The Securities and Exchange Commission fined Deutsche Bank $55 million for underreporting its risks by billions of dollars during the financial crisis.
The regulator said Monday that as the market began to melt down in 2008, the German bank steadily changed how it reported a $98 billion portfolio of derivatives in order to minimize the amount of risk it supposedly faced. Only a fraction of those derivatives were offset by collateral, meaning the bank could have faced billions of dollars in losses if a large amount of traders sought to exit those positions.
While the bank initially reported that “gap risk” in its financial statements, it changed its reporting methodologies multiple times in 2008. Each time, the end result was that that reported risk grew smaller, until the bank eventually reported it faced $0 worth of that type of risk from that particular portfolio. Internal documents showed the bank estimated that risk as actually ranging from $1.5 billion to $3.3 billion.
“At the height of the financial crisis, Deutsche Bank’s financial statements did not reflect the significant risk in these large, complex illiquid positions,” said Andrew J. Ceresney, Director of the SEC’s enforcement division. “Deutsche Bank failed to make reasonable judgments when valuing its positions and lacked robust internal controls over financial reporting.”