December 23, 2016 / 3:51 PM / 8 months ago

Deutsche wins biggest in U.S. regulatory casino

Germany's Deutsche Bank headquarters are seen next to the sculpture of a smiling man in Frankfurt, Germany, October 5, 2016.Kai Pfaffenbach/File Photo

LONDON (Reuters Breakingviews) - European lenders' end-of-year fines for mortgage mis-selling have confounded market expectations and left a clear winner: Deutsche Bank. Although Britain's Barclays failed to achieve similar closure, Germany's largest lender by assets and peer Credit Suisse's agreed settlements with the U.S. Department of Justice remove a major question mark.

If the combined $11.7 billion number for Deutsche and Credit Suisse seems big, the balance sheet hits are less so. That's because the bulk of the agreements are in the form of loan forgiveness or credit relief rather than hard cash. Remove that element and Deutsche will pay a $3.1 billion penalty, with Credit Suisse shelling out $2.5 billion. Factor in the fourth-quarter charges the banks have said they will take after provisions and both would probably have common equity Tier 1 capital (CET1) as a proportion of risk weighted assets at an adequate 11.3 percent, on Breakingviews calculations.

Deutsche investors have the most to cheer. When the Justice Department's initial $14 billion demand was leaked in September, the German bank's shares plunged. The settlement may slightly slow Chief Executive John Cryan's attempts to return the lender to economic profitability. But far worse could have ensued. Had Deutsche's $7.2 billion total settlement been entirely in the form of cash, its CET1 ratio might have fallen below 11 percent, near to a threshold set by its main regulator. A $14 billion hit might have pushed it closer to 9 percent, and potentially prompted panic among creditors.

Barclays' readiness to fight on rather than resolve its own mortgage misdeeds is partly because it did something similar with foreign exchange settlements, and partly because it has less to lose in taking on the U.S. regulator than Deutsche, which has other sizeable litigation outstanding. But mostly it feels a settlement would be unfair. Using figures from data provider Inside Mortgage Finance, it points out that its $74 billion issuance of residential mortgage-backed securities between 2005 and 2007 was half the size of the smallest dealer among the seven banks that have settled.

Nonetheless, Barclays' own capital ratio could have fallen below 11 percent, had it been fined similar amounts to Deutsche and Credit Suisse. A bit of ambiguity over the final legal bill may thus be preferable to the certainty of a big balance sheet hit. But it's still taking a punt on regulatory leniency in the era of Donald Trump.

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