DEUTSCHE BANK AND THE ROAD TO BASEL Case Solution And Analysis, HBR Case Study Solution & Analysis of Harvard Case Studies

Deutsche Bank And The Road To Basel Case Study Solution

Overview of the Deutsche Bank

The case “Deutsche Bank and Road to Basel III” explains how the changes in the new implementation of an updated regulatory framework which is the Basel III would impact the performance of the Deutsche Bank. The Basel Committee started to formulate a new model in which itsmain purpose istoimprove the transparency and quality of all the banking institution. The new framework was approved in the year 2010 and would be phased in the year 2013, and the framework would be completely implemented in the year 2019.

Key challenges faced due to Basel III

The Basel III was to redesign and improve the regulations, risk management and supervision of the financial institutes. The main area that Basel III covers is the capital requirement which is divided into two parts Tier 1 and Tier 2. The Tier one consist common equity and additional Tier 1 capital in which the total Tier 1 capital was increased from 4.0% to 6.0% while the risk-asset weighted between 9.5% and 13.5%. This meant that Deutsche Bank would have to face certain challenges in the year 2013 with also gaining opportunities due to the implementation of Basel III. Investors were concerned that the Deutsche Bank would have to gain fresh equity capital in order to meet the capital requirements. This would result in the reduction of profitability of the Deutsche Bank when going forward. The changes on the Basel III would result in the increase of the risk-asset weight whereas the ROE of the banking industry would decrease.

In July 2012, due to the implementation of Basel III, the Deutsche Bank was able to face the challenges as it had a Total tier ratio of 13.6% which was based on the risk weight assets which valued at around EUR373 billion according to the Basil II. Beginning of 2013, the Deutsche Bank was able to raise risk-weighted assets to EUR488 billion and its core tier ratio to 7.2% by reducing it from 10.2% according to rules of Basel III. The core Tier 1 which was required by the Basel III to reach to 9.5% before the rules of Basel III are completely implemented before the year 2019. The other challenges it faced was the decision of raising the additional capital by EUR9.8 billion which made them occupy a great position in the home market which is in Germany. The Deutsche after observing the benefits of investment banking in the market transformed to investment banking.

DEUTSCHE BANK AND THE ROAD TO BASEL Harvard Case Solution & Analysis

This caused to occupy the top leading position in the European retail market and led to improved revenue generation of the Deutsche Bank. During the year 2012 in the month of July, the Deutsche Bank held the largest market share in the United States and also become top ranking in the European Equity Research platform.During the month of July 2012, the Bank shares traded at the times of 8.2x (P/E ratio), and the book value per share which was calculated through P/TB was 0.60x. The P/E ratio was rising compared to the previous year’s 2010 – 2012, whereas the P/TB ratio was on the decline compared to the previous year 2011.

Agreeing towards the bank Decision

The decision that Deutsche Bank took regarding the new implementation of Basel III, in my opinion, I have to agree on the decisions it took for the implementation of Basel III which were made to focus on strengthening the retail banking in the European market. The reason for the focus on retail banking was due to the downturn on the investment banking as many of the company were exiting the investment industry.

Suggestion for the Bank’s improvement

The suggestion I would make towards the Deutsche bank is that the company should have focused towards the improvement of investment banking. The reason is that many of the company were being forced to exit the market due to the implementation of the Basel III. With occupying a great position in the U.S market, the Deutsche Bank could have gained opportunity by working towards the global investment banking.

Challenges and Opportunities for going forward

There are several challenges and opportunities which the Deutsche Bank would face in future due to the implementation of the Basel III. The challenges and opportunities are discussed below according to their respective headings.

Opportunities:

There are several opportunities which are provided due to the changes in the regulatory framework in the Basel III. The opportunities that the Deutsche Bank gains from Basel III:

The increase in the total Tier 1 Capital causes the Deutsche Bank an opportunity to issue more of its shares to the people. The Total Tier 1 Capital had been increased from 4.0% to 6.0%.
The global players are exiting the banking industry market, and the Deutsche has the opportunity for making an improvement in its public relations. The Bank can announce that it is still committed to the business which would be good news for the clients
The increase in the risk-asset weight would result in the bank in taking more risks towards its investment business by taking more securities of options, futures and forwards to improve its returns.

Challenges:

There are several challenges which are provided due to the changes in the regulatory framework in the Basel III. The challenges that the Deutsche Bank gains from Basel III:

The increase in the leverage and coverage ratio or the bank's liquidity from 4% to 4.5% results that the banks are required to keep a percentage of liquid security such as money to be able to counter during the financial downturns.
The Basel III was currently implemented in the European countries, and recently Japan had also implemented on its financial institution. But the U.S has a delay on implementing the Basel III which would cause problems for the Deutsche Bank.
The changes in the framework of the Basel III would result significantly to decline in the ROE for the entire banking industry.

There are several opportunities and challenges which are presented that the Deutsche would gain in the future. With the current position which Deutsche occupies makes the bank easier to avail the opportunities and easily face off against the challenges.....................

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