Deutsche Bank Resists Pressure to Scale Back Its Global Ambition

In many ways, Deutsche Bank operates in two different realms.

Deutsche Bank’s blocklong headquarters in London’s financial district oozes the wealth and sophistication one would expect of a global investment bank competing with the likes of Citigroup, Goldman Sachs and JPMorgan Chase. The modern eight-story building even has its own full-time curator, who has lined the walls with works by contemporary artists like Damien Hirst and David Hockney.

A different side of Deutsche Bank is on view at Postbank, the sleepy retail unit whose branches are ubiquitous in German towns and cities and have long served the basic needs of citizens. Depositors wait in line amid racks of greeting cards and shelves stacked with manila envelopes and packing tape. The tellers double as postal clerks.

Its blend of provincialism and global ambition reflects Deutsche Bank’s role as a so-called universal bank, a combination of branch network and investment house that gathers all those German deposits and puts them to work in global capital markets.

But the universal banking model is under attack by regulators on several continents as the industry faces new regulatory pressures. Some new rules could potentially force Deutsche Bank to separate its investment banking activities, the largest in Europe, from the less glamorous business of taking consumer deposits and writing loans.

The question confronting Deutsche Bank managers is whether those pressures could be intense enough to undermine the bank’s ability to compete with the big American banks.

“If all the measures before us were implemented as proposed,” Anshu Jain, the co-chief executive of Deutsche Bank, told an audience in Frankfurt last month, “they would practically spell the end of over 100 years of universal banking in Europe.”

Regulators are leaning on all big banks with measures like bonus caps, transaction taxes and higher capital requirements. But Deutsche Bank is under particular scrutiny because of a perception — considered grossly unfair by bank management — that it is too thinly cushioned against losses if there were another financial crisis.

The regulatory pressure comes in addition to a host of other challenges, including a long list of official investigations and lawsuits, most linked to investment banking, that are likely to be a burden on Deutsche Bank profits, and its reputation.

American regulators in particular seem to have set the bank up as a straw man that could collapse in the wake of another financial crisis. In what could be interpreted as a warning of regulation, Thomas M. Hoenig, vice chairman of the Federal Deposit Insurance Corporation, told Reuters last month that Deutsche Bank was “horribly undercapitalized.”

The unusually harsh statement came only weeks after Mr. Jain had assured shareholders that Deutsche Bank was one of the best-capitalized banks in the world. Mr. Jain was using a different measure of capital than Mr. Hoenig did, reflecting an intense debate in policy-making circles about the right way to measure bank risk.

European rivals like UBS in Switzerland or the Royal Bank of Scotland in Britain have already reduced the size of their investment banks under pressure from government regulators who want to make sure they never again have to ask taxpayers for a bailout. Others like UniCredit in Italy have been hobbled by the euro zone financial crisis. Deutsche Bank, however, seems determined to keep its two-track focus.

Deutsche Bank maintains that it can handle the additional capital requirements and remain a force in investment banking. Still, the outside critics have clearly been a source of frustration for Mr. Jain, who played a large role in building up the investment banking business after joining Deutsche Bank in 1995.

Measured by revenue, Deutsche Bank is the largest investment bank in Europe and sixth worldwide behind the American banks, according to Dealogic, a data provider. Deutsche Bank also consistently ranks near the top of banks worldwide in managing large sales of debt or shares, syndicated loans, or mergers and acquisitions.

Mr. Jain, 50, shares power with Jürgen Fitschen, 64, the other co-chief executive. Polished and confident, Mr. Jain is more often the face of Deutsche Bank to its global clients, while Mr. Fitschen focuses more on the German market.

Since taking over a little more than a year ago, they have increased the bank’s capital, including raising 2 billion euros, or $2.6 billion, in a sale of new shares in April. They have vowed to instill a sense of ethics that they acknowledge was missing in the years before the financial crisis began in 2008.

Deutsche Bank is one of numerous banks suspected by American and British authorities of manipulating benchmarks used to set interest rates on trillions of dollars in loans. Deutsche Bank has said that no senior managers were involved in any wrongdoing. Still, that and other legal proceedings have prompted the bank to set aside 2.4 billion euros to cover potential settlements or judgments.

On Monday, Deutsche Bank was among 13 banks accused by European antitrust regulators of colluding to block competition in the market for credit derivatives. A bank spokesman declined to comment on the complaint by the European Commission.

Mr. Jain, a native of India who earned a master’s degree in business at the University of Massachusetts, has worked hard to shift the focus from problems of the past to what he insists is a bright future for Deutsche Bank deploying German savings in the global economy. German deposits at Deutsche Bank total more than 300 billion euros, and are a crucial source of financing.

Mr. Jain, who declined a request for an interview, has won praise from some investors who have criticized Deutsche Bank over what they perceived as lax ethical standards and thin capital buffers.

“It’s going in the right direction,” said Hans-Christoph Hirt, director of Hermes Equity Ownership Services, which represents the interests of pension funds and other large investors. “They are doing a lot of very sensible things in the areas where we criticized them.”

Some regulators also remain doubtful whether recent moves by Deutsche Bank to increase its capital are sufficient. With its enormous portfolio of derivatives, valued at well over $1 trillion, Deutsche Bank is clearly too big to fail. Any problems at the bank could reverberate around the global financial system.

The Federal Reserve is seeking a new rule requiring foreign banks to hold capital in the United States in proportion to their activities in the country, a regulation that would hit Deutsche Bank particularly hard because of its big presence on Wall Street. Deutsche Bank has resisted efforts to set aside its capital by country, preferring instead to keep it under one global umbrella.

By one commonly used measure, Deutsche Bank is indeed among the better-capitalized banks in the world. Its ratio of capital to assets, or total money at risk, is 9.6 percent, up from just 5.9 percent when Mr. Jain and Mr. Fitschen took over the bank in 2012 from Josef Ackermann.

Some banking experts, however, question the way Deutsche Bank and other institutions have calculated their risk, using methodology that allows them discretion in estimating the chances that a loan or other asset could sour.

Among regulators, academics and some analysts, there is growing sentiment that the use of so-called risk-weighted assets to calculate capital is fundamentally flawed. “This is like asking the poachers to be game wardens,” said Adrian Blundell-Wignall, a well-known financial markets expert at the Organization for Economic Cooperation and Development in Paris.

Using another yardstick, known as the leverage ratio, Deutsche Bank still looks risky compared with its peers. According to estimates by James Chappell, an analyst at Berenberg Bank, a private bank in Hamburg, Deutsche Bank borrows $50 for every dollar of its own money that it lends or otherwise deploys in the market. It is Deutsche Bank’s leverage ratio that prompted Mr. Hoenig’s comments last month.

Mr. Blundell-Wignall, citing O.E.C.D. research, said that banks’ ratio of borrowed money to its own equity should not exceed 20 to 1. Banks with more than that “are potential accidents waiting to happen,” he said. Most large American banks have less leverage, because of tougher regulations than in Europe.

Deutsche Bank said in its first-quarter financial report that its ratio of borrowed money to capital was 36 to 1 at the end of March using European accounting standards. Using accounting methods more comparable to that used by American banks, the ratio was just 21 to 1, the bank said.

Some analysts say that Deutsche Bank might be forced to scale back its ambitions. Mr. Chappell of Berenberg Bank estimated that the cost to Deutsche Bank of meeting new requirements on capital would consume four years’ worth of profits.

“It can remain as a universal bank,” Mr. Chappell said, “but once they are properly capitalized, returns will be significantly lower.”