Last week, the U.S. Department of Justice (DOJ) announced that it was fining the giant German bank Deutsche Bank (DB) a staggering $14 billion for fraudulent practices relating to the financial crisis in 2008.
In response, Deutsche Bank released a statement saying it "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 $14 billion total demanded by the feds is significantly higher than Deutsche Bank expected, and is almost three times what Goldman Sachs settled with the DOJ for ($5 billion). However, if you're looking for comparable penalties, Bank of America paid over $16.5 billion (a record fine amount) in 2014. Reports indicate that Deutsche Bank was anticipating a figure closer to $3 billion.
In all likelihood, however, the total will be negotiated down from the Justice Department's starting point. This is part of the logic of announcing such a large penalty. In the wake of the news, shares of DB fell 8% and were another 3% in the red during trading on Tuesday. So far this year, the bank's stock is already down an eye-opening 47.5%.
Another potential consequence of this announcement could be future litigation against other major European banks involved in the financial crisis. Thus far, the DOJ has mainly only focused on American firms. The American operations of European banks still under investigation like Barclays, Credit Suisse, the Royal Bank of Scotland (RBS), and Switzerland's UBS all could face similar fines in the future.
Impact on Deutsche Bank
If DB ends up paying close to the $14 billion figure cited by the authorities, it may well cripple the bank. Reports indicate that the bank only has $6 billion in litigation reserves, so paying the fine could seriously impact how adequately it is capitalized.
Already this year, Deutsche Bank was one of the few banks that failed the Federal Reserve's stress test of the nation's banks conducted in June. Further, with a great deal of business in London, the bank is also heavily exposed to potential fallout from the Brexit vote for the U.K. to leave the European Union. Yet, like everything else relating to Brexit, the consequences are still uncertain.
The penalty being levied by the DOJ relates to the notorious mortgage-backed securities (MBS) that were sold in the lead-up to the financial crisis. The resulting housing bubble was one of the contributing factors to the worst effects of the financial meltdown. However, Deutsche remains the top foreign lender of commercial real estate (CRE) in the U.S. This means that the impact of the fine could send ripples throughout the entire CRE market. According to the International Monetary Fund (IMF), Deutsche Bank is the "most important net contributor to systemic risks" to global finance.
The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product.