III rules by 2019, Deutsche Bank AG (NYSE:DB) (ETR:DBK)  would require four years’ worth of profits, that would entail delaying dividends.

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