UPDATE 2-Regulator finds flaws in Deutsche Bank's Libor supervision
* Bafin wants Deutsche to fix supervisory flaws -source
* Bafin's report won't blame Deutsche's co-CEOs -sources
* Co-CEO Jain says Q1 saw solid performance
* Share price up 0.8 pct, blue chips down 0.9 pct
By Philipp Halstrick and Alexander Hübner
FRANKFURT, March 21 (Reuters) - German markets watchdog Bafin is set to rebuke Deutsche Bank over how it supervised its contribution to the setting of inter-bank lending rates at the heart of the international rate-rigging scandal, several sources familiar with Bafin's investigation said.
However, the watchdog's report will focus on "organisational flaws" at Germany's biggest lender rather than placing blame on Deutsche's co-chief executives Anshu Jain and Juergen Fitschen, or their predecessor Josef Ackermann, one of the sources said.
Bafin, which has been investigating Deutsche Bank's involvement in setting the London Inter-Bank Offered Rate, or Libor, is primarily seeking to get the shortcomings corrected, a second person familiar with the investigation said.
"It won't be much more than finger-wagging," the person said of the report, whose preliminary conclusions are due to be passed on to Berlin by the end of the month.
Bafin and other regulators have been investigating whether banks sought to manipulate Libor and its euro zone counterpart, Euribor, a key measure of how much banks pay to borrow from each other which is used as the basis for setting lending rates on a wide range of financial products from mortgages to complex derivatives.
Banks are usually quick to correct errors in their systems, even before regulators ask them to do so, the second source said.
Bafin, which is working with the Bundesbank and accountant Ernst & Young in its probe, has delved into suspected misconduct by individual traders and their counterparts at other banks.
Deutsche Bank has already dismissed or suspended seven employees involved in setting benchmark rates.
While Bafin itself cannot impose fines, its report is expected to feed into settlement talks between Deutsche and regulators in the United States and the UK.
Deutsche has already made provisions for possible fines in the Libor case, sources close to the lender have told Reuters, while analysts see the likely exposure at less than 500 million euros.
Swiss bank UBS and Britain's Barclays have already paid a total of nearly $2 billion to settle rate manipulation allegations, while Royal Bank of Scotland has been fined $612 million.
German financial daily Handelsblatt also said on Thursday, citing "insiders", that Bafin was focusing in on organisational issues at Deutsche and that there would be no consequences for current or former board members.
Reuters reported in February that Deutsche Bank's top leaders were unlikely to be sacked as a result of the investigations, citing three people with knowledge of the matter.
Bafin declined to comment on Thursday.
"The investigation is not yet completed," a spokeswoman said.
Deutsche Bank declined to comment and Jain did not mention the probe in a presentation to investors in London but instead spoke of a good start to the year.
"We expect our first quarter to be solid across all businesses, driven by robust revenues similar to last year's performance," Jain said, adding that he expected last year's cost reduction efforts would also help cut expenses in the first quarter.
Deutsche's shares were up 0.8 percent at 32.68 euros by 1534 GMT, when the main German DAX index was down 0.9 percent.
Bafin's president Elke Koenig told Reuters in February that a key question for officials was whether banks reacted quickly enough once the Libor problems became known, and whether they reached the right conclusions.
Thomson Reuters, parent company of Reuters, has been calculating and distributing Libor rates for Libor's sponsor, the British Bankers' Association, since 2005.
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