Rethinking bank shareholder equity: The case of Deutsche Bank

Abstract

We introduce and apply an innovative accounting approach to analyse the equity position of a European systemically important financial institution, Deutsche Bank, between 2001 and 2015. 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 both 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.

JEL classification:

• G21
• G28
• G34
• G35
• G38
• M41
• D83

Keywords:

• Capital requirements
• Basel III
• Bank equity presentation
• Bank equity composition
• Shareholder equity movements
• Financial analysis
• Capital adequacy
• Equity quality
• Capital movements
• Transactions with shareholders

Acknowledgement

Yuri Biondi is tenured senior research fellow of the National Center for Scientific Research of France (Cnrs − IRISSO), and research director at the Laboratory of Excellence on Financial Regulation (Labex ReFi), Paris, France. Imke Graeff is doctoral fellow at the Laboratory of Excellence on Financial Regulation (Labex ReFi), Paris, France. The authors wish to thank the editor in charge, Glen Lehman, and the anonymous referees for their comments and suggestions, as well as Colin Haslam, Shyam Sunder, Richard Baker, John Heater and the other participants to the ‘Accounting, Economics and Law’ Research Network Conference, SASE 2017 Annual Meeting (Lyon, June 29–July 1). Usual disclaimer applies.

Notes

1 In 2012, Italy introduced a tax system which features cost of equity as a tax-deductible item.

2 We introduce here the ‘days shareholder equity ratio’ to assess the shareholder equity duration. This ratio divides the shareholder equity stock for the share repurchase outflow and expresses it in number of days. It conventionally expresses the permanence of one euro contributed by shareholders into the bank entity process (Fig. 9).

3 For this comparison, shareholder equity is composed of invested capital and equity interest. This definition consequently excludes accumulated distributions.

4 For this comparison, shareholder equity is composed of invested capital, equity interest and losses from trading. This definition consequently excludes accumulated cash dividends.