Stocks fell on Friday as the possibility of a $14-billion (U.S.) fine against Deutsche Bank weighed on big banks and investors wrestled with lingering uncertainty about when the U.S. Federal Reserve will hike interest rates.
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As its shares tumbled as much as eight percent on Friday, Deutsche Bank said it expected to negotiate the final bill down to a much lower amount.
The claim against Deutsche, which the bank said it would dispute strongly, far outstrips the bank’s and investors’ expectations for such costs.
And it is not just the nightmare legacy issues that are dragging the bank down, as the prevailing ultra-low interest rate environment continues to crimp the bank’s ability to generate a decent margin between borrowing and lending money.
Deutsche shares sank 8.0 percent to 12.0 euros in midday deals in Frankfurt, while the US action was felt across Europe’s banking sector, with shares in Royal Bank of Scotland in London shedding 4.0 percent to 186 pence. This news also hinged on rumors, coming from a German Magazine that chose not to reveal its source. Deutsche has set aside just $5.5 billion to resolve legal issues.
Major U.S. banks also fell. Because comparable criminal settlements with other banks have been significantly lower.
USA market regulators previous year fined the German lender $55 million, concluding that it had overvalued its holdings of credit derivatives by at least $15 billion during the financial crisis.
The bank confirmed in a statement that the Justice Department had proposed a settlement of $14 billion and asked the German bank to make a counter proposal.
Deutsche’s new CEO John Cryan has led a cost-cutting and restructuring drive that’s involved job cuts and the bank’s withdrawal from some smaller countries.
Deutsche Bank has vowed to fight a massive demand from the US Department of Justice.
Brent crude was down 1.7 per cent at $45.81 a barrel, while USA crude was down 1.91 per cent at $43.07.
Goldman Sachs settled for $5.1bn in January this year.
Take Citigroup. In 2014 the United States bank was asked to pay $12 billion to resolve investigation into sale of shoddy mortgage-backed securities.
In the mortgage-backed securities matter, the bank is aiming for an amount between $2 billion and $3 billion, according to knowledgeable sources. While most investors do not expect a rate increase, there is a small but noticeable likelihood there will be one.
Bond prices were little changed.
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The news of the fine, first reported by the Wall Street Journal, hit Deutsche Bank shares which dropped by almost 9 per cent in late trading.
