The Federal Reserve Bank of New York has sharply rebuked Deutsche Bank for failing to address a litany of concerns at its US operations, casting doubt on the German lender’s ability to rehabilitate its business in the world’s largest and most profitable banking market.
In a March 31 letter, the regulator told Deutsche that the bank remained at the second-worst grade on its rating scale, more than two years after it was downgraded and labelled as being in a “troubled condition”, a person familiar with the matter told the Financial Times.
Germany’s biggest bank has changed its US leadership twice since 2017, appointing global equities boss Tom Patrick as Americas chief executive in August that year before announcing his replacement with Christiana Riley in July last year as part of a group-wide restructuring that included big cuts in the US.
Improving Deutsche’s relations with regulators and other stakeholders has been a priority of Ms Riley, alongside improving the economics of the bank’s pared-back trading operations and growing the corporate finance parts of its US wealth management businesses.
Deutsche passed the Federal Reserve’s stress tests last year, having failed in 2015, 2016 and 2018.
“The bank has made some progress,” the person familiar with the regulatory situation said. “It’s taking a little longer than we thought.”
Shares in Deutsche fell more than 6 per cent in after-market trading on the Frankfurt stock exchange after the latest rebuke by the New York Fed was first reported by the German newspaper Süddeutsche Zeitung on Wednesday evening.
Deutsche declined to comment, as did the NY Fed.
The March 31 letter said Deutsche’s US business continued to suffer from meaningful weaknesses, which had not been satisfactorily addressed by management. It expressed doubt as to whether the bank would ever progress to the “2” grade on the NY Fed’s five-rung scale that well-managed lenders aspire to, from “4” presently.
The regulator also cited continuing concerns about Deutsche’s money-laundering and compliance measures.
Deutsche has 90 days to respond to the NY Fed, which has now been chastising the German lender for more than six years, when its description of the bank’s “low quality, inaccurate and unreliable” regulatory reporting sent Deutsche shares to an 18-month low.
The bank’s so-called resolution plans — contingency plans for being safely wound up in the event of a crisis — are also facing regulatory scrutiny in the US. In its 2019 annual report, Deutsche said it was engaged with the Federal Reserve and Federal Deposit Insurance Corporation about “shortcomings” in its resolution planning and had promised to provide regulators with remediation measures by July 1 2020.
Deutsche’s relationship with Donald Trump has been another headache for its US business. The US Supreme Court this week heard arguments on whether the bank must turn over the president’s financial records to Congress.
Deutsche shares are close to all-time lows. The bank last month warned that the coronavirus pandemic could derail its ambition of returning to profitability this year after 2018’s €5.3bn loss.
The bank has promised 18,000 job cuts, including a mostly-completed round of dismissals in the US, which was hit hard as Deutsche eliminated most of its global equities business.