According to the news report by Bloomberg, Deutsche Bank’s US division has been put on the US Federal Reserve’s list of troubled banks and will be monitored by the US deposit insurance regulator. This new development has made the new Chief Executive Officer Christian Sewing’s already difficult job that much more difficult.
According to a source who is aware of the situation, the Federal Deposit Insurance Corporation has included the German lender’s US division, which is insured by the feds, to its list of banks that are weak enough to seriously endanger their financial standing.
After the news broke, the bank, already reeling a serious market decline, fell another 5.4%, which took the company’s shares to a near-record low and taking this year’s losses till date to more than 41%.
Deutsche Bank Group responded to this listing via an emailed statement, where the lender stated that their parent company Deutsche Bank AG was well capitalized and had significant reserves of liquidity. The bank also stated that it had already admitted to its regulators that there were areas for improvement with regard to their infrastructure and control environment. The bank averred that it was completely focused on fixing its US operations.
Sewing indicated that the German lender was fast-forwarding its plan to re-focus closer to home in the European market, however, this did not mean that the US would not get the attention it needed and deserved. This statement comes after the US regulators had already warned the bank in March this year that it urgently needed to fix issues listed by the Federal Reserve in a series of settlements over the past few years.
According to the New York Times, the regulators’ issues with the German bank stem from worry about Deutsche Bank’s processes in measuring exposure to clients as well as the valuation of collateral backing up its loans. Feds need accurate as well as efficient controls in place so that banks’ financial strength and risks can be assessed easily, especially when the economy is not stable.
Deutsche Bank’s below satisfactory measures could mean that the lender could end up failing two very critical tests that it will need to go through in the near future in the US.
The first is a set of stress tests conducted by the Federal Reserve. These stress tests are used to assess whether big banks can survive extreme economic downturns. So far, only one division of the German company – the US trust bank – has been through these tests – and failed. This year, the entire organization in the US will be tested – publically.
The second, even tougher, challenge facing Deutsche Bank (and other big foreign banks) is creating a plan that needs to be submitted to US regulators. The bank has to chart out a plan on how it would wind down operations in case it went bankrupt. The plans are now being demanded by regulators so that they are able to close troubled banks without having to go through the chaos and confusion that the entire market went through during the 2008 financial crisis. Call it a failsafe, if you will. Such plans are not easy to create, especially if controls are not up to the mark, as is the case with Deutsche Bank.
If Germany’s biggest bank fails these two critical tests, then things could from bad to worse for the lender. Pressure would be intense on the company to close down underperforming assets as well as operations, which would have the snowball effect of killing revenue streams and compounding losses.