European Central Bank Investigates Deutsche Bank’s Financial Stability
The European Central Bank (ECB) is currently examining allegations that Deutsche Bank has misrepresented its financial stability and understated its balance sheet risks. According to the Financial Times, this review is in response to the claims brought forward by Dario Schiraldi, a former Deutsche Bank employee. Schiraldi’s accusations revolve around the bank’s application of netting practices, which have come into question.
Understanding Netting Practices in Banking
Netting is a consolidation method that banks utilize to offset multiple financial obligations. The main objective of this practice is to reduce credit risk exposure and modify the calculation of regulatory capital requirements. In recent times, the ECB has shown interest in Deutsche Bank’s netting practices, aiming to understand how the bank manages its collateral and applies capital regulations.
However, the ECB is now focusing on the specific allegations that Schiraldi outlined in a letter sent to the central bank. He alleged that Deutsche Bank’s balance sheet was significantly affected by “aggressive netting and off-balance-sheet accounting techniques.”
The Allegations Against Deutsche Bank
Schiraldi claims that these techniques inflated Deutsche Bank’s capital and leverage ratios, consequently painting “a misleading picture of the bank’s financial soundness to regulators and markets alike.” Furthermore, he highlighted that Deutsche Bank’s use of netting lead to an “apparent understatement of leverage exposures by over €200bn ($231.5bn)” in its 2024 financial statements.
The ECB has yet to decide whether to take formal action in response to these allegations, such as opening an investigation. Deutsche Bank’s response to these allegations was to assert that it applies netting “in accordance with the relevant accounting standards and generally aligned with common industry practice.”
Legal Disputes Surrounding Deutsche Bank
Separately, Schiraldi has filed a lawsuit against the bank, seeking €152m in damages. He alleges that a flawed internal investigation conducted by Deutsche Bank contributed to his criminal conviction by an Italian court—a conviction that was later overturned.
This is not the first instance where Deutsche Bank and the ECB have been at odds. Previously, they clashed over Deutsche Bank’s estimation of the number of loans likely to default. This latest scrutiny comes amidst ongoing legal disputes involving Schiraldi, Deutsche Bank, and five other former employees who were initially convicted for false accounting and market manipulation in Italy, but later acquitted.
In a Frankfurt civil case, Schiraldi alleged that Christian Sewing, Deutsche Bank’s chief executive, supervised a flawed internal audit. This audit played a pivotal role in providing evidence that led to the conviction of Schiraldi and other bankers in Italy in 2019.
In his letter to the ECB, Schiraldi urged the central bank to investigate the role of Sewing in overseeing the audit report. To this, Deutsche Bank responded by stating that it considers the legal claims by former employees to be entirely without merit and will defend itself robustly.
Recently, the ECB lowered capital requirements for banks after strong performance in recent stress tests, enhancing their ability to make shareholder payouts. As the ECB continues its investigation into Deutsche Bank’s alleged misconduct, the financial industry will closely watch the developments.
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