Unlock the Editor’s Digest for free
Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
Deutsche Bank has warned that stricter rules for banks might obstruct Europe’s rearmament push, after it revealed a steeper than expected capital hit from the incoming regime.
Changes to bank capital rules being phased in could restrict financing for smaller companies in the defence supply chain, Deutsche’s chief risk officer said on Wednesday.
The reforms impose higher capital requirements on lenders to smaller, unrated companies, such as those in Germany’s Mittelstand, which have been gearing up to meet the country’s soaring demand for arms.
“I don’t want that on our tombstone at the end is written: ‘Unfortunately they didn’t have tanks but their banking regulation was really fair’,” Marcus Chromik said at a conference in Frankfurt.
The new rules overhaul how banks calculate risk-weighted assets (RWAs), with Deutsche likely to be among the worst affected according to analysts.
Figures earlier published by Deutsche last week indicate that under the regime, Deutsche’s RWAs would increase by one-third by the time the rules are fully implemented in 2033.
The changes could raise financing costs for smaller businesses or add to reporting obligations, slowing down Europe’s defence build-up at a time when the continent is grappling with how to re-arm, Chromik told the conference.
The capital rules limit the extent to which banks can use internal models to calculate their risk-weighted assets, which are important in determining how much capital regulators require a bank to have.
The German bank has repeatedly clashed with regulators over its internal risk models in recent years. Just 33 per cent of Deutsche’s RWAs are calculated using standardised models, compared with more than 50 per cent at BNP Paribas and UBS.
The changes, which would take Deutsche Bank’s RWAs to €470bn based on figures disclosed in a regulatory report, threaten to drag down Deutsche’s CET1 ratio, a measure of capital strength.
The figures in Deutsche’s so-called Pillar 3 report indicate that the ratio would drop from 13.8 per cent to about 10.4 per cent by 2033 — well below the bank’s target of 13.5-14 per cent and less than its regulatory minimum of 11.3 per cent.
Under the rules, from 2030 internal model RWAs cannot be less than 72.5 per cent of the standardised calculation — or they will be subject to a so-called output floor.
Deutsche’s chief financial officer James von Moltke told investors in 2023 he anticipated a “day-one impact” of about €30bn in higher RWAs by 2030, after taking steps to “offset some of the impacts of the output floor”.
But the figures from the bank’s latest Pillar 3 report indicate that, in a worst-case scenario, Deutsche’s RWAs would rise by €63bn by 2030.
The biggest jump in RWAs from the shift to standardised models comes from Deutsche’s corporate loan book, which would rise from €101bn to €179bn. Residential mortgage RWAs would also increase from €32bn to €51bn.
The bank noted that the higher RWA figures “do not reflect any mitigating impact from potential legislative revisions which are currently under discussion”, nor the effects of its own mitigation plans in the years ahead.
“In recent years, we have consistently demonstrated our ability to absorb and offset the impact of regulatory changes through a combination of mitigating actions, capital efficiency measures resulting in RWA reductions, and organic capital generation,” Deutsche said.
The bank added that its strategy, financial targets and capital return plans remained “unaffected by these amendments”.
Deutsche shares have fallen 6 per cent over the past two trading days following the publication of the disclosure late last week.
Analysts at Citi described the market reaction as “overblown”. “Given the long transition timeframe, and likelihood that the final rules will change, we see no near-term impact on capital return prospects,” they said.
Other European lenders expected to be affected by Basel IV include SEB, Danske Bank and UBS, according to analysts at Citi, Morgan Stanley and Autonomous.
Some banks might even benefit from the rules initially. The RWAs of Chromik’s former employer, Commerzbank would decline from €174bn under the current methodology to €165bn by 2030 and only climb to €190bn by 2033, based on their latest Pillar 3 report.
UK banks are not expected to report under the standardised framework until 2027, when Basel IV is scheduled to take effect.
