Fed reprimands Deutsche Bank; Senate Democrats want PPP answers

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Deutsche scolded

The Federal Reserve “has issued a fresh rebuke over Deutsche Bank’s money-laundering controls” just as the bank “tries to prove to investors and regulators that it is cleaning up its act.” According to the German newspaper Süddeutsche Zeitung, the Fed “also slapped Deutsche Bank for failing to solve problems that led it to classify the bank’s U.S. operations as being in ‘troubled condition’ in 2017. The designation is rare for a major bank” and “one of the lowest employed by the Fed,” the Wall Street Journal said.

“In a prepared speech to be delivered at the bank’s annual meeting later this month and published on its website,” CEO Christian Sewing said the bank is still not where it wants to be in terms of its controls.

The Fed’s letter, dated March 31, “casts doubt on the German lender’s ability to rehabilitate its business in the world’s largest and most profitable banking market,” the Financial Times said.

Separately, Deutsche Bank “has restarted its job cuts program, just six weeks after suspending redundancies during the coronavirus pandemic, as Germany’s largest bank tries to rein in costs and keep its restructuring on track,” the Financial Times reported.

“The uncertainties of the coronavirus crisis have made it even more of an imperative that we stick to our transformation plan announced last July,” two senior bank executives said in a staff memo. The bank temporarily suspended the restructuring in March, as did other large European banks and corporations.

More PPP troubles

Three Democratic members of the Senate Banking Committee have asked Treasury Secretary Steven Mnuchin and Small Business Administrator Jovita Carranza “to keep a closer eye on the banks handing out aid to small businesses after some companies said they had received less than they expected, without explanation,” the New York Times reported.

“Whether inadvertent or intentional, this troubling report warrants a response from your agencies,” the senators, Sherrod Brown of Ohio, Robert Menendez of New Jersey and Tina Smith of Minnesota, said in the letter. The letter came after “some business owners told the Times that they had not received as much money as they had asked for, and said they had been told that the decision was made by the banks — not the SBA, which is funding the program.”

“Despite having a $115 million endowment and a board of trustees populated by billionaires,” the Aspen Institute think tank accepted more than $8 million in Small Business Administration Paycheck Protection Program loans. “Aspen’s decision to accept the money has created a division among the organization’s many fellows and moderators who run its programs.”

“The Trump administration said firms that took PPP loans that they didn’t need will be allowed to repay the money without legal consequences, reversing an earlier threat that the government could pursue them criminally,” Bloomberg reported.

Poor quarter

Dutch bank ABN Amro reported a loss in the first quarter “as the combination of coronavirus and its loans to scandal-hit oil trader Hin Leong led to a more than tenfold increase in impairment charges. The company reported a €1.1 billion provision for bad loans, up from just €102 million in the same period last year.”

About half of the provision was “to cover an expected future increase in defaults, but the company also took two significant ‘exceptional’ charges linked to individual customers that have run into trouble in recent weeks.”

“The latest woes come on top of ABN Amro’s recent run-ins with authorities,” the Journal noted. “The bank is facing a criminal probe in the Netherlands over a lack of controls to prevent money laundering and terrorism financing. In Germany, it is embroiled in a long-running criminal tax-fraud investigation.”

Wall Street Journal

Vigilance

Banks need to “update the models at the heart of their businesses, given widespread economic uncertainty and a dearth of relevant historical data,” the Journal warns. “Models—used not just to estimate loan losses but also to value little-traded assets and design, price and assess the risk of products—are crucial to a bank’s financial position and health. Depending on how they are calculated, estimated loan losses or asset revaluations could easily eat into those buffers.”

“The current crisis has made the imperfections and risks inherent in bank models a lot worse, and miscalculations could be expensive. The coming quarters could spring a few surprises on bank investors.”

Financial Times

Questioning dividends

The Fed “is facing growing criticism for not intervening to stop banks from paying dividends, as regulators in the U.K. and the EU have done,” the FT says.

“I think the Fed is wrong” to allow the payouts to continue, former Federal Deposit Insurance Corp. Chairman Sheila Bair said at an FT digital conference. “We don’t know how bad this [crisis] is going to get.”

Coming back

“Striking the right tone with staff is just one of the many challenges facing bank bosses from Wall Street to the City of London and Hong Kong’s Central district as they pave the way for a return to offices after an unprecedented months-long period of widespread working from home to curtail the spread of coronavirus,” the FT says. “Banks are also weighing up the merits of testing staff for Covid-19 infections and potential antibodies; deciding which teams come back to the office and when; and working out how to deal with restricted public transport and schools that remain closed.”

Here come the lawyers

“One of Germany’s most prominent securities lawyers has filed an investor lawsuit against Wirecard, accusing the payments group of ‘false, omitted and incomplete’ disclosures.” The suit filed by Andreas Tilp “adds to Wirecard’s legal woes over the findings of a KPMG special audit that could not verify sales and profits at the heart of whistleblower allegations of fraud. The lawsuit claims that the KPMG report showed that the group for years had experienced a ‘massive shortfall in compliance’ that it had been obliged to disclose to shareholders early on."

“Tilp has made his name in the legal battle against Volkswagen and Porsche, where he is leading an ongoing €10 billion collective lawsuit over the groups’ communication during the ‘dieselgate’ scandal."

Quotable

“It was obviously easier to get us out. The comeback requires a much more complex set of decisions to be made.” — Leon Kalvaria, chairman of Citigroup’s investment bank, about what banks need to do as they contemplate returning to the office.

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