Finance Case Study: Deutsche Bank's Universal Banking Approach

This case study examines Deutsche Bank's adoption of the universal banking method, a strategy implemented in response to the Global Financial Crisis to offer a wide range of financial services, including customer, retail, and investment banking. The study details the advantages, such as competitive advantage and financial system stability, and disadvantages of the method, including increased risk concentration, regulatory challenges, and conflicts of interest. The adoption of universal banking allowed Deutsche Bank to merge commercial and investment banking functions, but also led to challenges in risk management and increased complexity. The case study highlights the repercussions on trading and markets, challenges in managing increased leverage, and the impact of the 'too big to fail' concept. It also discusses the seclusion of rules and regulations, promoting monopoly structures, and potential conflicts of interest, particularly in the context of combining investment and commercial banking.

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Banking
Name of the Student
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Table of Contents
Case Study of Deutsche Bank..........................................................................................................2
Task 2...........................................................................................................................................2
Adoption of Universal Banking Method......................................................................................2
Challenges due to Universal Banking Method............................................................................3
Disadvantages of the method.......................................................................................................4
References....................................................................................................................................5

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Case Study of Deutsche Bank
Task 2
A majority of the financial reforms which have been undertaken by the regulating bodies
in the recent years are a result of the Global Financial Crisis. The main aim of these reforms
undertaken by the entities is to better regulate the capitals of the entities and improve the market
infrastructure. The main purpose of these regulations is to ensure that the banking facilities
implementing them achieve substantial progress in their business. However, this fundamental
change could not be sustained by the method applied for a long period of time.
Adoption of Universal Banking Method
The main purpose of adopting the universal banking method was to create banks which
offered a wide range of solutions and services in areas like customer banking, retail banking,
investment banking and financial and payment services which otherwise the banks were not
compelled to do so. The implementation of the Universal Banking Method restricted these banks
to parts in investment banking. This is also known as the “one size fits all” approach. As
Deutsche Bank was limited to a very low number of customers and needed to develop its
expertise in ensuring that it grew in scope and size, it adopted the Universal Banking Approach.
The impact of the Global Financial Crisis on Deutsche Bank was very severe and resulted
the bank splitting into 10 smaller financial institutions. The only way in which this bank could
become global yet again was the adoption of the Universal Banking Method. The main
advantages of the Universal Banking Method is that it allows the banks competitive advantage in
the non-segmented countries while also providing sufficient funds to ensure the long term
stability of the financial system. After the adoption of the Universal Banking Method, Deutsche

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Bank merged the commercial and investment banking functions together, but also became
relevant in the Insurance industry.
However, the universal banking method which was followed in the 90s was a success
because it increased the competition amongst the prevailing banks while huge amount of tax
incentives were also given. These incentives helped the banks become limited companies and the
gap between the private and the public bank was narrowed down. Apart from Deutsche Bank,
many other banks also adopted this policy as it allowed them to undertake mergers and
acquisitions as per their convenience. Also, there were no credit limits or currency controls after
1990. This abolishment helped the businesses in branching out their businesses outside the
normal business territory.
Challenges due to Universal Banking Method
The main challenges posed by the universal banking method were felt in the form of
repercussions on the trading and markets. The cost of raising the funds increased significantly for
both the governments and the financial institutions. Even though the method initially created a
critical mass necessary for maintaining liquidity and stability in the market, it could not live up
to the initial hype created by it. As banks became specialists in lending and depositing funds, the
process of risk management was not applicable to them anymore. As these investments were
high yielding, the risks taken by the firm in lending out funds also increased. Thus the process of
risk management became irrelevant due to the increased risk concentration.
The increased leverage ratio of the banks resulted in a quicker growth rate amongst the
businesses but resulted in the forming of more complex manual of operating regulations imposed
on the banks.

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The only financial measure which was considered to have impacted the funding profile of
a bank by creating financial stress is the low ROA. Moreover, the low cost of financing of the
assets generating low ROA also increases the risks faced by the business. Due to the complexity
and size of the financial institutions, the regulatory issues were not anymore applicable on the
firms due to the “too big to fail” concept. However, apart from their size, protecting the
taxpayers, market and depositors were also the reasons for the dysfunctions of the institutions.
Disadvantages of the method
The adoption of the Universal Banking Method resulted in the seclusion of rules and
regulations which previously had a significant impact on the Banking Industry. It promotes a
monopoly structure amongst the banks and creates unnecessary conflicts of interest.
This monopoly structure negatively impacts the smaller banks and general public and
creates a negative impact on the economic development of a country. There arises a conflict of
interest when the banks combine both investment banking and commercial banking and the
importance of commercial banking is lost by the banks.

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References
Ferran, E., Moloney, N., Hill, J.G. and Coffee Jr, J.C., 2012. The regulatory aftermath of the
global financial crisis. Cambridge University Press.
Francke, H.H., Ketzel, E. and Kotz, H.H. eds., 2012. Handbook of public credit in Europe.
Springer Science & Business Media.
Jain, A. 2013. Challenges and Opportunities for Universal Banks. [online] Deutsche Bank.
Available at: https://www.db.com/en/media/Deutsche-Bank-Anshu-Jain-CFS-Speech-Global-
universal-local-bank.pdf [Accessed 20 Apr. 2016].
Kregel, J.A., 2013. Universal banking, US banking reform and financial competition in the
EEC. PSL Quarterly Review, 45(182).
Molyneux, P., 2016. Structural Reform, Too-Big-To Fail and Banks as Public Utilities in
Europe. In Financial Crisis, Bank Behaviour and Credit Crunch(pp. 67-80). Springer
International Publishing.
Muraleedharan, D., 2014. Modern banking: theory and practice. PHI Learning Pvt. Ltd..
Schildbach, J. 2012. Universal banks: Optimal for clients and financial stability. Deutsche Bank
Research. Available at:
http://www.dbresearch.in/PROD/DBR_INTERNET_EN-PROD/PROD0000000000296976/
Universal+banks%3A+Optimal+for+clients+and+financial.pdf [Accessed 11 April 2020].