NEW YORK (TheStreet) -- Germany's largest bank, Deutsche Bank (DB), is to have a major new shareholder -- the royal family of Qatar. In order to raise capital up to $11 billion, the bank is going to be issuing an additional 360 million shares.
Shares worth $2.4 billion will go to a company owned by Sheikh Hamad Bin Jassim Bin Jabr Al Thani while the rest will be in the form of a rights issue to existing shareholders.
Why did the bank need such a major capital infusion now? It needs a cushion.
European regulators have criticized the region's banks for having very thin capital buffers to withstand the financial shocks that plagued the world economy for the past few years.
Be it the 2008 subprime crisis that started in the U.S. or the eurozone fallout more recently, banks are required to have enough capital on their books to absorb losses. In industry jargon, it is referred to as a Tier 1 capital ratio. Before the announcement, Deutsche Bank's ratio stood at 9.5%. It is now expected to improve to 11.8%, a major step up from the paltry 6 % in the middle of 2012.
However, there is a downside to the equity infusion. With new equity returns to existing shareholders get diluted, and in some cases the stock market can punish a company for such an action.
While the market did push up Deutsche Bank shares slightly after the announcement shares are currently down to $41.52, down 14% for the year to date in an environment the bank's joint CEOs, Anshu Jain and Jurgen Fitschen, have described as "challenging."