Troubles ahead for Germany’s Deutsche Bank

Germany’s biggest bank “Deutsche Bank” admitted that in routine operations, it mistakenly transferred as much as 28 billion euros, an amount greater than its market capitalisation. The mistake occurred on March 16, when Deutsche Bank deposited money into the account at Deutsche Boerse’s “Eurex” clearing house. This statement was issued to the AFP news agency by a representative of the German Bank. The amount should have been smaller and the bank did not announce it. This shows that Deutsche Bank has problems with information technology and control.
The AFP pointed out that accounting errors occur frequently, but in the case of “Deutsche Bank” the amount is extremely unusual as it exceeds its market capitalisation of 24 billion euros.
The incident was quickly resolved and no damage was caused, as advised by the bank. However, it raises questions about the risk management system and control processes within the bank, which the dismissed executive director John Cryan should have improved considerably.
The price of Deutsche Bank’s shares fell to 9.07 euros on June 1, it had never been so low in its history.
Investors were upset due to the decreased price of shares of one of the most famous banks in the world. Consequently, in an announcement by the US investment insurance company FDIC, the Deutsche Bank was described as a “troubled bank”.
The bank immediately issued a statement in which investors asserted that the company was “very well capitalised” and that it had “very significant liquidity reserves”. This, however did not help the situation.
The Wall Street Journal claims that the FDIC relied on an internal document from the Federal Reserve (Fed) in which Deutsche Bank was described as a “troubled” bank.
Eventually, the price of shares recovered slightly and stopped at 9.41 euros.
The US branch of Deutsche Bank did not pass the second round of the annual second-rate US Fed stress test, which is tasked with assessing the resilience of the banking sector to a possible recession and financial crisis.
German lenders suffer from a “widespread and critical gap” in parts of their business, announced the Fed.
On the other hand, 31 of the 35 banks surveyed passed Fed’s check, while Goldman Sachs and Morgan Stanley received only “conditional” passes.
Stress tests were introduced after the 2008 financial crisis, and the Fed is committed to conducting annual testing per country, including foreign subsidiaries.
One part of the Fed tests checks to confirm that banks have enough capital to fight recession. The second part focuses on the “capital plans” of bank. For example, how much money they intend to return to shareholders.
The 35 largest banks tested in mid-June passed the first part of the test. However, with the Deutsche Bank subsidiary, the Fed has identified “financial weaknesses in data capabilities and controls in terms of supporting the company’s capital planning process, as well as weaknesses in its approaches and assumptions used to forecast revenue and losses due to a crisis situation.
This decision is still a big blow for the troubled German lender, whose financial health has recently been the centre of attention, and will also require the bank to change the way it operates in the US.
Deutsche Bank plans to abolish between 7,000 and 10,000 jobs, or about a tenth of its global workforce, as part of efforts to reduce costs. Standard & Poor’s agency downgraded its credit rating. At the end of February, the bank recorded an annual loss of EUR 500 million.
The central bank in Germany advised that their US subsidiary “made significant investments in improving capital planning capabilities, as well as controls and infrastructure.”
Chairman of Deutsche Bank Paul Achleitner began talks with key shareholders and German officials about a merger with Commerzbank. A key obstacle would be the drop in shares of Deutsche Bank. Investors suggest to Achleitner not to merge with Commerzbank at this time because it would require significant changes including increase capital and significant write-offs of assets, according to well-informed sources.
The two banks have already led similar talks in the summer of 2016, but they have not decided on an agreement. Although they are currently focused on restructuring their business.
Standard & Poor’s credit agency cut the Deutsche Bank’s credit rating to BBB — the third lowest investment level. The reason for this is significant
risks after several changes in management and strategy over the years. Standard & Poor’s nevertheless confirmed that the bank has good capital and liquid assets.
Deutsche Bank still does not operate profitably today, and the price of its shares has sank by over 50 per cent in the past two years, this year accounts for 30 per cent of the aforementioned 50 per cent

Stefano Virgilli
stefano@virgilli.com