Deutsche’s Fine

Time for a Rethink

  • Why it matters

    Why it matters

    The author argues that U.S. financial regulators are treating Deutsche Bank more harshly than its U.S. rivals, endangering the entire global financial system in the process.

  • Facts

    Facts

    • The penalties imposed by the U.S. Justice Department date back to the bank’s actions during the mortgage scandal almost 10 years ago.
    • The fine initially proposed for Deutsche Bank was $14 billion, it emerged last week in a leak.
    • In most cases, the actual penalties paid by banks investigated by the Justice Department were much lower than the amounts initially proposed.
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    Audio

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CEO of Deutsche Bank John Cryan speaks during of the bank's annual shareholders meeting in Frankfurt, Germany, Thursday, May 19, 2016. (AP Photo/Michael Probst)
John Cryan’s battle with the U.S. Justice Department is only beginning, but the damage may have already been done. Source: AP Photo/Michael Probst

 

Just to be clear, this article is not intended as a defense of Deutsche Bank. It is no exaggeration to say that Germany’s largest bank has lost its moral compass in the last two decades.

Too many of the bank’s employees have forgotten what the bank’s legendary chairman, Alfred Herrhausen, once wrote: “In the long term, you can only sell products that have a good reputation.”

The bank gambled away its reputation some time ago, and its products are not selling well. Some of its bankers have repeatedly lied, enriched themselves, and cheated and manipulated people.

Given Deutsche Bank’s past, it would be easy to say that the bank has only itself to blame for the U.S. Department of Justice’s tough approach in a mortgage scandal that happened almost 10 years ago.

But that’s only part of the story, because Deutsche Bank has since mended its ways.

Merely the uncertainty over potential fines in the billions are making it impossible for the financially-stricken Deutsche Bank to raise urgently-needed capital from investors.

The new top management, headed by Chief Executive John Cryan, is not using the term cultural change. For Deutsche Bank managers, a solid ethical base is no longer lip service but a matter of course – and critical to the bank’s survival.

The same recognition has also entered the consciousness of most employees, while many proponents of the former “all is allowed” philosophy have since left the bank.

Mr. Cryan and his fellow senior managers have certainly understood what is at stake, and not just because the bank is in an extremely precarious economic situation today as a result of scandals from previous years.

But the latest indiscretion from the United States also puts a spotlight on the U.S. regulatory agencies, and it raises the question of whether it may be time for them to rethink their approach as well.

Exactly $14 billion, or €12.55 billion, is the breathtaking sum that the U.S. Justice Department is demanding as an initial offer for a legal settlement of the massive sale of bad mortgage loans before the financial crisis.

The figure sounds spectacular and would be demanding too much of Deutsche Bank, which already has an extremely thin capital base. The consequence would most likely be a government bailout, because the troubled bank is currently unable to raise any capital in the market.

Nevertheless, the number itself does not come as a shock to top management. With other banks, similar and in some cases even larger sums were invoked at the beginning of the settlement negotiations. In all other cases, the actual penalty was only a fraction of the initial amount.

In other words, the problem is not the total amount but the lack of discretion. With an already unstable bank, it only creates more uncertainty. On Friday, for example, the bank lost €1.5 billion in market value.

Far worse is the fact that the debate over the penalty could take on an uncontrollable momentum. There is a substantial risk that the issue will be used in the U.S. presidential election campaign, and that it will be difficult for the candidates to explain why Deutsche Bank should pay significantly less than the original sum.

Besides, the sum feeds the suspicion that foreign companies are in fact treated more severely than their U.S. rivals. In most cases, while U.S. authorities often start the negotiations high, the figures that were publicly released in connection with U.S. banks have been very close to the actual penalty, which usually runs into the billions. It isn’t surprising that the leak is now being interpreted as payback for the European Union’s demand that Apple pay back taxes to Ireland.

It seems negligent for regulators to place such a large bank, one that has been rated the world’s most financially-interconnected by the International Monetary Fund, in this type of situation.

Of course, the bank itself did its part to contribute to the problem. Deutsche Bank made many enemies in the United States, where it ignored the rules all too often. From the standpoint of regulators, its management was nothing less than chaotic. It is no accident that Deutsche Bank failed this year’s stress test in the United States once again.

Mr. Cryan and his team have been trying for some time to remedy these problems and develop a better relationship with regulators. The fact that they are only succeeding with this in Europe is a sign that the blame may also lie with U.S. authorities.

Another omission by U.S. authorities is far more serious: They should have realized long ago that the days of exorbitant penalties ought to be over. First, banks are now subject to such strict regulations that they can hardly do anything but behave correctly. Second, the penalties themselves are becoming a threat to financial stability.

Merely the uncertainty over potential fines in the billions are making it impossible for the financially-stricken Deutsche Bank to raise urgently-needed capital from investors. It seems negligent for regulators to place such a large bank, one that has been rated the world’s most financially-interconnected by the International Monetary Fund, in this type of situation.

Instead of continuing to ask bank shareholders to pay up, regulators should finally call those individuals to account who are responsible for the scandals, including former top executives. The judiciary has failed in this respect, and it is apparently trying to deflect attention away from its mistakes by imposing larger and larger fines.

 

To contact the author: d.schaefer@handelsblatt.com

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