BANKING ERROR

Development Bank Error Much Larger Than First Thought

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Germany's "stupidest bank," according to the tabloid press. Picture source: PR

An error which saw German development bank KfW mistakenly transfer billions to four other banks is considerably larger than first thought, Handelsblatt has learned. Early reports of the incident suggested up to €6 billion was transferred. In fact, the total sum was €7.6 billion.

The incident, which took place in late February, is thought to have been the result of a rare combination of human error and malfunctions in the bank’s payment systems. A programming fault took place at the same time as maintenance work on payment systems, all of which meant that payments to other banks were executed multiple times, continuing on an infinite loop until manually stopped.

KfW did not incur financial losses, since the money was immediately returned by the recipient banks. But there has been considerable damage to the state-owned development bank’s image, particularly since it already has a bad track record of IT problems and errors.

A spokesperson for the German finance ministry said “a comprehensive explanation of the incident and complete elimination of its causes and of any risk of repetition” had been requested.

In 2008 KfW mistakenly transferred €320 million, or $348 million, to Lehman Brothers, after the American financial firm had already suffered a high-profile bankruptcy. That incident drew widespread negative publicity, with tabloid newspapers ridiculing KfW as “Germany’s stupidest bank.”

A critical report last year on the bank’s IT systems by Bafin, the German banking regulatory authority, demanded reforms to KfW’s computing infrastructure. In fact, Bafin saw the issue as so urgent it insisted that the bank retain an extra 2-percent capital buffer, over and above the usual mandatory levels, to insure against any problems arising. This presents no financial problem for the well-resourced bank, but is an indication of the seriousness of the problem.

A spokesperson for the German finance ministry said “a comprehensive explanation of the incident and complete elimination of its causes and of any risk of repetition” had been requested. KfW’s audit committee has asked the financial services firm Deloitte to conduct an external audit into the exact circumstances of the latest error.

The incident was no doubt noted at the highest levels of Germany’s political and financial systems. KfW is jointly owned by the federal government and the country’s 16 federal states. The latest error was discussed on Tuesday by the supervisory board, which is chaired by Finance Minister Wolfgang Schäuble.

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