To comply with the tougher regulations by the Federal Reserve
on foreign banks,
Deutsche Bank AG
) plans to trim its U.S. assets by $100 billion. The lender aims
to reduce assets held in its U.S. unit by transferring some
operations to Europe or Asia.
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Deutsche Bank's move comes following the Fed's confirmation last
week that foreign banks operating in the U.S. would have to
strengthen their capital and liquidity position to better combat
another financial meltdown.
The new rules laid by the Fed are for foreign banks with $50
billion or more in assets in America includes establishment of an
intermediary holding company in the U.S. Further, the foreign
bank operations will be required to maintain capital equal to 4%
of their assets as compared with the largest American banks,
which will be maintaining a leverage ratio of 5%. Notably, the
new rules will be effective from Jul 2016, while the leverage
ratio requirement will not be applied until 2018.
The Frankfurt-based bank targets to trim its $400 billion balance
sheet in the US (excluding the $200 billion held as branch assets
that does not fall under the new rules) to nearly $300 billion.
Consequently, the company plans to transfer certain operations to
other areas including Mexican arm and the Frankfurt and
Tokyo-based repo operations that are currently part of its U.S.
Deutsche Bank will also shrink a substantial part of its repo
business in the U.S, as the bank is losing clients for other
lucrative offerings. Notably, this highly capital-intensive
business though with minimal margin was being offered to hedge
fund clients to generate other profitable business from them.
Moreover, the company aims to convert some of its U.S.-unit owned
debt to its German unit as hybrid debt to transfer it into equity
capital that would help in fulfilling the stricter regulatory
guidelines. Further, in an attempt to improve its leverage ratio
in Europe, Deutsche Bank is awaiting German regulators' approval
to raise roughly €6 billion in additional capital through hybrid
Although these stringent capital rules will significantly improve
the financial sector's long-term stability and security, they
will be a major handicap to foreign banks like
) having substantial U.S. operations. Amid a sluggish operating
environment in Europe, Deutsche Bank was expecting to augment
profits from its foreign operations in the near term. However,
these rules might limit its flexibility to operate in U.S.
Deutsche Bank currently carries a Zacks Rank #3 (Hold). Some
better-ranked foreign banks include
Mitsubishi UFJ Financial Group, Inc.
The Royal Bank of Scotland Group plc
). Both these stocks have a Zacks Rank #2 (Buy).