Deutsche Bank AG is possibly headed towards yet more regulatory scrutiny. The European Central Bank (ECB) is reportedly considering a formal investigation into a shady deal which saw Deutsche buying its own subordinated bonds without approval.
No stranger to controversies and regulatory penalties, the German lender has, over the years, developed a questionable reputation with some customers — but still manages to hold on to its position as the fourth-largest bank in Europe by net assets.
In the United States, Deutsche Bank has been found guilty of more than 45 regulatory violations — costing the company over $16 billion in fine, based on data provided by GJF ViolationTracker.
Deutsche Bank and Its Latest Regulatory Violation
According to Bloomberg, Deutsche Bank was found knee-deep into the questionable practice of buying back own subordinated bonds — which is a clear violation of the regulatory framework put in place by the ECB and the EU government.
"I'm shocked, shocked to find that gambling is going on in here!" https://t.co/eIqT2aIGHC
— Nomi Prins (@nomiprins) September 18, 2019
The alleged offense reportedly involves securities called AT1 and AT2 bonds — both considered the riskiest categories of bank debts.
Citing unnamed sources, the report suggests that the bank continued selling these bonds without ECB’s approval from at least 2014 to 2017. The anomaly came to light only after it managed to bag the requisite approval for repurchasing the notes in 2017.
Intentional Violation or Human Error?
Another report by the Financial Times claims the staff at the German lender “forgot” to seek approval from ECB before going ahead with the repurchase of the securities at the heart of the controversy.
However, there are conflicting reports as to why Deutsche Bank didn’t disclose the repurchase to relevant authorities.
The AT1 bond first emerged in the aftermath of the 2008 financial crisis. It was introduced in compliance with the Basel III global regulatory framework to protect depositors from potential bailout costs in the event a bank runs into trouble. AT1 bonds save depositors from the brunt of the crisis by imposing the loss on its holders (without requiring the bank to be liquidated).
However, if the bank itself remains in possession of these bonds, their very purpose is rendered redundant. This is why the ECB has mandated that banks must seek its approval first before repurchasing the asset class.
The ECB’s next step is currently speculative as the central bank is reportedly still in the fact-finding phase of the initial investigation. If it finds enough proof to march ahead with a formal investigation, that could mean further trouble for Deutsche Bank — which is currently undergoing a broad restructuring to boost its bottom-line.
What’s your take on this latest scandal by the 17th largest bank in the world? Do you think regulatory bodies worldwide should consider imposing stricter penalties to deter banks from repeatedly violating regulations? Share your thoughts in the comments below.
Images courtesy of Twitter/@nomiprins.