Deutsche Bank Got a Scolding From the Fed

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 CEO.

U.S. 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 uneasy encounter, which was followed by another meeting between the Fed 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 authorized to discuss the confidential talks.

Representatives for Deutsche Bank and the New York Fed declined to comment.

Sewing should have a good sense of what still needs fixing to please the regulators -- he after all served as deputy chief risk officer and oversaw audit and legal during his three decades at the bank before taking the top job last month.

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 U.S. limits on risky bets and polices 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 U.S. unit of the bank.

An unhappy Fed can chop into profits by imposing additional fines or restricting a firm’s U.S. activities until it shapes up. 

Wells Fargo 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.

Deutsche Bank’s obligations under the cease and desist orders are myriad.

One order, for example, says the bank must 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.

People briefed on the meeting in late March said it followed a series of gatherings in recent months at which authorities checked in on the bank’s progress, sometimes expressing dissatisfaction.

Yet it also stood out: It was scheduled hastily, and the central bank’s representatives were particularly blunt.

Their message: The company’s units were still relying on dysfunctional technology and managers needed to do more to change the culture.

Officials said senior management must address the situation with urgency. It’s a problem the bank has recognized and has been attempting to address, one of the people said.

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