The charges leveled by a U.S. bank regulator are serious: imprecise accounting, insufficient monitoring and faulty IT systems. Financial reports to inspectors are “low-quality, inaccurate and unreliable,” said officials with the Federal Reserve Bank of New York.
The subject of those admonishments was not some minor American savings bank, but the U.S. subsidiary of Deutsche Bank.
The global banking giant, under the management of Anshu Jain and Jürgen Fitschen, has promised repeatedly since 2012 to make improvements in many areas. The harsh criticism by U.S. regulators doesn’t knock Germany’s largest bank out of its accustomed orbit, especially since it doesn’t include financial penalties. But the latest chastisement from the other side of the Atlantic does not exactly foster trust.
The decline in value of Deutsche Bank shares should be sufficient warning for those responsible at company headquarters in Frankfurt. Soothing words, seminars and discussions about cultural change are not enough to reestablish credibility and trust, when claims and reality are as far apart as U.S. regulators say. The reported failings are already problematic. Even more disquieting is the Federal Reserve’s accusation that progress has scarcely been made since the bank’s mistakes were first made public.
Was Deutsche Bank not able or not willing to improve its financial reporting more quickly? Assurances that intensive efforts are underway at the bank to sharpen controls and improve systems are eloquently empty of all meaning.
It is indeed true that Deutsche Bank is spending €1 billion ($1.34 billion) to improve security, technology and internal monitoring. But either the warnings from U.S. banking regulators were not taken seriously enough, or the reaction simply came too late. In either case, Deutsche Bank management doesn’t look very good in the matter.
Was Deutsche Bank not able or not willing to improve its financial reporting more quickly?
It has been demonstrated again and again in recent months how dangerous and expensive legal controversies with U.S authorities can be.
J.P. Morgan had to pay €13 billion ($17.5 billion) for dubious mortgage transactions, and authorities are seeking €12.7 billion ($17 billion) in penalties from Charlotte-based Bank of America for similar sales.
The French firm BNP had to pay almost €6.7 billion ($9 billion) in damages for engaging in prohibited business deals with countries like Iran.
Credit Suisse had to pay more than €2.5 billion ($3.36 billion) because for years it helped U.S. citizens evade taxes. This record sum brought the large Swiss bank its highest quarterly losses since the outbreak of the financial crisis.
The fact that penalties in the billions represent quite an economic burden for banks doesn’t seem to interest either the U.S. justice system or financial regulators. Clearly, authorities hope to achieve a deterrent effect: the more severe the punishment, the less likely banks will be repeat offenders.
Deutsche Bank is among the banks threatened with huge penalties because of legal problems in the United States. On the one hand, there is the allegation of colluding with other banks in calculating benchmark interest rates. The European Commission has already ordered Deutsche Bank to pay €725 million ($974 million) and experts expect a far higher penalty from U.S. authorities.
Deutsche Bank also faces steep fines because of investigations by the United States into prohibited financial dealings with countries such as Iran and Sudan. Germany’s Commerzbank can expect a penalty of around €500 million ($672 million) because of those sorts of money transfers.
Far more money is likely involved in the allegation of manipulating exchange rates, in which Deutsche Bank is said to be involved as one of the world’s largest currency traders.
This week, the German bank was roundly criticized in the U.S. Senate as well. A subcommittee on tax issues accused Deutsche Bank, along with the British multinational Barclays, of helping hedge-fund firms to engage in tax trickery. The two financial institutions are alleged to have sold complex financial products to hedge funds in order to reduce their tax payments by billions of dollars. According to legislators, the transactions were morally questionable, but not illegal.
It’s not a good sign when Deutsche Bank comes under such intensive attacks in one of its most important markets. The fact is that both Mr. Jain and Mr. Fitschen see enormous potential for growth in the United States. The co-bosses are planning further investments there. The difficulties with U.S. authorities are ill-timed for this reason alone.
Despite all of its talk about rebuilding trust, Deutsche Bank’s crisis of confidence is not over yet.
Sven Afhüppe is assistant chief editor at Handelsblatt. He can be reached at firstname.lastname@example.org.