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Deutsche Bank's US failures

Deutsche Bank CEO John Cryan May 2016 shareholders meeting source Arne Dedert DPA 60609409
More stress for Deutsche Bank's CEO John Cryan.
  • Why it matters

    Why it matters

    The failed U.S. stress test and fine mark fresh setbacks for Deutsche Bank, underlining the challenges Germany’s biggest bank faces in turning around its fortunes.

  • Facts

    Facts

    • A Deutsche Bank subsidiary in the United States again failed the Fed’s stress test for qualitative reasons and will have to make improvements in its risk and controling.
    • Deutsche Bank’s chief executive, John Cryan, has been working since last July to improve the bank’s operations and put an end to mounting legal costs.
    • Germany’s biggest bank made a loss of €6.8 billion, or $7.6 billion, last year, the largest loss in the company’s history.
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    Audio

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John Cryan celebrates his one-year anniversary at the helm of Deutsche Bank on Friday. Developments this week have made it clear that the new chief executive, who promised a major overhaul of the bank’s operations, remains far from his goals.

Warnings that Germany’s biggest bank remains a global risk have been coming fast and furious this week – and all from the United States.

The U.S. Federal Reserve said that a Deutsche Bank subsidiary in the United States once again has failed to meet the central bank’s stress test criteria, citing the Deutsche’s inadequate risk management and controlling operations.

The subsidiary, Deutsche Bank Trust Corporation, had been given 15 months to improve its U.S. operations and pass a stress test after it failed the test the first time in March last year. The Fed’s statement makes clear it was unable to turn things around.

“The Federal Reserve identified deficiencies in the risk management and control infrastructure at Deutsche Bank Trust Corporation, including risk measurement processes; stress testing processes; and data infrastructure,” the U.S. central bank said in its report, released Wednesday.

Deutsche Bank’s shares fell as much as 4.8 percent to an all-time low of €12.05, or $13.40, in morning trading Thursday, putting it below the record lows seen Monday in the aftermath of Britain’s decision to leave the European Union.

The stock recovered slightly in the later hours, but remained down 4 percent at €12.14 by 4:50 p.m. in Frankfurt, making it the biggest decliner in the German blue-chip DAX index, which rose 0.1 percent.

Investors are increasingly turning their back on the bank’s shares. Earlier this week it emerged that billionaire George Soros was betting against the stock. Now Handelsblatt has learned that major Chinese investors have started “shorting” the bank’s stock as well.

The Deutsche Bank unit failed to “to provide complete and accurate trade data in an automated format in a timely manner."

The Federal Reserve isn’t the only one worried. The International Monetary Fund in a report Wednesday warned that, of all the major global banks, “Deutsche Bank appears to be the most important net contributor to systemic risks.” That means the global financial system is more vulnerable to a Deutsche Bank collapse than any other bank, and makes monitoring its risk controlling systems all the more important.

“The relative importance of Deutsche Bank underscores the importance of risk management, intense supervision … and the close monitoring of their cross-border exposures, as well as rapidly completing capacity to implement the new resolution regime,” the IMF said in a report on the German financial system.

On top of the failed stress test and IMF warning came a fine of $6 million slapped on Deutsche Bank Securities Inc., another subsidiary. The fine was leveled Wednesday by the U.S. Financial Industry Regulatory Authority, or FINRA.

The Deutsche Bank unit failed to “to provide complete and accurate trade data in an automated format in a timely manner when requested by FINRA and the Securities and Exchange Commission (SEC),” the U.S. financial authority said in a statement.

FINRA and the SEC regularly request certain trade data from brokers and banks to guard against possible market manipulation and insider trading.

The warnings and the fine mark another setback for Deutsche Bank and its chief executive, John Cryan, who took over in July of last year and has vowed to improve its operations and clear the air with regulatory authorities that have repeatedly targeted the bank since the 2008 financial crisis. Mr. Cryan is also busy with a broader reorganization of the bank to generate sustainable profits and settle hundreds of court cases related primarily to its investment banking operations.

 

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The Fed’s stress test checked whether the bank’s U.S. subsidiary, Deutsche Bank Trust Corporation, could continue lending even in times of severe financial stress. The test reviewed 33 banks for their capital levels and internal risk management. Only the U.S. subsidiaries of Deutsche Bank and Spanish bank Santander failed.

Both Deutsche Bank and Santander’s U.S. units did have enough capital, but they failed the stress test on “qualitative grounds,” meaning, for instance, inadequate risk management, the Federal Reserve said in its stress test report.

Deutsche Bank Trust Corporation is made up of the bank’s U.S. transaction banking and wealth management business.

The failed test means the subsidiaries cannot pay dividends to their parent companies or to other shareholders and cannot issue or buy back shares until the Fed approves their newly adjusted plans to deal with risk.

Bill Woodley, the chief executive of DB USA Corporation and deputy chief of Deutsche Bank Americas, said the capital adequacy of Deutsche Bank Trust Corporation “has never been in doubt” but acknowledged that more needed to be done to meet the Fed’s bar for reporting.

“We appreciate the Federal Reserve’s recognition of our progress, and we will implement the lessons learned this year in order to strengthen our capital planning process for future CCAR submissions,” Mr. Woodley said in a statement.

The IMF’s own study looked more broadly at the inter-connectedness of Deutsche Bank. It asked to what extent any problems it might have in paying back loans or refinancing could threaten the livelihood of another bank.

To be sure, systemic risks are in the eye of the beholder. The U.S. Office of Financial Research, or OFR, rated Deutsche Bank as the fifth-riskiest bank in its last annual report, behind JP Morgan, HSBC, Citigroup and BNP Paribas. The OFR study takes a somewhat broader look than the IMF and gives greater weighting to the sheer size of a bank’s balance sheet.

That a bank is systemically relevant alone also doesn’t say much about whether it is actually in serious danger of collapse and posing a real financial threat. That depends on things like whether the bank is viewed as stable, whether it has a robust business model, solid capital reserves, solid profits, and solid risk controls. None of these issues were specifically raised by the IMF.

But these are all areas where even John Cryan has admitted the bank has work to do and urged patience from shareholders. The bank’s record-low share price suggests that investors aren’t too confident about the bank’s business model, either.

 

Gilbert Kreijger is an editor with Handelsblatt Global Edition in Berlin, covering companies and markets. Frank Wiebe and Robert Landgraf of Handelsblatt and Christopher Cermak of Handelsblatt Global Edition contributed to this story. To contact the author: kreijger@handelsblatt.com

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