WASHINGTON/FRANKFURT (Reuters) – IMF Managing Director Christine Lagarde donates to Deutsche Bank DBKGn.DE Some tough recommendations were made on Thursday, saying Germany’s largest lender needs to overhaul its business model and quickly reach an agreement with U.S. regulators over the potentially hefty fines it could face.
A senior European official sought to boost confidence in the continent’s banking system, saying it was generally functioning well, while sources said Germany’s financial watchdog had so far found no evidence that Deutsche Bank violated money-laundering rules in Russia, which could Alleviating one of its many headaches. .
Meanwhile, Handelsblatt reported on Thursday that the chief executives of several German blue-chip companies had discussed Deutsche Bank and were prepared to provide capital injections to prop up the bank if needed.
Lagarde, however, has been outspoken about problems with Deutsche Bank, which the IMF believes poses more potential risks 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 TV on the sidelines of the fall meetings of the International Monetary Fund and World Bank in Washington.
“It has to look at its long-term profitability – given our low interest rates around the world, and probably for longer than many expect – and decide how big it wants to be and how to strengthen its overall balance sheet,” he said.
Germany’s flagship lender is under intense pressure as the U.S. Department of Justice (DOJ) plans to fine it as much as $14 billion for misselling mortgage securities, the latest setbacks sending its shares to record lows last week, leaving customers feeling overwhelmed. worry.
Deutsche Bank is undergoing deep reforms, including cutting about 100,000 jobs, revamping information technology and selling non-core assets. On Thursday, the company reached another agreement with its works council to cut 1,000 more jobs in Germany, bringing the total number of unemployed in Germany to 4,000.
Lagarde acknowledged that Deutsche Bank was selling assets, but stressed the importance of an out-of-court settlement with the Justice Department.
“A bad settlement is always better than a good trial,” she said, adding that Deutsche Bank was “not in trial mode.”
“The settlement will…provide some certainty about what the bank will be liable for and whether it complies with its regulations. So the sooner the better,” she said.
Deutsche Bank has spent 12 billion euros ($13.4 billion) on litigation since 2012 and said it had set aside 5.5 billion euros for expected legal costs. That’s well below the cap on possible fines from the U.S. Department of Justice, although other banks have negotiated much smaller fines, and Deutsche Bank hopes to do the same.
In preparation for a higher-than-expected legal bill, Deutsche Bank has started discussions with Wall Street firms about its options for raising capital. Senior advisers to the companies are willing to help underwrite the share sale to raise about 5 billion euros, according to Bloomberg.
Deutsche Bank declined to comment on the report.
Nevertheless, the amount of provision remains uncertain. “We believe … may not be sufficient to cover all ongoing litigation,” Scope Ratings said in a Thursday note.
Shares of Deutsche Bank have recovered slightly from record lows, but are still down 43% from the start of the year.
However, one major shareholder said the sell-off was overdone. “For us, Deutsche Bank is not a bank in crisis,” said Frank Engels, head of fixed income at United Investments.
European Commission Vice President Valdis Dombrowskis said the EU banking sector was functioning well despite problems at individual institutions in Germany or Italy. “Overall, the banking sector seems to be heading in the right direction,” he told reporters in Washington.
Deutsche Bank also got some positive signals from the domestic market in another major lawsuit. BaFin, the financial watchdog, has so far found no evidence that the company violated Russian anti-money laundering rules, the people said.
But regulators in Russia, Europe and the United States are also investigating its “mirror trading”. These may have enabled clients to move funds from one country to another without notifying authorities in 2014, potentially violating Western sanctions imposed on Russia over the conflict in Ukraine.
Bafin declined to comment on its investigation.
Britain’s Financial Conduct Authority, the U.S. Department of Justice and the Department of Financial Services have launched investigations into whether European or U.S. sanctions targeting Russian individuals were breached.
Ratings agency Moody’s said it did not expect Deutsche Bank to receive disproportionate penalties in the U.S. mortgage case, which could prevent it from paying interest on “AT1” debt that forms part of its capital reserves.
“We don’t think Deutsche Bank will agree to a settlement that would impair their ability to pay the AT1 coupon in April 2017,” said Moody’s analyst Laurie Mayers.
Investors have focused on potential damage from the U.S. mis-selling case in recent weeks, even as German companies rushed to support the bank, which plays a key role in financing its international operations and domestic needs.
In a report based on sources, Handelsblatt said several German companies discussed an emergency plan under which they would buy shares in Deutsche Bank for just a few billion euros to boost their reserves . The newspaper added that Berlin welcomes the intervention of the private sector.
Sources told Reuters that Berlin was in careful talks with U.S. authorities to help Deutsche reach a quick settlement and put the bank back on its feet.
Germany’s influential industry association BDI said that as an export-oriented economy, Germany needs strong lending institutions with international competitiveness.
(1 USD = 0.8958 EUR)
Additional reporting by Kathrin Jones, Jan Strupczewski, Svea Herbst-Bayliss, Jonathan Gould and Rene Wagner