The big idea: For banks, the accelerated trend in globalization meant they had to provide a range of commercial and investment banking services to clients, and they had to do so in all the places their customers were doing business. Increasingly, customers banked outside of their home countries. Additionally, most investment banking activities, especially sales and trading, benefited from economies of scale, so banks became more profitable as the volume of services and transactions they provided increased.

As big banks became a “one-stop shop,” increased leveraging in the sector contributed to higher returns during the boom and deeper financial troubles during the 2008 global financial crisis. The response was a revised global banking regulatory framework — Basel III. It aimed to make the global financial system safer by increasing bank capital and liquidity requirements, among other things. Basel III could fundamentally change the banking industry landscape.

The scenario: Deutsche Bank engaged in investment banking activities (sales and trading, origination, advisory, etc.) through its corporate and investment banking division, as well as loan and deposit services through its commercial division. When Basel III regulation was agreed on in 2010, Deutsche Bank was a global institution with much of its revenue coming from outside Germany — and generated from investment banking operations.

For investors, Basel III raised concerns that Deutsche Bank would need to issue fresh equity capital to meet the requirements, thereby diluting the value of existing shares. In addition, profitability in the banking sector had declined steadily since the crisis, and investors worried that stricter requirements would further reduce profitability. It needed alternative ways to profit. But how?

The resolution: Deutsche Bank reduced leverage between 2007 and 2011, thereby starting to address capital concerns. In 2010, it acquired Deutsche Postbank, a German private-sector retail bank. Postbank strengthened Deutsche Bank’s deposit base and gave it an alternative revenue source.

In addition to strengthening its retail banking presence in European markets, Deutsche Bank used the downturn in investment banking to gain market share as many competitors were forced to exit the business. By July 2012, Deutsche Bank had the largest market share in U.S. fixed-income trading, beating JPMorgan Chase.

The lesson: Strategically, the 2010 Postbank acquisition provided Deutsche Bank with low-cost funding — and brought its business model closer to global peers. The new regulatory environment created areas of the business that are more attractive and others that are less so. Banks would have to weigh the impact on their traditional strengths.

Gerry Yemen, George (Yiorgos) Allayannis, Matthew Dougherty

and Andrew Wicks

Yemen is senior researcher at the University of Virginia Darden School of Business, Allayannis is a business professor and associate dean, Dougherty is a Darden graduate and Wicks is a business professor.