* NY Fed sees shoddy reporting, inadequate auditing
* Says Deutsche Bank made no progress fixing problems
* Bank to come under closer Fed scrutiny from 2016
* Shares down 0.5 percent, underperforming peers
(Adds Dudley speech, details on examiners)
By Kathrin Jones and Arno Schuetze
FRANKFURT, July 23 The Federal Reserve Bank of
New York has found serious problems in Deutsche Bank AG's
U.S. operations, including shoddy financial
reporting, weak technology and inadequate auditing and
oversight, people close to the matter told Reuters.
In a letter to the German lender's executives last December,
a senior official with the New York Fed described financial
reports produced by some of the bank's U.S. divisions as "low
quality, inaccurate and unreliable", said one of the sources,
who is familiar with the letter.
The New York Fed, as the U.S. central bank's eyes and ears
on Wall Street, directly supervises the biggest U.S. and foreign
banks, partly through embedded regulators who go to work each
day inside the firms.
"The size and breadth of errors strongly suggest that the
firm's entire U.S. regulatory reporting structure requires
wide-ranging remedial action," said the letter, first reported
by the Wall Street Journal. (on.wsj.com/1r3VIn3)
The New York Fed declined to comment, citing the
confidentiality of supervisory activities. The European Central
Bank and German financial watchdog Bafin declined to comment.
Deutsche said it was investing 1 billion euros ($1.4
billion) to upgrade its internal systems, including the quality
of its reporting, with about 1,300 people working on the
improvements. "We have been working diligently to further
strengthen our systems and controls," a spokeswoman said.
The letter is nonetheless a blow to Deutsche Bank co-Chief
Executives Juergen Fitschen and Anshu Jain, who have been
seeking to transform the lender's corporate culture amid
scandals, investigations and fines following the financial
crisis of 2008-2009.
While the New York State Department of Financial Services is
looking at Deutsche in relation to issues including possible
forex manipulation and Iran sanctions violations, the New York
Fed's concerns are separate and arose from routine examinations
by its staff, a source familiar with the matter said.
Other sources familiar with the matter said technical issues
were at the heart of the reporting problems, meaning Deutsche
will likely have to add or amend any documentation it puts out,
such as statements on its performance, but not face large fines.
"These type of issues have gone from just plain looking at
the balance sheet to qualitative management issues, and the Fed
seems to be very unhappy with these guys," said a source
familiar with the matter.
BEST IN CLASS
Deutsche Bank shares lost 0.5 percent, one of the biggest
decliners in Germany's blue-chip index and the European
"This does not fit with Deutsche Bank's ambitions to be best
in class," said a Deutsche Bank shareholder, who declined to be
named because he did not want to put at risk his relationship
with the bank.
Germany's largest bank has been in U.S. regulators'
crosshairs for some time over a host of issues, including
investigations emanating from the financial crisis and criticism
that it is too thinly cushioned against potential losses.
A U.S. Senate committee this week accused Deutsche, along
with rival Barclays, of helping hedge fund clients to
avoid taxes. Deutsche is also under investigation by U.S.
authorities over alleged sanctions violations.
With the threat of fines and settlement costs looming, as
well as European banking stress tests year, Germany's largest
lender raised 8.5 billion euros last month to strengthen its
Deutsche's capital strength had been under the spotlight
since Thomas Hoenig, vice-chairman of the Federal Deposit
Insurance Corp, a U.S. banking regulator, described the bank as
"horribly undercapitalised" in an interview with Reuters last
The bank, like other foreign lenders, will come under closer
scrutiny by the Federal Reserve from 2016 and will be required
to retain deeper capital cushions to absorb potential losses,
while holding easy-to-sell assets to raise cash quickly in a
Foreign lenders will also be included in the Fed's stress
tests of banks' resilience to economic shocks.
The Dec. 11 letter from the New York Fed to Deutsche Bank
said the bank had made no progress in fixing previously
identified problems and ordered senior bank executives to ensure
steps were taken to fix the problems. It also said the bank
might have to restate some financial data it has submitted to
A month before the letter was sent to Deutsche, New York Fed
President William Dudley talked of "the apparent lack of respect
for law, regulation and the public trust" in general at large
lenders. "There is evidence of deep-seated cultural and ethical
failures" at many of them, he said in a Nov. 7 speech on
U.S. regulators ramped up the number of staff embedded at
Wall Street banks in the wake of the financial crisis, with the
biggest firms housing more than 100 examiners from the Fed and
the Office of the Comptroller of the Currency.
The New York Fed would not say how many embeds are currently
at Deutsche Bank.
"You'd like to think that the New York Fed is on top of its
game and sends letters like this all the time to the big boys,
but I'm not so sure," said Walker Todd, a former New York Fed
legal officer now at the Institute for New Economic Thinking.
"The field examiners find these sorts of violations all the
time. But comparatively few make it this high up the food
($1 = 0.7428 Euros)
(Reporting by Kathrin Jones, Arno Schuetze, Aruna Viswanatha,
Emily Flitter, Jonathan Spicer and Avik Das; Editing by David
Goodman, David Holmes and Dan Grebler)