The New York Fed sent the bank a letter in December saying errors in its regulatory reports show inadequate oversight at its U.S. operations, Jordan Thomas, a lawyer at Labaton Sucharow LLP, representing a former Deutsche Bank employee who has accused the Frankfurt-based company of masking losses, said by phone from New York today. He declined to say how he came to see the letter, whose contents were first reported by the Wall Street Journal late yesterday.
Earlier this year, U.S. regulators approved new standards that will require foreign banks operating in the country to hold more capital to protect taxpayers from having to bail them out in a crisis. Deutsche Bank co-Chief Executive Officer Anshu Jain is also tightening governance and controls after his firm became a target of industry-wide probes into market manipulation and other alleged wrongdoing.
“This shows that Deutsche Bank still has a lot of work to do to comply with new rules for foreign banks in the U.S.,” Christopher Wheeler, an analyst with Mediobanca SpA, said by phone from London today. “If its systems are not bought up to scratch, the U.S. unit could be prevented from paying dividends to its parent” if it fails to pass U.S. capital standards.
Deutsche Bank declined to comment on the letter. Michele Allison, a spokeswoman in New York, said in a statement that the bank has “been working diligently to further strengthen our systems and controls and are committed to being best in class.” Germany’s largest lender has said it’s investing 1 billion euros ($1.4 billion) in that effort and assigned 1,300 people to the program.
“The size and breadth of errors strongly suggest that the firm’s entire U.S. regulatory reporting structure requires wide-ranging remedial action,” Daniel Muccia, a New York Fed senior vice president who supervises Deutsche Bank, wrote in a Dec. 11 letter to the Frankfurt-based lender, according to the Journal. The letter said the company also hadn’t made progress toward fixing lapses identified previously.
Andrea Priest, a spokeswoman for the New York Fed, declined to comment on the report and said she wouldn’t make Muccia available for comment.
Deutsche Bank fell 0.7 percent to close at 26.48 euros in Frankfurt. The Bloomberg Europe Banks & Financial Services Index rose 0.4 percent.
Some investors aren’t that concerned because the financial consequences of the regulator’s criticism won’t necessarily be severe, said Shailesh Raikundlia, an analyst at Espirito Santo Investment Bank in London.
“It’s a slap on the wrist,” Raikundlia, who recommends selling the shares, said by phone today. “There’s the possibility of a fine, but it’s more of an accounting issue really.”
The U.S. has extracted almost $12 billion in fines in settlements with France’s BNP Paribas SA (BNP) and Zurich-based Credit Suisse Group AG (CSGN) since May. BNP Paribas admitted to violating U.S. sanctions against Sudan, Iran and Cuba while Credit Suisse pleaded guilty to helping Americans cheat on taxes.
Deutsche Bank plans to add about 500 people in compliance, risk and technology in the U.S. by year-end amid heightened regulator scrutiny, Jacques Brand, head of Deutsche Bank North America, said in an interview earlier this month. The lender will also continue to invest in “technology and strengthening control functions,” he said.
Deutsche Bank will probably offer investors more insight into its U.S. operations once the Fed’s standards for foreign banks take effect and the criticism of the company’s reports voiced in December will probably accelerate that process, said Raikundlia.
The Fed approved capital standards that will take effect in 2016 for banks with $50 billion of assets in the U.S. in February. The rules will force the largest foreign firms to consolidate U.S. operations into one subsidiary and abide by the same capital and liquidity minimums as domestic peers.
Thomas represents Eric Ben-Artzi, a former Deutsche Bank quantitative risk analyst, in a whistle blower claim against the company filed with the U.S. Securities and Exchange Commission. Ben-Artzi has accused the lender of masking losses by misrepresenting the value of derivatives from 2007 to 2010.
Deutsche Bank continues to reject those claims as false, said Ronald Weichert, a spokesman for the company in Frankfurt. He declined to comment on the state of the investigation.
“We have every reason to believe that the SEC and other authorities’ investigation of Ben-Artzi’s claims is still active,” said Thomas, the chairman of Labaton Sucharow’s whistle blower representation practice.
He also said Ben-Artzi’s wrongful dismissal suit against Deutsche Bank has yet to conclude. The lawyer said he doesn’t represent the former risk analyst in that matter.
Banks worldwide are under pressure to beef up regulatory compliance and are accelerating hiring in those divisions amid heightened scrutiny of their strength and probes into the manipulation of benchmark interest rates, the alleged rigging in currency markets and money laundering.
The complaints from regulators focus on data in quarterly regulatory filings from two of the U.S. division’s subsidiaries and the parent company’s New York branch, the Journal wrote.
New York Fed examiners expressed concerns to Deutsche Bank about the quality of the data in 2002, 2007 and 2012, according to the newspaper’s account of the letter. In one example cited, examiners found Deutsche Bank Trust Company Americas incorrectly assessed the value of collateral when reporting the value of loans in which borrowers were at risk of defaulting.
While meeting with two top U.S. executives in September, Fed officials described the firm’s reporting as the worst among its peers, the newspaper wrote, citing an e-mail from the company that it reviewed.
External auditor KPMG LLP also identified deficiencies in the way the bank’s U.S. operations reported financial data last year, according to the Journal. Robert Wade, a spokesman for the accounting firm, declined to comment.
“Deutsche Bank has long been seen as one of the biggest and most worrying foreign banks in the U.S, given it had little capital physically located in the U.S.,” said Wheeler. “This cannot be taken lightly.”
To contact the reporter on this story: Nicholas Comfort in Frankfurt at email@example.com