America’s Department of Justice asks Deutsche Bank for $14 billion

“DEUTSCHE BANK has no intent to settle these potential civil claims anywhere near the number cited.” Shock may explain the rickety syntax. On September 16th Germany’s largest bank confirmed reports that America’s Department of Justice had asked for $14 billion to settle possible claims connected with the underwriting and sale of residential-mortgage-backed securities (RMBSs) between 2005 and 2007. Deutsche’s share price, already hovering close to record lows after a wretched year, plunged by more than 8%. So did those of other European banks yet to agree terms with the DoJ over RMBSs. Royal Bank of Scotland’s shares dropped by 4.4% and Credit Suisse’s by 4%; Barclays and UBS shed 2%-plus.

American banks have settled with the department for amounts between $3.2 billion (Morgan Stanley) and $16.7 billion (Bank of America), as well as paying smaller sums to the Federal Housing Finance Agency (FHFA), another regulator. Analysts had expected Deutsche’s penalty to be at the bottom of that range, or even below it. Deutsche, which settled for $1.9 billion with the FHFA in 2013, is indeed likely to pay much less than $14 billion for the sins of its swaggering pomp; but it can ill afford a bigger bill than it bargained for.

Deutsche is in poor shape. It lost €6.8 billion ($7.4 billion) last year and trades at around 30% of the net value of its assets. Its ratio of core equity to risk-weighted assets, an important measure of a bank’s resilience, is 10.8%, lower than its peers. John Cryan, its chief executive for the past 14 months, scrapped last year’s dividend and has told investors to expect none for 2016. He hopes to raise that equity ratio to 12.5% by 2018. Deutsche’s risk-weighted assets total around €400 billion, so the 1.7% required translates into a capital shortfall of nearly €7 billion.

The sale of Deutsche’s stake in Hua Xia, a Chinese bank, is expected to make up around 0.5 points of the gap. But a big fine will make it harder to close up the rest without asking investors for more capital. Deutsche has already set aside €5.5 billion for litigation costs. However, that covers not only the RMBS claims but also the potential cost of investigations by American and British authorities into whether slack controls at Deutsche allowed money-launderers to whisk cash out of Russia. Every €1 billion of extra penalties will take Mr Cryan 0.25 points further away from his target.

Recently rumours have swirled that Deutsche might seek safety in a union with its smaller domestic rival, Commerzbank, or sell its asset-management arm to raise cash. In a letter to staff on September 12th, Mr Cryan told them not to “become distracted by speculation about alleged mergers or sales plans.” The boss continued: “We have enough on our plate to solve on our own.” They certainly do.