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February 26, 2014

DB adjusts legal structure | Fed intermediate holding company rules

FT reported (subs. required) and Reuters re-reported (free) that Deutsche Bank (DB) is adjusting its structure to curtail US balance sheet and the associated capital redundancies introduced by the new Fed intermediate US holding company rules.

FT reported (subs. required) and Reuters re-reported (free) that Deutsche Bank (DB) is adjusting its structure to curtail US balance sheet and the associated capital redundancies introduced by the new Fed intermediate US holding company rules.

Why?

New Fed rules formally announced last Wednesday require non-US banks with more than $50 million in US assets to have an intermediate bank holding company in the US capitalized locally in the same manner as a US bank.   Banks have until July 1st 2016 to comply.

This holding company is then subject to the Fed's variant of Basel III in particular including 6% hard leverage ratio (Tier 1 capital / leverage ratio exposure) instead of 3% for European banks.   DB was already close to the wire on the 3% level at 3.1% according to their 2012 annual report.   Their 2013 annual report is expected in March.

So what's DB doing?

Changing legal structure: rolling up its Mexico subsidiary and it's Frankfurt and Tokyo repo businesses to legal entities outside the US

Trimming US repo: pulling back on clients which use secured funding (a low ROE business) without significant use of DB's other higher ROE product lines

Possibly reassigning US operations: to Europe / Asia – nothing specific is outlined

And what's the net effect?

Targeted reduction of $100bn out of $600bn total US assets of which $400bn are subject to the Fed rule. 

An observation

There is no mention of DB's OTC derivatives in the articles.  It would be no surprise to me if "reassigning US operations" included repapering OTC derivatives with US counterparties to face DB's Europe-located derivatives trading entity.  Whilst this wouldn't escape Dodd-Frank ET rules it might help reduce its US intermediate bank holding company capital needs.

 


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