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For the umpteenth time, Deutsche Bank AG is ensnared in an alleged regulatory blunder. Except this time, the stakes are greater than its own integrity: Confidence in its regulator, the European Central Bank, is on the line too.
The ECB is considering whether to probe Germany’s biggest bank for trading in its riskiest debt without the regulator’s approval, according to the German newspaper SueddeutscheZeitung. In an effort to maintain liquidity in the bonds, the firm’s securities unit continued to make a market in the notes well after they were sold to investors. Typically, banks need to be authorized to buy their own subordinated bonds because they count as equity capital that should help a lender absorb potential losses.
By secretly buying the notes, Deutsche could have created a false market for the bonds, keeping a lid on its overall borrowing costs. That would also have left investors in the dark about how the bank’s capital might have been affected by the purchases. While it’s not clear how much of the debt Deutsche had on its books at any one time, nor what effect the trades may have had on the bonds’ prices, the purchases allegedly went on for years.
What’s more, after being told by the ECB in 2014 that it should stop buying the bonds, Deutsche allegedly carried on doing it until 2017. Only then did it receive the regulator’s green light, and not retroactively.
Why the ECB, which assumed regulatory oversight of Europe’s biggest lenders in 2014, is digging into this only now is a mystery. It may turn out that Deutsche misunderstood the guidance it received from the ECB, or that the numbers involved were immaterial, which led the ECB to put off a formal probe. Or maybe Deutsche thought it was able to make a market in the notes under terms spelled out in the offer documents. Deutsche and the ECB declined to comment for this piece.
But the ECB is a young regulator and its record so far as an enforcer of the financial rulebook is somewhat spotty. Setting the record straight on what is potentially a serious breach is not inconsequential.
The years in question were a period of turmoil for Deutsche. Faith in its ability to meet its obligations reached a nadir as clients worried whether the lender could afford a massive US fine for selling toxic mortgage securities. Customers were pulling billions of euros of cash every day. There were fears that the firm would run out of reserves to pay interest to bondholders, specifically on its subordinated, additional Tier 1 notes. Some notes fell to a low of 70 cents on the euro in February 2016.
The ECB must show it’s doing all it can to establish an account of what happened, not least because this isn’t the first time that its banking oversight has been called into question.
—Bloomberg