Deutsche Bank has agreed to pay a penalty of $55m to the US Securities and Exchange Commission (SEC) for filing misstated financial reports regarding a derivatives portfolio and inflating its value during the height of the financial crisis.
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SEC division of enforcement director Andrew Ceresney said: "At the height of the financial crisis, Deutsche Bank’s financial statements did not reflect the significant risk in these large, complex illiquid positions. Deutsche Bank failed to make reasonable judgments when valuing its positions and lacked robust internal controls over financial reporting."
The derivatives portfolio includes Leveraged Super Senior (LSS) trades through which the German lender bought protection against credit default losses.
The trades however being leveraged, the collateral posted for these positions by the sellers was a fraction (nearly 9%) of the $98bn total in purchased protection.
SEC said in its statement: "This leverage created a "gap risk" that the market value of Deutsche Bank’s protection could at some point exceed the available collateral, and the sellers could decide to unwind the trade rather than post additional collateral in that scenario.
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By GlobalData"Therefore, Deutsche Bank was protected only up to the collateral level and not for the full market value of its credit protection. Deutsche Bank initially took the gap risk into account in its financial statements by adjusting down the value of the LSS positions."
The regulator alleged that when the credit markets started to deteriorate in 2008, the bank steadily altered its methodologies for measuring the gap risk.
Each change in methodology reduced the value assigned to the gap risk till the lender stopped adjusting for gap risk.
According to internal estimates, the bank was exposed to a gap risk between $1.5bn and $3.3bn during the period.
