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Deutsche Bank has laid out a steeper than expected capital hit from new rules on how banks calculate risk, as European lenders begin to reveal the impact of Basel IV reforms.
Under the new rules, which will be fully implemented by 2033 and limit the extent to which banks can use internal models to calculate their risk-weighted assets, Deutsche’s RWAs would increase by one-third, based on figures from the lender’s latest Pillar 3 report which includes key information required from banks under the current regulatory framework.
The German bank has repeatedly clashed with regulators over its internal risk models in recent years.
Risk-weighted assets are important in determining how much capital regulators require a bank to have. Watchdogs are seeking to limit the extent to which banks can use internal models to calculate their RWAs, and so cut down the variation in capital requirements between banks.
The changes, which would take Deutsche Bank’s RWAs to €470bn, threaten to drag down Deutsche’s core capital or CET1 ratio, a measure of capital strength.
The figures in the 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 current target of 13.5-14 per cent and less than its current regulatory minimum of 11.3 per cent.
Under the new 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.
Analysts at Autonomous estimate that Deutsche Bank would be among the most affected lenders in Europe.
Just 33 per cent of the bank’s RWAs are currently calculated using standardised models, compared to more than 50 per cent at BNP Paribas and UBS.
The biggest jump in RWAs from the shift to standardised models would come 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 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 which are 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 new rules initially. The RWAs of Deutsche’s local rival 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 currently scheduled to take effect.
