Washington: International Monetary Fund (IMF) chief Christine Lagarde gave Deutsche Bank some tough advice yesterday, saying Germany’s biggest lender needed to reform its business model and reach a rapid deal with US regulators over a potentially huge fine.
A senior European official tried to shore up confidence in the continent’s banking system, saying it was working well overall, while sources said Germany’s financial watchdog had found no evidence so far that Deutsche violated money laundering rules in Russia, possibly relieving one of its many headaches.
However, Lagarde did not mince her words about the problems of Deutsche – which the IMF has identified as a bigger potential risk to the financial system than any other global bank – in an era of ultra low interest rates.
“Deutsche Bank, like many other banks, has to look at its business model,” she told Bloomberg Television during the IMF and World Bank’s autumn meetings in Washington.
“It has to look at its long-term profitability – given the lower-bound interest rates we have around the world and probably for longer than many expect – and decide what size it wants to have and how it wants to strengthen its whole balance sheet.”
Germany’s flagship bank is under heavy pressure as it fights a penalty of up to $14 billion that the US Department of Justice (DoJ) plans to impose for mis-selling mortgage securities, its latest setback that sent its shares to a record low last week and worried clients.
Deutsche is in the midst of a deep overhaul that includes slashing a workforce of around 100,000, revamping information technology and selling non-core assets. It struck another deal yesterday with its works council to cut a further 1,000 staff in Germany, bringing total job losses there to 4,000.
Lagarde acknowledged that Deutsche was selling assets but underlined the importance of reaching an out-of-court settlement with the DoJ.
“A bad settlement is always better than a good trial,” she said, adding that Deutsche was “not in a trial mode”.
“A settlement would ... would deliver some certainty as to what weight the bank will have to carry and whether it matches with its provisions or not. So the sooner, the better,” she said.
Deutsche has already spent 12bn euros ($13.4bn) on litigation since 2012, and says it has put aside 5.5bn euros for its expected legal bill. This is far less than the top end of a possible DoJ fine, although other banks have negotiated their penalties down to much smaller sums and Deutsche hopes to do the same.
Deutsche Bank got some positive signals from its home market on one of its other major litigation cases. The Bafin financial watchdog has found no evidence to date that it violated money laundering rules in Russia, people close to matter said.
But regulators in Russia, Europe and the US are also investigating it over “mirror trades”. These may have allowed clients to move money from one country to another in 2014 without alerting authorities, potentially enabling them to breach Western sanctions on Russia over the Ukraine conflict.
Investors have been focused on the potential damage from the US mis-selling case in recent weeks, although German companies have rallied behind the lender, which plays a key role in financing their international operations and domestic needs.
Berlin is pursuing discreet talks with US authorities to help Deutsche secure a swift settlement and put the bank back on a firmer footing.
Germany’s influential industry association BDI said that as an export-oriented economy Germany needs strong internationally competitive lenders.