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Deutsche Bank – fallout from the credit crisis or a crisis about to unfold?

by: (Course Director - Governance, Risk & Compliance) on

There’s plenty in the news at the moment about Deutsche Bank (DB) and its impending tussle with the US Department of Justice (DoJ) over mis-selling. That’s not mis-selling to consumers, but the mis-selling of residential mortgage backed securities (to the tune of around $71 billion between 2005 and 2007) which no doubt contained toxic debts like sub-prime mortgages.

This all happened in the run-up to the credit crisis, and now the DoJ is looking to hold banks to account for their market conduct during the last decade. It has been suggested that imposing large fines on DB, along with Barclays and Credit Suisse before the US elections would be good political capital for the incumbent Democratic Party (but that’s another story).

Anyway – to DB. It’s been leaked that the DoJ is looking for a fine of $14 billion which is more than DB was expecting and very close to its market capitalisation of €16 billion (although we must remember that DB has a balance sheet of over €1.8 trillion). This closeness of the possible fine to the market capitalisation has worried investors and DB’s share price has taken a big hit over recent weeks. This can only weaken its market capitalisation further. The reality may be that the fine agreed upon is actually much lower than $14 billion, but the speculation is still causing uncertainty.

Which leads to my question(s):

A balancing act?

Surely regulators need to tread this path carefully. On the one hand, enforcement is a necessary regulatory power in their toolkit, and it is clear that DB’s activities at the time in question (along with other industry players) are worthy of investigation and if needed, remedial enforcement actions.

BalancingBut on the other hand, regulators shouldn’t impose penalties that could lead to failure of the company in question, should they? Okay, this is probably an overstatement, and in the end the reality will be a reduced settlement which is agreed on after considerable negotiation. But in the interim period, will DB need financial support from the German government? Support needed to help it to pay a fine imposed on it by the US? That might be difficult to justify to the German electorate which is still paying for the bailout of other EU states, let alone financial companies.

Let’s bear in mind that Deutsche Bank are down playing rumours. The chief executive John Cryan emailed all Deutsche Bank employees last week confirming Deutsche Bank’s strong fundamentals, but the speculation is not helping DB’s share price, which has fallen by nearly 50% this year.

Is it all about politics after all?

Looking at the wider political landscape, is it a coincidence that talk of such a large fine is following the EU ordering US giant Apple Inc. to repay €13 billion in back taxes to Ireland?  Not according to German politician Markus Ferber who described the investigation as a “tit for tat response”.

It’s also worth remembering that DB hasn’t exactly been in favour in the US as it has failed their capital adequacy stress tests for the past two years in succession.

One thing is for certain, the arguments and pressure on DB don’t look like ending anytime soon.

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