Deutsche Bank has for the first time laid out plans to slash its U.S. balance sheet as it seeks to allay concerns over how it would deal with tough new rules imposed by the Federal Reserve on foreign banks.
The lender aims to reduce assets held in its U.S. arm by up to a quarter largely through reassigning some operations to Europe or in Asia. This comes after the Fed confirmed last week that overseas lenders operating in the U.S. would have to ring fence capital in the country to safeguard against future financial crises.
(Read more: )
Stefan Krause, Deutsche's chief financial officer, told the Financial Times that the lender was confident it would be able to meet the new capital and leverage requirements imposed on its U.S. arm. He said the balance sheet adjustment should not be seen as a pullback from the bank's U.S. franchise, where the lender is focused on growing its asset and wealth management business as well as battling to regain ground lost to U.S. rivals in its flagship fixed income arm.
"The U.S. continues to be an important market for us. We are very comfortable we will be able to meet the leverage requirements in the U.S.," he said.
Deutsche Bank will aim to reduce its $400 billion balance sheet in the U.S. – not including the $200bn held in its U.S. branch that does not fall under the new rules – to about $300 billion in part by reassigning operations such as its Mexican arm and its Frankfurt and Tokyo-based repo businesses that are currently part of its U.S. business elsewhere.
The bank will also reduce a sizeable chunk of its repo business in the U.S. after discovering that some of its clients were not making use of its other offerings. The capital-intensive but low margin short-term lending is often offered by banks to hedge fund clients as a sweetener for other more lucrative business.
The foreign banking organisation rules announced by the Fed were widely seen as more lenient than some bankers had feared, with an extension of a year until 2016 to comply with capital requirements and an extension until 2018 to comply with leverage requirements.
Under the new rules, which European lenders have complained unfairly penalize their US operations, foreign banks in the U.S. will have to have a minimum leverage ratio – a measure of total equity to total assets – of 4 percent in their U.S. holdings. Analysts at Morgan Stanley and Citi have estimated that Deutsche will need to allocate more than 7 billion euros ($9.6 billion) in capital to its U.S. subsidiary to meet the new rules.
Analysts have predicted that some foreign banks in the U.S. will issue debt abroad and transfer this to their U.S. arms. But Deutsche Bank plans instead to convert some of the existing debt its U.S. arm owes to its German arm into hybrid debt that would convert into equity capital under certain conditions.
Deutsche Bank is also hoping that the German regulator will soon give it the green light to raise up to 6 billion euros in additional capital through hybrid debt to help it improve its leverage ratio in Europe.