Deutsche Bank Is First Bank Busted for Breaking Volcker Rule

  • Fed levies $157 million in fines for lax oversight of traders
  • In two probes, regulator faults oversight of trading and chats

Deutsche Bank Busted by Fed for Breaking Volcker Rule

Deutsche Bank AG was hit with the Federal Reserve’s first major fine for failing to ensure traders abide by the Volcker Rule’s ban on risky market bets -- and will also pay even more for letting currency desks chat online with competitors, allegedly revealing positions.

The simultaneous sanctions, totaling almost $157 million, fault lax oversight of traders that persisted into last year. The company -- which raised $8.5 billion from investors this month to recapitalize -- admitted to the Fed in March 2016 that it still lacked adequate systems for keeping tabs on dealings that might run afoul of the Volcker ban.

“Significant gaps existed across key aspects of Deutsche Bank’s Volcker Rule compliance program,” the Fed said Thursday, fining the firm $19.7 million for the lapses. As for chats, the bank failed to detect that currency traders engaged in “unsafe and unsound conduct,” disclosing some positions or talking about coordinating strategies, the Fed said. The company will pay $136.9 million for that.

Chief Executive Officer John Cryan, who took over almost two years ago, is trying to refocus on growth after probes and litigation sapped years of earnings, pushing the firm to tap investors to shore up capital. The latest penalties bring the lender’s total disclosed fines and legal settlements since the start of 2008 to $14.7 billion, the most of any European bank, and highlight the weakness of its controls after growing aggressively to compete with U.S. investment banks.

“It’s pretty unpleasant that they stand out with the Volcker Rule violations,” Andreas Plaesier, an analyst at M.M. Warburg with a hold rating on Deutsche Bank shares, said by phone. “It’s really surprising just how many controls failed across the bank in recent years and it doesn’t cast a good light on former management.”

While the bank had signaled that its misconduct in currency markets was less egregious than that of competitors, the penalty is “relatively low” and will probably be covered at least in part by existing reserves, Plaesier said.

That fine was lower than penalties the Fed has imposed on other banks for similar issues. In 2015, the U.S. central bank slapped six banks with fines totaling more than $1.8 billion for their “unsafe and unsound practices in the foreign exchange markets.”

Yet the Fed wasn’t the only regulator examining the currency chat rooms. New York’s Department of Financial Services, which has a track record of demanding stiffer penalties than the Fed, has been preparing to sanction the firm as well, a person familiar with the matter said last month.

“We are pleased to resolve these civil enforcement matters with the Federal Reserve,” said Renee Calabro, a Deutsche Bank spokeswoman, declining to comment further on Thursday’s cases. In December, the lender agreed to settle a U.S. mortgage-backed securities probe for $7.2 billion.

Trump’s Review

The Volcker Rule, named for former Fed Chairman Paul Volcker, seeks to make the financial system safer by barring banks with federally insured deposits from betting their own money. Such wagers once drove epic profits and bonuses in the years before 2008’s financial crisis.

Now, traders are largely relegated to helping clients buy and sell securities, profiting mainly on the spread or price moves. And banks are supposed to ensure such market-making doesn’t bleed into outright wagers -- a line that can be blurry.

Read more: Goldman said to prepare Volcker defense for $250 million trader

The Fed credited Deutsche Bank for taking steps to identify and shore up its policies and controls. It didn’t accuse the bank of engaging in banned proprietary trades.

Senior financial officials in the Trump administration have said they intend to rethink the Volcker Rule, which was created by the Dodd-Frank Act of 2010. Treasury Secretary Steven Mnuchin, who’s leading an effort to overhaul Dodd-Frank, has said Volcker went too far in choking off trading and should be made simpler to understand. The rule’s critics have suggested regulators appointed by President Donald Trump could just ease off on enforcing its toughest provisions.

Chat Probes

Transcripts of chats between Deutsche Bank traders and those from other banks emerged more than a year ago in civil litigation over the matter filed in Manhattan, and the U.S. Justice Department had been looking into the bank’s currency-trading activities. In March, the bank said the department had informed it that the U.S. criminal inquiry had been closed without action. 

In Thursday’s chat-room settlement, the Fed ordered the bank to improve its senior management’s oversight of foreign exchange trading and cooperate in any investigations of the individuals involved.

The bank has been contending with other inquires this year. The U.S. attorney’s office in Manhattan has been examining possible sanctions violations and “mirror trading” that moved billions of dollars out of Russia.

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