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How Deutsche Bank caught fire as Europe’s banking turmoil spreads

Deutsche Bank chief Christian Sewing - Stefan Wermuth/Bloomberg
Deutsche Bank chief Christian Sewing - Stefan Wermuth/Bloomberg

When Christian Sewing took the reins at Deutsche Bank in April 2018, his promise was simple: to make Germany’s biggest lender more boring.

Once a titan of the banking industry that rivalled Wall Street’s biggest beasts, Deutsche never really recovered from the 2008 financial crisis.

In the face of heavy fines, sluggish performance, sweeping restructuring costs and competition from more agile US rivals, Sewing was forced to return the struggling lender to its roots as a provincial German bank.

Less than four months into the job he announced a radical restructuring plan, which included laying off a fifth of Deutsche’s workforce, closing down large parts of its investment banking division – including equities trading – and setting up a “bad bank” with €74bn (£65bn) of toxic assets.

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“What we have announced is nothing less than a fundamental rebuilding of Deutsche Bank through which we are ushering in a new era for our bank,” Sewing said at the time.

After years of pain, the plan appeared to be bearing some fruit. Last year, Deutsche posted profits of €5.7bn (£5bn) – its best performance in 15 years.

But the German lender has become the latest flashpoint in Europe’s banking crisis following a sharp jump in its credit default swaps, which investors buy to protect themselves from a company defaulting on its debts. Shares in the bank fell by as much as 14pc on Friday before paring some losses.

Analysts were scrambling for reasons to explain the sudden investor flight. Andrew Coombs, at Citigroup, said concerns about Deutsche’s commercial real estate exposure and a US Justice Department investigation into banks and Russian sanctions did not appear significant enough to explain the move.

He blamed it instead on an “irrational market”. As with Credit Suisse, “the risk is if there is a knock-on impact from various media headlines on depositor psychologically, regardless of whether the initial reasoning behind this was correct or not”, he said.

Indeed, it was contagion fears that drove Credit Suisse into the arms of its fiercest rival last week after customers pulled funds from the scandal-hit bank at a rate of knots, rather than any fundamental concerns around its financial position.

German officials dismissed comparisons between Deutsche and the Swiss lender on Friday. Asked whether the German bank was the new Credit Suisse, Chancellor Olaf Scholz said: “Deutsche Bank has fundamentally modernised and reorganised its business and is a very profitable bank. There is no reason to be concerned about it.”

However, amid the market panic triggered by the collapse of Silicon Valley Bank (SVB), Credit Suisse became a target in part thanks to the litany of scandals that befell the bank in recent years.

If the Swiss lender was regarded as the European banking industry’s weakest link, then Deutsche Bank could be seen as the industry's problem child thanks to its own notorious catalogue of blunders and missteps.

The bank’s share price has been on a rollercoaster ride for years amid a steady drumbeat of embarrassing scandals and poor financial results.

Over the past decade the German lender has been forced to stump up billions of dollars in fines for money laundering, bond mis-selling, interest rates manipulation, mortgage fraud and sanctions violations, with its Frankfurt headquarters having been raided twice in the past five years.

Deutsche paid up $630m to UK and US regulators in 2017 for its unwitting role in spiriting roughly $10bn of illicit cash out of Russia between 2012 and 2015, after bank staff missed multiple warning signs of so-called “mirror trading”.

The scheme saw the lender convert roubles into dollars on behalf of wealthy Russian clients, using thousands of apparently pointless, paired equity trades in Moscow and London. It was “highly suggestive of financial crime” and should have raised red flags, the Financial Conduct Authority later said.

In another case, Deutsche agreed to pay US regulators $150m for “inexcusable” failures to prevent suspicious transactions by the late paedophile financier Jeffrey Epstein, and again for clearing hundreds of billions of dollars for Danske Bank, a lender implicated in one of the world’s largest-ever money laundering scandals.

Like many other German institutions, the bank was also left with egg on its face when its asset management arm suffered €600m of losses when its shares in payments company Wirecard – which was built on a multibillion dollar fraud – turned sour in 2020.

And the bank last year opted to settle a class action lawsuit brought by US investors for $26m, following allegations it had failed to carry out proper “know your client” checks on Epstein, Russian oligarchs including Roman Abramovich, and businesses with links to terrorist group Hezbollah.

The investors claimed Deutsche had provided banking services to a revolving carousel of “unsavoury characters”, including some engaged in criminal activity “in reckless disregard of the financial crimes they helped perpetrate”.

“Deutsche Bank has been the subject of repeated scandals, investigations and regulatory enforcements for years,” the complaint filed by investors added.

“Neither Deutsche Bank nor its top commanders have learned from past misconduct. At Deutsche Bank, history keeps repeating itself.”

As part of the settlement, Deutsche denied wrongdoing.

Analysts tried to reassure investors on Friday that Deutsche's capital and liquidity remained strong.

Stuart Graham of Autonomous Research said: “Investors are worrying about the health of the bank. We are relatively relaxed in view of Deutsche’s robust capital and liquidity positions.

“We have no concerns about Deutsche’s viability or asset marks. To be crystal clear – Deutsche is not the next Credit Suisse.”

Paul de la Baume, senior market strategist at FlowBank, told Bloomberg: “It is a clear case of the market selling first and asking questions later.

“Traders do not have the risk appetite to hold positions through the weekend, given the banking risk and what happened last week with Credit Suisse and regulators.”

On weekends, Sewing is known to enjoy a few beers at a local Greek restaurant in Osnabrueck, the rural city in northwest Germany where he lives with his wife and four children.

Rather than embarking on his usual 475-mile commute to spend the weekend back home, the 52-year-old might want to stay closer to Deutsche’s Frankfurt HQ in case contagion fears cause any more damage to Germany’s biggest lender.