Libor Fixing Scandal: Deutsche Bank Internal Probe to Threaten Capital Boost and Risk Cuts?

Deutsche Bank unveiled major cost cutting, risk reducing and capital boosting plans in the face of regulatory requirements and analysts weighed the cost of any involvement in the global libor-rigging scandal as it pre-reported earnings that missed expectations.

Deutsche Bank said in a preliminary results statement that net income fell to around €700m from €1.2bn a year earlier, a figure that missed analysts' estimates by 30 percent. Pretax profit will also likely be significantly less than forecast, with the bank expecting a decline to about €1bn from €1.8bn euros compared with the same period last year.

As part of 2013 Basel III regulatory capital requirements, Deutsche Bank emphasised that it will reduce the number of risk-weighted-assets and in tandem will reduce costs through job cuts.

Deutsche Bank said it will publish full second-quarter earnings on 31 July as scheduled.

Meanwhile, a report by Reuters revealed that "an internal probe at Deutsche Bank has found that two former traders may have been involved in colluding to manipulate global benchmark interest rates but there was no indication of failure at the top of the bank. The internal probe has not yet been concluded and only preliminary findings have emerged so far, three people close to the investigation said."

While Deutsche Bank representatives had not responded to calls for comment from IBTimes UK at the time of printing, the reports suggest the bank may have future litigation and settlement fees to account for, if external investigators find examples of rate manipulation.

The German lenders' stock fell by over 4 percent at one point in early trading, reaching €22.58 as of 1000 GMT.

Libor Fixing Investigations

After Barclays became the first bank to settle for a record fine with some US and UK regulators for manipulating Libor between 2005 and 2009, the scandal has uncovered a more widespread problem and questions into how Libor is calculated and set.

Government investigators around the world are currently conducting probes into a number of other institutions, in addition to Barclays.

While Barclays settled with the US Department of Justice (DoJ), the U.S. Commodity Futures Trading Commission (CFTC) and the UK's Financial Services Authority (FSA), the bank is still under investigation in other jurisdictions, such as Switzerland.

In Europe, central banks and regulators will be ramping up efforts to address the way Libor is currently calculated and investigate most banks, not just Barclays, when it comes to rate manipulation.

According to numerous media reports, traders at Deutsche Bank, HSBC, Societe Generale and Credit Agricole are currently under investigation for interest-rate manipulation as part of a global probe.

Citing unnamed sources and with no confirmation or comment from the people or the banks themselves, Reuters and the FT said that regulators are investigating the possible roles of Michael Zrihen at Credit Agricole, Didier Sander at HSBC and Christian Bittar at Deutsche Bank.

Deutsche Bank has still yet to return a response to these reports over the last week, after IBTimes UK sought comment.

However, mirroring Barclays' own internal investigations, that helped it marry up its findings with government investigators, the internal probe report could indicate that government investigators could have evidence to slap a major fine onto the institution and therefore impact on its capital.

Capital Raising

Meanwhile, Deutsche Bank and the rest of Europe's banks, faces a challenge of raising enough capital to comply with regulatory capital requirements as well as buoying up profits and its stock price.

Deutsche Bank's Core Tier 1 capital ratio was 10.2 percent at the end of the second quarter, well ahead of regulatory requirements and it confirmed that its simulated, pro forma, Basel III fully phased-in Core Tier 1 capital ratio of 7.2 percent at the beginning of 2013 is in place.

However, over the last year, Deutsche Bank's stock price has plummeted by some 40 percent and is still falling.

Deutsche Bank is under significant pressure to shore up its capital base to the Basel III levels that effectively triple the size of the capital reserves that the world's banks must hold against losses, since it was written into law in 2010, while also trying to turn a profit and give a boost to its share price.

Basel III capital ratio levels will be phased in from January 2013 through to January 2019 and it requires banks to hold a key capital ratio (ratio of equity capital to risk-weighted assets [RWA]) of 4.5 percent, plus a new buffer of a further "conservation buffer" of 2.5 percent, meaning banks must hold a total core capital equal to 7 percent of their RWA.

The penalty that Deutsche Bank or any other bank will face, if it doesn't fall in line with Basel III requirements, includes restrictions on paying dividends and discretionary bonuses.

While capital has clearly been raised by Deutsche Bank, it is being punished in profitability.

Cutting Costs

One of the key ways Deutsche Bank plan to shore up billions of euros is by reducing headcount.

Deutsche Bank has cut around 500 investment bank jobs October last year.

It is also considering cutting about 1,000 positions at the unit as revenue declines, said an unnamed sources cited by Bloomberg and Reuters.

In an interview with Wall Street Journal Deutschland earlier this month, Karin Ruck, deputy head of Deutsche Bank's supervisory board and its Deutsche Postbank unit's supervisory board member, Stephan Szukalski said the bank is aiming to make some major cuts to people and products.

"We're trying to avoid job cuts in the service divisions, IT, payment transactions, loan processing and call centre," said Szukalski to the WSJ Deutschland. "The bank aims to save by consolidating the back office, or in the purchasing department as well as on travel costs and expenses. In total, cutting product duplication and reducing the complexity of processes should save around €1.5bn a year. Salaries in investment banking have a risk premium priced in. When things don't go well, (employees) can be severed comparatively quickly."

Slashing headcount is one of the main ways banks have shored up its capital and cut costs.

Last month, Credit Suisse revealed plans to axe one third of senior employees in its European investment banking department in a bid to shore up its capital base amidst a weaker economy and regulatory requirements that are eroding its capital raising and advisory activities, the IBTimes UK reported.

According to a set of unnamed sources first cited by Reuters, the Swiss bank is planning to cut 60 directors and managing directors' positions in the investment banking department (IBD) as part of its previous announced strategy to sever thousands of jobs as the Eurozone crisis and onerous capital requirement legalities chips away at the bank's balance sheet.

Credit Suisse is expected to announce the first set job cuts in July this year and will continue to layoff other staff until the end of 2012 and the bankers effected will be mainly those who advise on mergers and acquisitions, stock market listings, financing and debt issues.

The IBD is a smaller department within the investment banking group and is separate to fixed income.

One of the sources said that the job cuts could affect 20 percent to 30 percent of senior investment banking staff in Europe.

Credit Suisse declined to comment when contacted by the IBTimes UK.

In April this year, HSBC, the largest bank in Europe confirmed that it is cutting another 2200 jobs in the UK, in line with a previously announced global cost cutting programme.

HSBC says that 3,100 posts are being closed but due to new roles being created, a selection of staff will be redeployed in other positions, meaning a net 2,217 staff will be leaving.

The UK headcount slash falls in line with the planned global job cull of 30,000 people by 2013, which is worth 10 percent of HSBC's total workforce, as it seeks to save $3.5bn worth of costs ahead of a raft of global banking regulation changes.

The brutal round of cuts has meant that almost 7,000 jobs were axed at HSBC last year, adding to the 2,000 so far shed this year.