INTERNATIONAL BANKING

“Deutsche versus DoJ”

“Deutsche versus DoJ” is an individual assignment written as an analyst’s report. It should include a combination of background research on the case involving Deutsche Bank, and an empirical investigation (i.e. an event study) of the impact of the announcement of a fine levied on Deutsche Bank by the US Department of Justice. Reports should be around 2,500 words (excl. appendices).

The Scenario

In September 2016, the Department of Justice in the United States fined Deutsche Bank $14 billion over the bank’s earlier sale of mortgage-backed securities. The fine will be the largest settlement paid by any bank. Worryingly for Deutsche Bank, the size of the fine is roughly equivalent to its market capitalisation. Deutsche Bank has been making a case for a reduction in the fine. The prospect of a bank failure has systemic implications. Indeed, other European banks are currently under investigation by the Department of Justice. The banks include Barclays, Credit Suisse, UBS and RBS.

Your report should consider the following:

1. Why did the Department of Justice fine Deutsche Bank? 2. Explain the response of Deutsche Bank to the fine and report on its counter proposal to the Department of Justice. 3. Identify the date of the announcement of the fine. Trace the reaction of the share price of Deutsche Bank. Use graphics. 4. Collect daily share prices and the market capitalisation for Deutsche Bank from DataStream (or Yahoo Finance) for a period, say from August 2015 to October 2016. Source comparable data for the market index. Estimate the market model for Deutsche Bank and determine the market reaction to the announcement of the DoJ fine. Did it destroy shareholder value? 5. Repeat the event study analysis for the other European banks currently under investigation by the Department of Justice i.e. Barclays, Credit Suisse, UBS and RBS. Collect daily share price data and market capitalisation for each of the banks. Select a relevant market for the UK and Switzerland. Calculate the effect of the announcement of the fine on Deutsche Bank on shareholder value at the other banks.

Hints and Suggestions

1. One may estimate the market model using the following regression: ??? = ? +????? +???, where the dependent variable is the natural logarithm of a bank’s daily share price return and the independent variable is the same for the market (e.g. FTSE 100) Index. Construct daily share price returns as follows: ??? = 100∗log⁡ (??/??−1). If you prefer to calculate in Excel, us ln for natural logarithm. Estimate the

market model for a period of at least six months and end the estimation at least one month before the announcement date. Keep the estimates of alpha and beta and use them to construct predicated returns during the event window i.e. a short period, say 1 day before day zero (announcement date) and 1 day after. You may construct a longer window length. Calculate abnormal returns over the event window by subtracting from actual returns the predicted return. Define predicted returns using the equation???? = ∝ ̂+? ̂????, and abnormal returns as ???? = ??? −????⁡over the event window. 2. The following webpage offers a good review of event studies and associated tests, but remember you are dealing with the simplest case: http://www.eventstudytools.com/excel. This page provides a good example of how to carry out an event study with simple t-testing and using Excel. Please watch the YouTube video on conducting an event study. Click on zip-archive to download an Excel file that contains a worked example. 3. You should report if the abnormal return is statistically significant from zero on announcement date, and for a window around the announcement date. This will formally test the null hypothesis that the abnormal return on announcement day is equal to zero against the alternative that it is not. Please see the downloaded Excel file. 4. Alternatively, Stata can perform the event study analysis. Please compile a do file. 5. Tabulate the market reactions to the announcement of the fine. What can we infer from your results?

Submission requirements

1. In hard copy format. 2. Electronically via the TurnItIn software in Blackboard.

It is your responsibility to allow enough time for submission. Failure to submit in both formats and not provide data will result in a zero mark.

Please note the University does not tolerate unfair practice.

The School is unable to consider extensions for assignments unless certifiable evidence of a genuine complaint or circumstance supports a request and normally before the submission date.