Deutsche Bank And US Regulators Deal Over Fine

29 December 2016 10:38:20 AM


Germany’s Deutsche Bank and American regulatory authorities have come to a deal over a fine imposed on the bank for activities of its American branch related to the sub-prime scandal. The initial fine levied in September was for $14 billion – the agreed settlement will see the bank pay a little more than half of this sum $7.2 billion. Other European based banks with branches in the US are also facing, or likely to face, fines for their activities related to the selling of sub-prime assets in the US.

It has emerged that the deal reached with the US authorities will see Deutsche Bank pay $3.1 billion of the fine in cash to the authorities with the remaining $4.1 billion disbursed as “consumer relief” over a number of years through changes to the terms of loans and other help.

The problems arose because financial institutions had the bright idea of lending money to poor risks on mortgages. The individuals either had poor credit histories or low incomes, but the loans were agreed and at higher interest payments, reflecting the increased risk to the lenders – so far so good. However, in order to free up capital tied up in the loans, the loans were effectively sold on. The prospect of an individual loan failing was relatively high, compared to all mortgage loans, but even within this group (baring calamity) the vast majority of loans would reach term and be repaid. Somebody had the bright idea of bundling these (slightly) iffy mortgages together into a securitised “Consolidated Debt Vehicle” with the idea that the majority of sub-prime loans would make it to term and offset any that did fail when treated as a block. These vehicles were then graded as investment grade (lowest risk) by ratings agencies and sold to investors by the banks and other financial institutions. This is where the authorities have found fault. They concluded that these investments had been mis-sold because of the underlying risk associated with the assets – hence the fines. It remains to be seen if any fallout will encompass the ratings agencies for their failure to certify the investments correctly. The Global Financial Crisis was primarily triggered by concerns over the implosion of sub-prime debt.

Dr. Mike Campbell is a British scientist and freelance writer. Mike got his doctorate in Ghent, Belgium and has worked in Belgium, France, Monaco and Austria since leaving the UK. As a writer, he specialises in business, science, medicine and environmental subjects.

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