[ by Melanie Gretchen and Howard Haykin ]

Deutsche Bank co-CEOs Anshu Jain and Jürgen Fitschen are faced with the task of strengthening the bank's finances.  To do so, however, might require them to break a promise made in September - not to tap shareholders for additional funds.  While that vow seemed doable in the fall, circumstances have changed dramatically since then, and the executives find they have few options.  

New American capital rules, non-core losses and a looming Libor settlement have put additional pressure on Deutsche Bank, which begins the new year behind its peers on capital.  Yes, the bank will should be able to narrow the gap by the end of the quarter (3/31), when it expects to have an 8% Tier 1 ratio, as required by Basel III. 

But these days, investors expect large global banks with significant exposure to capital markets to maintain a Tier 1 ratio at around 10% - something Deutsche Bank probably needs to do as soon as practicable.  With limited time, they probably wouldn't be able to build up capital organically, as they had hoped.  However, a rights issue of €5 billion ($6.5 billion) would do the trick.  It would raise the bank’s ratio above 9% by spring, and put it on a par with better capitalized rivals like UBS. 

[C-I Note:  A rights offering is an issue of rights to existing shareholders permitting them to buy additional shares in the company - participating in the offering enables a shareholder to maintain the same stake in the company relative to all other shareholders.]

Risk of Being a Short-Term Management Team.   Chief executives who renege on promises to shareholders usually don't survive very long with that company - although there are exceptions.  Credit Suisse CEO Brady Dougan survived a U-turn over capital in July, but did so only because he had the support of some big anchor investors.  If Mr. Jain and Mr. Fitschen are unable to rally similar support, an alternative would be to offer sacrificing their own 2012 bonuses. 

All this, of course, is conjecture.  And besides, with bank shares running up in price as a result of the relaxation of Basel liquidity rules, Deutsche Bank might be pleasantly surprised to find that a rights offering is favorably received by shareholders - in which case, they can keep their bonuses and live for another day.

For further details, go to [Dealbook, 1/8/13].