Why Deutsche Bank Is at the Mercy of Regulators: QuickTake Q&A

Deutsche Bank AG, Europe’s largest investment bank, in March announced it would give up on a two-year attempt to sell Postbank, the domestic retail lender it acquired in 2010, and instead merge the subsidiary with its other German retail operations. One big reason for the change of heart, according to Chief Executive Officer John Cryan, was his confidence that regulators would allow what they had denied his predecessors: letting him use Postbank’s deposits to finance more lucrative activities in other parts of the company. But now it seems Cryan may have gotten ahead of himself. So what happened?

German banking laws generally prohibit parent banks from using all of their subsidiaries’ capital to ensure each legal entity can meet individual capital requirements. German financial regulator Bafin and the European Central Bank, which together oversee Deutsche Bank, can grant waivers from the stand-alone capital requirements if they think sufficient safeguards are in place. One example of such a safeguard is a subsidiary’s inclusion in group-wide risk management.