Hong Kong's Bafin's barbs against Deutsche Bank underscore the scale of the challenge facing new co-Chief Executive John Cryan. A leaked letter from the German watchdog, published by the Wall Street Journal on July 16, slams the bank's executives over the Libor scandal for "serious omissions of responsibility". Repairing relations with the regulator and strengthening the bank's controls will compound the already-sizeable job of boosting Deutsche's financial performance.
The 37-page letter, sent to Deutsche's executive committee in May, is the regulator's interpretation of a report by financial services firm EY into the bank's interest rate-setting conduct. Bafin says six current members of the bank's 20-strong executive committee were incompetent at best in their investigations of rate-rigging, and some made inaccurate statements. The overall impression is of a rotten corporate culture, where conflicts of interest were actively encouraged and controls were non-existent.
Deutsche says the report confirms its own findings that no present or former top executive instructed a junior employee to rig interest rate benchmark submissions. It has already fixed some of its control failings. And Deutsche and individual executives have written private responses to Bafin that aim to rebut many of the watchdog's conclusions. Even so, the lack of trust between regulator and regulated is striking.
Moreover, Deutsche's management received multiple warnings about compliance failings. Consultancy Oliver Wyman identified weaknesses in the bank's assessment and monitoring of risk as far back as 2007. A year later, the German central bank pointed to organisational and structural deficiencies. A 2009 McKinsey report cautioned that Deutsche was failing to run adequate tests on high trading profit. Bafin says that when the bank did attempt to establish why a trader on the interest rate trading desk was abnormally successful, it failed to read any of his communications in French.
Some of the regulator's findings may be water under the bridge. Co-CEO Anshu Jain resigned last month, while his counterpart Juergen Fitschen will step down next year. But given the widespread failings, Cryan will surely want to review all of the bank's compliance and control functions. Deutsche's executive committee, meanwhile, looks in need of fresh faces. Cryan's tough overhaul task now looks even harder.
The 37-page letter, sent to Deutsche's executive committee in May, is the regulator's interpretation of a report by financial services firm EY into the bank's interest rate-setting conduct. Bafin says six current members of the bank's 20-strong executive committee were incompetent at best in their investigations of rate-rigging, and some made inaccurate statements. The overall impression is of a rotten corporate culture, where conflicts of interest were actively encouraged and controls were non-existent.
Deutsche says the report confirms its own findings that no present or former top executive instructed a junior employee to rig interest rate benchmark submissions. It has already fixed some of its control failings. And Deutsche and individual executives have written private responses to Bafin that aim to rebut many of the watchdog's conclusions. Even so, the lack of trust between regulator and regulated is striking.
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Some of the regulator's findings may be water under the bridge. Co-CEO Anshu Jain resigned last month, while his counterpart Juergen Fitschen will step down next year. But given the widespread failings, Cryan will surely want to review all of the bank's compliance and control functions. Deutsche's executive committee, meanwhile, looks in need of fresh faces. Cryan's tough overhaul task now looks even harder.