(Bloomberg) -- A tense scene unfolded inside Deutsche Bank AG’s Manhattan tower just hours before news began leaking that the firm was looking for a new chief executive officer.
U.S. regulators on that day in late March gave senior executives a stern warning that remains in effect: Europe’s biggest investment bank, they said, must act more urgently to fix lapses described in a series of settlements with the Federal Reserve over the past few years. Their patience was wearing thin.
The encounter, which was followed by another meeting between the Federal Reserve Bank of New York and Chairman Paul Achleitner, underscores a daunting behind-the-scenes challenge facing new CEO Christian Sewing. He doesn’t only have to reshape the firm, revive profits and improve morale -- he has to get regulators off Deutsche Bank’s back.
This account of the frayed relationship between the German bank and the Fed is drawn from interviews with people with direct knowledge of the situation, who asked not to be identified because they aren’t authorized to discuss the confidential talks.
Representatives for Deutsche Bank and the New York Fed declined to comment.
Sewing should have a pretty good idea of what the regulators want fixed. Before becoming CEO last month, he served as deputy chief risk officer and oversaw audit and legal over three decades at the bank.
Since 2015, the Fed has piled more than $250 million in fines on Deutsche Bank while issuing four cease-and-desist orders. Last year alone, the regulator faulted how the firm oversees traders, adheres to U.S. limits on risky bets and monitors client transactions for illicit activity. In each case, failing to fix problems could result in more severe penalties.
Then in March of this year, the bank made a significant blunder sure to rattle any regulator, inadvertently transferring 28 billion euros ($35 billion) to one of its outside accounts. While the error was quickly reversed and caused no financial harm, the incident was another blemish for a bank that was supposed to be cleaning up. Days later, on March 26, Fed officials met in New York with senior executives at the U.S. unit of the bank.
An unhappy Fed can chop into profits by imposing additional fines or restricting a firm’s U.S. activities until it shapes up. Wells Fargo & Co. learned that the hard way in February, when the Fed imposed a then-unprecedented cap on its growth, citing a pattern of consumer abuses and compliance lapses. There’s no indication that’s likely yet for Deutsche Bank.
The New York Fed warned Deutsche Bank in late 2013 about persistent deficiencies in the bank’s processes and technology systems, urging it, among other things, to improve “senior management oversight and controls” for finding suspicious transactions.
Neither the company nor regulators provide public updates on its progress. But behind the scenes, a Fed-approved monitor produced a report this month outlining dozens of fixes Deutsche Bank needs to make to fortify its anti-money laundering efforts, the people said.
People briefed on the meeting in late March said it followed a series of gatherings over recent months in which authorities sometimes expressed dissatisfaction. Yet it also stood out: it was scheduled hastily, and the central bank’s representatives were particularly blunt.
Their message: The company’s units were still relying on dysfunctional technology and managers urgently needed to do more to change the culture. It’s a problem the bank has recognized and has been attempting to address, one of the people said.
Late on March 26, the first reports filtered out that Deutsche Bank was considering candidates to replace then-CEO John Cryan. While a change in leadership can assuage regulators that a company is taking criticisms seriously, there are signs the timing of that news was coincidental.
As media reports on succession talks proliferated, the bank said little to clarify what was happening. Meanwhile, Achleitner, on vacation to see the Machu Picchu ruins in the Peruvian Andes, broke off his trip to visit the regulators in New York, where Fed officials again expressed frustrations, the person said.
The board named Sewing its new CEO on April 8, effective immediately. The bank also promoted Karl von Rohr, who’s been in charge of resolving the bank’s many legal cases, to co-deputy CEO. And Tom Patrick is still head of its U.S. operations and has a good relationship with regulators, another person said.
Within weeks, Sewing outlined plans that could make it easier for Deutsche Bank to meet its obligations and appease the Fed. He’s abandoning the company’s two-decade push to compete head-to-head with Wall Street’s top firms, focusing instead on the lender’s home market of Europe. The bank will shrink its global equities business and scale back U.S. rates sales and trading and corporate finance. The remaining U.S. business will be smaller and easier to run.
The stock market, meanwhile, remains unconvinced by Sewing’s initiatives. Deutsche Bank’s shares hit an 18-month low of 10.92 euros on Wednesday and opened only cents higher in Frankfurt on Thursday.
Sewing has also shaken up the leadership in New York. Further changes to the U.S. business are due soon, and the firm may end up eliminating 20 percent of staff in the country, people familiar with the matter have said. Further hints as to the size of the cull emerged Wednesday, when the New York Post reported that it would cut the length of gardening leave for laid-off employees to a month, in order to save money. Normally, the bank would have paid staff for up to three months to stop them going directly to a competitor, the paper said.
But there’s at least one area where the bank is still hiring: it continues to beef up the team responsible for catching suspicious transactions.
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