Deutsche Bank's CEO Warns Basel May Hit Capital Buffer

Deutsche Bank AG (DE:DBKGn) (NYSE:DB) is likely to keep aside more capital or scale back businesses as regulators lay stricter rules regarding risk measurement by the banks. The news was first reported by Bloomberg.

John Cryan who took over his position as the sole Chief Executive Officer (CEO) of the bank after Jürgen Fitschen stepped down as Co-CEO last month, indicated such plans in a conference in New York this week.

The report quoted Cryan saying, “The big issue for us, and this is a little idiosyncratic to us, is on the operational risk side.” Cryan views that the implementation of rules proposed by the Basel Committee on Banking Supervision for calculation of operational risk may lead to “quite a significant inflation in the amount of capital that would be required.”

In March this year, the Basel Committee proposed revisions of the operational risk capital framework. The proposal prohibits the banks from employing their own models for determination of capital requirement to cover operational risks which include losses from litigation, trading misconduct and cyber crime. Regulators believe that models used by the banks are excessively complex and have resulted in inadequate levels of capital for some banks.

The Basel Committee had noted then, "For most banks, the Committee expects that these proposals will have a relatively neutral impact on capital. While the objective of these proposals is not to significantly increase overall capital requirements, it is inevitable that minimum capital requirements will increase for some banks."

Cryan however seems to look at it as an unfavorable proposition. He stated, “Essentially it means we need an awful lot more capital to support the business we currently write,” adding, “And we can’t have that because we essentially don’t have the access to that capital and so we’d have to reduce further the business we write or try to reprice it.”

While Cryan is expediting efforts to revamp the bank and boost profitability, the litigation headwinds are not likely to ease soon as the bank continues to struggle with numerous lawsuits and regulatory proceedings. However, the company expects to settle the significant cases this year.

Deutsche Bank currently carries a Zacks Rank #5 (Strong Sell). Some favorably placed stocks in the foreign banks include Canadian Imperial Bank of Commerce (TO:CM) , Bank of Montreal (TO:BMO) and Royal Bank of Canada (NYSE:RY) , each sporting a Zacks Rank #1 (Strong Buy).

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