Deutsche Bank gets Fed scolding that burdens CEO Sewing

Bloomberg

A tense scene unfolded inside Deutsche Bank AG’s Manhattan tower just hours before news began leaking that the firm was looking for a new chief executive officer. US regulators on that day in late March gave senior executives a stern warning that remains in effect: Europe’s biggest investment bank, they said, must act more urgently to fix lapses described in a series of settlements with the Federal Reserve over the past few years. Their patience was wearing thin.
The encounter, which was followed by another meeting between the Federal Reserve Bank of New York and Chairman Paul Achleitner, underscores a daunting behind-the-scenes challenge facing new CEO Christian Sewing. He doesn’t only have to reshape the firm, revive profits and improve morale — he has to get regulators off Deutsche Bank’s back.
This account of the frayed relationship between the German bank and the Fed is drawn from interviews with people with direct knowledge of the situation, who asked not to be identified because they aren’t authorised to discuss the confidential talks.
Representatives for Deutsche Bank and the New York Fed declined to comment. Sewing should have a pretty good idea of what the regulators want fixed. Before becoming CEO last month, he served as deputy chief risk officer and oversaw audit and legal over three decades at the bank.
Since 2015, the Fed has piled more than $250 million in fines on Deutsche Bank while issuing four cease-and-desist orders. Last year alone, the regulator faulted how the firm oversees traders, adheres to US limits on risky bets and monitors client transactions for illicit activity. In each case, failing to fix problems could result in more severe penalties.
Then in March of this year, the bank made a significant blunder sure to rattle any regulator, inadvertently transferring 28 billion euros ($35 billion) to one of its outside accounts. While the error was quickly reversed and caused no financial harm, the incident was another blemish for a bank that was supposed to be cleaning up. Days later, on March 26, Fed officials met in New York with senior executives at the US unit of the bank.
An unhappy Fed can chop into profits by imposing additional fines or restricting a firm’s US activities until it shapes up. Wells Fargo & Co. learned that the hard way in February, when the Fed imposed a then-unprecedented cap on its growth, citing a pattern of consumer abuses and compliance lapses. There’s no indication that’s likely yet for Deutsche Bank.
The New York Fed warned Deutsche Bank in late 2013 about persistent deficiencies in the bank’s processes and technology systems, urging it, among other things, to improve “senior management oversight and controls” for finding suspicious transactions.
Neither the company nor regulators provide public updates on its progress. But behind the scenes, a Fed-approved monitor produced a report this month outlining dozens of fixes Deutsche Bank needs to make
to fortify its anti-money laundering efforts, the people said.