Friday, April 24, 2015

This Week in Bank Failures

Deutsche Bank agreed yesterday to pay $2.5 billion in fines for its actions in manipulating base rates. The investigation of interest rate manipulation began with Libor, and the bank will plead guilty in London to Libor rate manipulation, but the settlement covers other base rates the bank may have manipulated worldwide. Text messages released by regulators show bank employees negotiating with traders both inside and outside the bank over what rates to report in place of the bank’s actual rates. In the settlement with the United States, New York State, and the United Kingdom, the largest fines will go to the Commodities Futures Trading Commission and the U.S. Justice Department.

The bank is also obliged to fire and ban specific employees. The employees will likely be barred from working for any bank in the two countries. Many of the employees were still working for the bank in New York, London, and elsewhere as of yesterday morning, and this side of the settlement assures that the bank will not be able to see the penalties as merely part of the cost of doing business.

U.K. regulators emphasized that the size of the fines was influenced by the false statements the bank made to regulators in the two countries over a period of years as the investigation was going on. It is the largest combined penalty to come out of the Libor case so far, and much larger than the bank had planned for.

Cutbacks will have to follow, and the costs of the fines must have changed the shape of restructuring plans the bank was already working on. The bank will sell off Postbank in Germany and scale back its other operations, it announced tonight. Observers expect the bank will phase out most of its branch network over a period of years while scaling back its securities operations by a similar amount to avoid going into too much debt. It is winding down operations in several countries, perhaps a dozen. The only major area the bank is looking to expand is transaction processing.

HSBC is considering moving its headquarters out of the United Kingdom to a country in continental Europe where regulators are more lenient about offenses such as fraud, market manipulation, and deceptive marketing practices. The destination is not yet chosen, but the wording of the proposal points to Luxembourg, though some analysts say Hong Kong is more likely in the end in spite of the initial focus on Europe. However, statements from officials in Hong Kong suggest the bank would have to reduce its size to be headquartered there again. The mere fact that the board of directors has formally proposed such a move is a measure of the existential risk posed by the bank’s recent raft of operational failures.

Deposit flight resumed in earnest this week in Greece amid reports that the ECB will let some of the country’s large banks fail if the central government is late in payments on its bonds. Some banks in Greece have large holdings of government bonds, and the ECB might be obliged to account for those assets differently in the event of a default. If banks were then considered insolvent they would become ineligible for ECB assistance. Tonight, a short-term debt deal looks unlikely, with European leaders insisting the country present plans for a complete overhaul of its national economy before any funds are released. The new government in Greece is working on such a plan but cannot realistically have it ready to present before fall.

Novo Banco in Portugal is at risk because of a lawsuit by Goldman Sachs that seeks to hold the bank responsible for $1 billion in debts incurred by its predecessor, Banco EspĂ­rito Santo. Novo Banco might have to be liquidated or reconstituted again if Goldman Sachs prevails.

Citizens Bank is operating more smoothly after being spun off by RBS, its quarterly earnings report shows.

State regulators in Ohio put Montgomery County Credit Union into conservatorship yesterday because of management problems at the 6,000-member credit union. The credit union remains open and will be managed for a time by the NCUA with an eye toward financial stability and restoring sound operations.