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April, 12th 2011

Surprise: Deutsche Bank moves to avoid financial regulation

– Liz Mair

Or not, as the case may be:

Hoping to sidestep new financial regulations that could have forced it to raise billions in new capital, Deutsche Bank AG is planning to restructure its U.S. operations, which would allow it to operate with a thinner capital cushion than the new rules envisioned.

Executives of the German Bank had worried it would have to put up as much as $20 billion in new capital to offset losses in its U.S. unit that have left it undercapitalized, according to an internal company document reviewed by The Wall Street Journal. Such a capital injection could have hurt Deutsche's own capital levels at a time when European banks are undergoing "stress tests" to determine if they have sufficient capital.

The corporate shift involves Deutsche's main U.S. subsidiary, known as Taunus Corp. The entity, named for a mountain range outside of Frankfurt, where the bank is based, is one of the largest bank-holding companies in the U.S., with $373 billion in assets. It houses Deutsche's two main U.S. businesses: an investment bank and capital-markets arm, and a banking unit with about $18 billion in deposits. Both of those operating units are well-capitalized under U.S. law.

But Taunus has a third leg, a collection of scores of other holding companies that racked up losses during the financial crisis. The result is that, as of Dec. 31, Taunus's Tier 1 leverage ratio, a primary gauge of its financial health, stood at negative 1.3%. That is lower than virtually all of its peers, which generally are required to keep their ratios at 4% in order to be considered well-capitalized, according to Federal Reserve data.

To avoid pumping in the billions needed for its capital levels to pass muster, Deutsche is planning to change the status of Taunus so that it is no longer classified as a bank-holding company, people familiar with the matter said. Deutsche executives believe that will allow Taunus to avoid having to comply with the Dodd-Frank Act.

OK, so Taunus will be doing the reverse of what Goldman Sachs, Morgan Stanley and American Express did back in 2008, i.e., transform themselves into bank holding companies so as to get access to bailout goodies.  Fine; I'm happy enough for them to do so.  Also, it's worth noting that Deutsche Bank did not, to my knowledge anyway, take bailout money, so arguably the imperative to regulate them should be lesser.

That said, like everyone else Taunus "racked up losses" and obviously isn't well-capitalized and some people won't be happy about Deutsche Bank moving to exempt itself from Dodd-Frank's requirements, as such.  But this is arguably another little reminder that regulation can generally be gotten around, if the party to be regulated is sufficiently interested in avoiding said regulation, and therefore that regulation isn't the panacea that a lot of folks pretend. [intro]

 

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