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European banking shares dive amid threat of Deutsche Bank fine European banking shares dive amid threat of $14bn Deutsche Bank fine
(about 11 hours later)
Shares in Deutsche Bank plunged 8% on Friday morning after the German lender was threatened with a $14bn (£10.6bn) charge by US for mis-selling mortgage-backed securities in the run-up to the financial crisis. Fears that Deutsche Bank could face a $14bn (£10.5bn) penalty from the US authorities for mis-selling bonds in the run-up to the financial crisis prompted an 8% plunge in its shares and raised fears about the potential bills for rival lenders involved in similar investigations.
It triggered a large sell-off of banking shares across Europe, as investors spooked by the prospect of Deutsche paying a large settlement after an investigation by the US Department of Justice (DoJ) piled out of the sector. Even as Deutsche insisted it had no intention of agreeing to such a settlement with the Department of Justice, questions were raised about the possible impact on Germany’s lender from activities which allegedly took place a decade ago. Berlin called for its biggest bank – run by Briton John Cryan – to be treated fairly.
In London, Royal Bank of Scotland fell 4%, making it the biggest faller on the FTSE 100. RBS is being investigated by the DoJ over its own mortgage-backed securities business. Deutsche’s plight led to a sell-off in shares on Friday in other banks facing potential penalties from the DoJ, including Royal Bank of Scotland, which fell more than 4% – the biggest faller in the FTSE 100. The focus also turned on Barclays as well as major Swiss banks.
On Europe’s Stoxx 600 index, the financial sector was the worst performer, with banks including Credit Suisse among the biggest fallers behind Deutsche. The DoJ action comes almost eight years to the day that Lehman Brothers collapsed, catapulting the global economy into a deep and prolonged crisis, and demonstrated that the clean-up of the financial sector is still ongoing. The matter relates to the way banks packaged up mortgage bonds before the crisis – between 2005 and 2007 – and sold these so-called residential mortgage backed securities (RMBS) to investors, who later suffered losses.
The DoJ action comes almost eight years to the day that Lehman Brothers collapsed, catapulting the global economy into a deep and prolonged crisis. It would be one of the largest penalties levied on a bank, but Deutsche insisted it would not pay the full amount demanded by the DoJ. It would be one of the largest penalties levied on a bank, but Deutsche insisted it did not expect the $14bn to be the final figure. Jasper Lawler of CMC Markets said that the mooted penalty represented around 80% of the stock market value of Deutsche, which has been already been pummelled amid fears for its growth prospects in a low interest rate environment across the major global economies.
“Deutsche Bank has no intent to settle these potential civil claims anywhere near the number cited,” the bank said. “The negotiations are only just beginning. The bank expects that they will lead to an outcome similar to those of peer banks which have settled at materially lower amounts.” After the possible penalty was reported late on Thursday night by the Wall Street Journal, the bank issued an urgent statement in which it described the price as the “opening position” by the DoJ. “The DoJ has invited the bank as the next step to submit a counter proposal,” Deutsche said.
In 2014, the DoJ asked Citigroup to pay $12bn after an investigation into the sale of mortgage-backed securities, sources said. The fine eventually came in at $7bn. “Deutsche Bank has no intent to settle these potential civil claims anywhere near the number cited. The negotiations are only just beginning. The bank expects that they will lead to an outcome similar to those of peer banks which have settled at materially lower amounts.”
The $14bn fine exceeds the $13bn JP Morgan paid in 2013 to settle allegations that it misled investors about the quality of mortgages it was selling in before the 2008-09 crisis. Until now, the DoJ has focused its RMBS investigations on US banks. The DoJ asked Citigroup to pay $12bn initially but the fine was eventually set at $7bn while Goldman reportedly faced a $15bn bill before agreeing to pay $5bn earlier this year. In 2014, Bank of America paid $16.7bn to US authorities to settle similar charges.
In 2014, Bank of America agreed to pay a record $16.7bn to US authorities to settle similar charges. In late 2013, Deutsche Bank agreed to pay $1.9bn to settle claims that it defrauded US government-controlled Fannie Mae and Freddie Mac, America’s biggest providers of mortgage finance, into buying $14.2bn in mortgage-backed securities before the 2008 financial crisis. Germany’s finance ministry spokeswoman, Friederike von Tiesenhausen, also indicated that the matter was not over. “The government is aware that the US authorities have agreed similar settlement payments with other credit institutions. The government expects that at the end of this process a fair result will be achieved on the basis of equal treatment,” she told Reuters.
The potential penalty was described by German newspaper Handelsblatt as a “minor catastrophe”. It said: “For a bank of this calibre and complexity, this would be unacceptable and would practically force a capital increase.”
Deutsche has set aside €5.5bn for a string of legal claims and Ingo Frommen, banking analyst at German bank LBBW told Reuters: “If the final bill is at €5bn or more Deutsche Bank will not be able to avoid a capital hike anymore” .
There was some speculation that the scale of the fine had been prompted by the European commission’s demand that Apple pay €13bn (£11bn) in back taxes to Ireland and the possible impact of the looming US election.
In the City, the focus quickly turned to RBS, which as recently as Monday was warning analysts that it would need to put more money aside to deal with any penalty from the DoJ for RMBS settlements. Analyst estimates for the scale of the charges on RBS – which has racked up more than £50bn of losses since its 2008 bailout – range from £4bn to £9bn. While RBS had hoped to have agreed a deal with the US authorities last year, it has indicated that talks are not expected to begin until 2017.
Deutsche’s shares closed 8.4% lower at around €12 while RBS was off 4.4% at 185p – well below the 502p average per share price paid during the bail out – and Barclays was down 2.8% at 164p.