(Bloomberg Opinion) -- Deutsche Bank AG’s latest conduct slipup has a familiar look. Several of its investment bankers allegedly misrepresented how sophisticated some of their clients were so they could sell them risky products. It carries an echo of the early 2000s, when securities firms from around the world missold derivatives to myriad municipalities and small companies across Europe.
That Deutsche should find itself at the center of yet another misconduct case by repeating past mistakes is alarming. Chief Executive Officer Christian Sewing is trying to regain the confidence of investors and regulators by showing he has consigned decades of reckless growth and regulatory breaches to the past. The German bank’s latest troubles are a test for its senior management and for its main regulator, the European Central Bank, which has resolved to clamp down on wrongdoing.
Much has changed since the financial crisis. Banking supervisors are far more familiar with the consequences of excessive risk-taking and have better tools to spot firms misbehaving, ideally preventing the same errors from happening again. The supervision of banks and financial markets in Europe is dramatically different too.
Since 2014, the ECB is responsible for overseeing the biggest lenders in the euro area, replacing national regulators that were too beholden to their domestic banks. True, the euro zone’s central bank still relies on those same local supervisors to take the lead on misconduct cases: The ECB is primarily a prudential regulator. But its core remit to maintain financial stability is to make sure the lenders it oversees have appropriate controls and risk-management systems. Its toughness in enforcing crackdowns on misconduct is critical to rebuilding the trust in banking that Europe still lacks.
Details on Deutsche’s latest violations are still sketchy. The bank said it had initiated an investigation into activities around a limited number of clients, without elaborating. According to the Financial Times, the probe focused initially on a Deutsche unit in Spain that sells swaps and derivatives, after clients complained. The misconduct centers around one former employee who has already left Deutsche, and regulators have been informed, the FT wrote.
Pressure on companies and investors to juice returns in an era of negative bond yields creates an incentive for securities firms to get clients to take on more risk than they should. While Deutsche has been trying to wean itself off volatile trading income — the part of the business that has been most prone to misbehavior — it still needs its investment bank to grow as its other commercial lending businesses sputter. That brings its own pressure.
The scale of the misselling and the seniority of the bankers involved will show whether this is a case of a few bad apples or a more endemic failure to supervise staff.
There’s potentially plenty at stake for the ECB, too. The regulator is responsible for vetting whether managers are fit and proper. ECB staff can carry out onsite inspections to assess a lender’s corporate governance, risk culture and internal controls, all of which can feed into the ECB’s thinking on the likelihood of a firm deviating from rules.
Though it formally relies on BaFin, the German finance regulator, to do the heavy lifting in supervising Deutsche on misselling and misconduct — which are principally regulated by national laws — the ECB can be assertive. BaFin has hardly covered itself in glory recently in relation to Wirecard AG, a German fintech that collapsed in a fake accounting scandal.
To help the ECB meet its objective of ensuring the safety and soundness of banks, the Frankfurt-based regulator is equipped with powers to instruct local supervisors such as BaFin to step in where it doesn’t have the powers to intervene directly. National regulators who fail to supervise banks appropriately are just as much the ECB’s problem as they are their own government’s.
The ECB is still carving out a role for itself as a regulator, but perceptions in the financial markets are important. If there’s a significant case to be answered here, the ECB can’t be seen to simply delegate conduct oversight to others.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Elisa Martinuzzi is a Bloomberg Opinion columnist covering finance. She is a former managing editor for European finance at Bloomberg News.
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