Deutsche Bank is to create a €30-50 billion ‘bad bank’ as part of an overhaul of its operations, as it shifts focus away from high-risk investment banking, according to the Financial Times.
Institutions typically create bad banks to wall off risky assets from the main organisation, either as a special purpose entity (SPE), often backed by the government, or as a separate internal unit to hold bad assets, or as a spin-off bank that isolates the main institution from the risk.
The new ‘non core asset unit’ will mainly contain unprofitable long-term derivatives, said the FT, quoting sources familiar with the plans. While these assets still contribute to Deutsche’s cash flow to some extent, the associated profits have already been taken, leaving the bank with a financial millstone in a more tightly regulated market.
Most analysts agree that CEO Christian Sewing’s revamp needs to be radical, and may see the company shift focus towards private wealth management, transaction processing, and sustainable profit. As part of it, Deutsche is reportedly considering shrinking or closing its equity and rates-trading businesses outside of Europe.
Earlier this month, Deutsche Bank auditors uncovered serious failings in anti-money-laundering (AML) and sanctions controls at its London offices. These allowed cheques and electronic payments to be processed without proper screening for a number of years.
In September 2018, Germany’s Federal Financial Supervisory Authority, BaFin, rebuked the company for AML failures and installed an external monitor to supervise improvements.
In February this year, the bank was found to have cleared €160 billion of transactions for Danske Bank’s Estonia unit, which has been under investigation for money laundering. In 2016, the UK’s Financial Conduct Authority (FCA) placed Deutsche Bank under special measures for systemic AML failures.
Earlier this year, US congressional investigators subpoenaed Deutsche Bank as Democrats stepped up probes into President Trump’s financial affairs.
Meanwhile, the heads of Bank of America, Morgan Stanley, and Citigroup appeared before Congress, telling investigators that they are trawling their businesses for evidence of laundered Russian cash, in the wake of allegations that Deutsche Bank helped criminals to move illicit funds out of Russia.
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