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
We analyse the effects of changes in regulatory capital requirements under Basel III on the dynamic evolution of bank shareholder equity over time. Evidence from managerial and regulatory reports shows that bank shareholder equity stands between micro-prudential regulatory capital requirements and managerial pursuit of equity economising strategies. Shareholder value strategies see shareholders as the equity investment remuneration recipients. Micro-prudential regulators, in turn, address them as equity investment providers. With opposing cash streams, one orientation puts the other to a test. The article visualises this conflict by analysing the actual shareholder contribution to the bank equity position in nine case studies of European financial institutions between 2001 and 2017; our evidence-based financial analysis applies an innovative method to data directly extracted from financial statements, in order to measure this equity position evolution and assess bank equity dynamics in light of revised regulatory capital requirements and persistent assurance of shareholder value thriving in managerial reports. The choice of in-depth analysis of a sample of relevant case studies overcomes the absence of detailed data on changes in bank equity in existing databases.
This article contains the proceedings of the open debate that followed the plenary panel on ‘Accounting Regulation and the Public Good’ at the international workshop on ‘Which Accounting Regulation for Europe’s Economy and Society?’ organised under the auspices of the European Parliament in Strasbourg, on 20 May 2015.
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