Rethinking bank shareholder equity: The case of Deutsche Bank
Link to item filehttps://ssrn.com/abstract=2920445
SujetCapital requirements; Basel III; Bank equity presentation; Bank equity composition; Shareholder equity movements; financial analysis; capital adequacy; equity quality; capital movements; transactions with shareholders
JEL codeM.M4.M41; D.D8.D83; G.G3.G38; G.G3.G35; G.G3.G34; G.G2.G28; G.G2.G21
Journal issueAccounting Forum
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Abstract (EN)Do you believe that bank shareholder equity provides an indefinitely lasting source of funding which covers for (residual) risk and loss-absorption? Our innovative approach clarifies and disentangles actual shareholder contribution to bank equity. This case study applies it to Deutsche Bank, a European systemically important institution, from 2001 to 2015. Our analysis shows that bank shareholder equity lasted for less than three months in 2007 in the bank entity, while payout policies exhausted shareholder contribution to loss-absorbing capital in 2006-2008. Since 2005, shareholder contribution to Tier 1 Capital remained below 10%. According to our findings, the actual contribution by shareholders to bank equity capital was limited, while shareholder payout policies, including share buybacks and trading on its own shares, were material. These findings raise concerns on the actual capacity by shareholder equity to assure protection against (residual) risk and loss absorption. Customer and investor protections appear to lay with bank entity equity dynamics. These findings have implications for bank financial sustainability and resilience, company capital maintenance, and regulatory capital requirements. Further developments based upon this innovative methodology may improve on existing prudential and accounting regulations.
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