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Capital markets

Act of liberation or desperate escape?

Deutsche Bank is raising fresh capital by bringing a Qatari sheik on board and making nice promises, much to the chagrin of its shareholders. The bank's efforts are not enough, argues DW's Rolf Wenkel.

Once upon a time there was a bank in Germany that for decades succeeded in making consumers uneasy, played a risky hand in the big casino of investment banking and acquired a reputation for being the most arrogant money house in the Federal Republic. The culprit, of course, was Deutsche Bank.

Their arrogance lent the bank to litigation risks both during and after the global financial crisis, for which billions of euros in provisions are now necessary.

The bank's transgressions do not only stem from the case of Leo Kirch, whose former media enterprise crumbled due to an either inadvertent or deliberate utterance about its creditworthiness from former bank chief Rolf Breuer. They also have to do with the concern's investment banking, which has been aggressively expanded by Co-CEO Anshu Jain, who has held the reins for years. There have been so many legal battles, affairs and processes surrounding the bank that there is hardly an auditor out there who is able to accurately assess the bank's risks.

Additionally, regulators came to the realization after the financial crisis that many banks operated with insufficient equity that was disproportionate to the size of their business. Deutsche Bank was one of them.

Low interest rates in the euro zone, new regulations and the persistent risk of litigation have apparently spurred the bank's co-chairs Jain and Fitschen to action. They are issuing new shares, bringing in a Qatari sheik, bolstering the austerity program to more than 4.5 billion euros ($6.17 billion) until late 2015 and slicing erstwhile returns forecasts in half.

The bank's PR department would be overjoyed to see the media interpret and laud the move as a courageous act of liberation. But whether the move was in fact a liberating one remains to be seen.

Gearing up for the stress test

European banks are facing a new stress test. At least 3 percent of risk capital must be covered by equity capital according to the new, so-called Basel III agreement. The European Central Bank is even demanding a "hard" equity capital quota of 8 percent. This forces many institutions, including Deutsche Bank, to take action.

Banks can increase their capital on hand by simply lending less. This is undesirable from an economic standpoint, however, as it chokes off the flow of credit into the real economy, thus slowing investment, growth and job creation. Deutsche Bank is taking a different approach - its helmsmen want to create up to 300 million new shares and raise some 8 billion euros in fresh money.

That plan has been met with frustration among shareholders because the value of their shares automatically diminishes when new shares flood the market. "Deutsche Bank aspires to return surplus capital to shareholders – including in the form of competitive dividend payout ratios – in the long-term," Deutsche Bank said in a statement Sunday. But how much comfort can shareholders find in those words?

Sheiks are not the problem

The yellow press, for its part, will surely latch onto a different aspect of the move. Yet again a Qatari sheik has a hand in a German corporation, some will say. It's an easy target to stoke latent fears that foreign powers are usurping the crème de la crème of the German economy.

But such involvement has always been business as usual. Sheiks from the Middle East have often joined German concerns – and not once to a company's detriment. The Qatari investment company that Deutsche Bank is bringing on board has long been a major shareholder of the Volkswagon Group and so far there haven't been any complaints from the auto maker's headquarters in Wolfsburg.

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