If you’re a bank with a stock market value of €18bn (£15.4bn), a potential $14bn (£10.5bn) penalty is deadly serious. But Deutsche Bank’s battle with the US Department of Justice could have wider implications. It is only three months since the International Monetary Fund said that Deutsche “‘appears to be the most important net contributor to systemic risks”. Translation: the bank is so big that it could become a danger to others, not just itself.
For the moment, there is no reason to panic. First, Deutsche is probably right to think that it won’t end up paying the full $14bn. It is normal for the DoJ’s claims to shrink as the two sides get into the argy-bargy of the settlement process.
Second, the DoJ’s claim has not arrived out the blue. Deutsche has known for years that this day was coming because it is one of several banks – including our own Royal Bank of Scotland – still on the hook for allegedly mis-selling US mortgage-backed securities in the run-up to the banking crash. Deutsche’s pot of provisions to settle legal claims runs to €5.5bn, although the trouble with the DoJ is one of several legal scraps.
Third, regulators’ post-crisis reforms are designed to deal with crises at individual banks, not prevent them altogether. Banks’ capital structures are ordered so that the riskiest bonds can be “bailed in” to provide financial support. Deutsche’s riskiest convertible bonds fell 6% in value on Friday – but that is what one would expect. Fourth, Deutsche has powerful political friends – note Berlin’s call for “fair treatment” by the US for its biggest bank.
Yet the IMF’s summer verdict of Deutsche was sober. This is an underperforming bank with an identity crisis. By comparison with most other European giants, Deutsche’s post-crisis response has been slow and muddled. UBS sought refuge in its asset management business. Barclays, with the rock-solid Barclaycard in its portfolio, wants to be an Anglo-US transatlantic bank and has been steadily shedding non-core operations.
Deutsche, however, has so far resisted calls to change shape, even as its capital ratios have looked thin compared with rivals’. Possible self-help plans could involve selling the retail bank, Postbank, or the asset management operation but, so far, new-ish chief executive John Cryan has opted only for cuts to costs.
The strategy is credible but designed to avoid tapping shareholders for fresh capital. If the final figure from the DoJ is so big that an injection of cash becomes essential, Deutsche has a serious headache: the best time for a bank to raise capital is when it doesn’t need to, not when it is pushed into a corner.
