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09/10/2010

Basel III is coming. And with representatives of 27 leading economies set to meet this weekend to approve the final details of a far-reaching package of reforms to the global banking system, Germany's Deutsche Bank looks like it might be trying to get a leg up on compliance.

Both the Financial Times and the Wall Street Journal are reporting that Deutsche Bank may be planning a stock issue for early next week to raise as much as €9 billion ($11.4 billion) to both increase its stake in Deutsche Postbank AG and to add to its capital cushion. Deutsche Bank already owns 30 percent of Postbank, a stake it took on in the height of the financial crisis, but may be interested in obtaining a majority stake prior to a 2012 deadline.

The stock issue, should it go forward, may be an attempt to beat numerous competitors in both Germany and Europe to the punch. Several banks are expected to need more capital once the new rules, known as Basel III, are agreed to. The Association of German Banks estimated earlier this week that German banks could need as much as €105 billion ($133 billion) in fresh capital under Basel III, a total that could change depending on the details of the reform package.

The rumors of the capital increase did not go down well on the stock markets, however. Deutsche Bank's share price took a hit on Friday morning, down by around 5 percent compared to its closing price on Thursday.

It's not just German banks that will need to bolster their capital cushions, however. According to Reuters, analysts expect banks in Greece, Spain and Portugal to begin raising funds as well. The National Bank of Greece on Wednesday announced plans to raise €2.8 billion to bolster its capital.

Insuring against Future Crises

The meeting on Sunday -- which US Federal Reserve Chairman Ben Benanke, Bank of England Governor Mervyn King and European Central Bank President Jean-Claude Trichet are to attend -- is expected to approve more stringent capital requirements for banks as a way to insure them against future crises.

The plan as it currently stands would require banks to have a top-quality capital -- known as Tier 1 capital -- ratio of between 7 percent and 8 percent. Should they fall below that, their ability to pay dividends and bonuses will be restricted. Deutsche Bank's Tier 1 capital ratio stood at 7.5 percent at the end of June.

Some last minute jockeying has marked the run-up to Sunday's meeting, with Germany in particular arguing against setting capital ratios too high. Germany has also been lobbying for exceptions for smaller banks, with an eye toward exempting the country's state-owned savings banks. A person close to the negotiations told the Financial Times, however, that the Basel group would insist on there being "a totally level playing field with absolutely no exceptions."

A Fragile Recovery

Exactly when the new rules will go into effect also remains up for debate. US officials reportedly would like to see the first phase of capital buffer rules go into effect as early as 2012, but a German central bank official told the Financial Times he expects them to be phased in over five to 10 years starting in 2013. A slower introduction may be vital for those banks which might have difficulty raising money on capital markets. Their only option to raise capital would be through profit retention, often a slow process.

Analysts have warned the Basel Committee to avoid setting capital requirements too high for fear that banks could increase their capital ratios by cutting back on loans, a move that would strangle the fragile economic recovery. Should the requirements be set too low, however, banks would be vulnerable to future financial crises.