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Deutsche Bank becomes first bank busted for breaking Volcker rule

Deutsche Bank AG logo at one of the bank's branche

Deutsche Bank AG was hit with the Federal Reserve's first major fine for failing to ensure traders abide by the Volcker rule's ban on risky market bets — and will also pay even more for letting currency desks chat online with competitors, allegedly revealing positions.

The simultaneous sanctions, totaling almost $157 million, fault lax oversight of traders that persisted into last year. The company — which raised $8.5 billion from investors this month to recapitalize — admitted to the Fed in March 2016 that it still lacked adequate systems for keeping tabs on dealings that might run afoul of the Volcker ban.

“Significant gaps existed across key aspects of Deutsche Bank's Volcker rule compliance program,” the Fed said Thursday, fining the firm $19.7 million for the lapses. As for chats, the bank failed to detect that currency traders engaged in “unsafe and unsound conduct,” disclosing some positions or talking about coordinating strategies, the Fed said. The company will pay $136.9 million for that.

CEO John Cryan, who took over almost two years ago, is trying to refocus on growth after probes and litigation sapped years of earnings, pushing the firm to tap investors to shore up capital. The latest penalties bring the lender's total disclosed fines and legal settlements since the start of 2008 to $14.7 billion, the most of any European bank, and highlight the weakness of its controls after growing aggressively to compete with U.S. investment banks.

“It's pretty unpleasant that they stand out with the Volcker rule violations,” Andreas Plaesier, an analyst at M.M. Warburg with a hold rating on Deutsche Bank shares, said by phone. “It's really surprising just how many controls failed across the bank in recent years and it doesn't cast a good light on former management.”

That fine was lower than penalties the Fed has imposed on other banks for similar issues. In 2015, the U.S. central bank slapped six banks with fines totaling more than $1.8 billion for their “unsafe and unsound practices in the foreignŽ-exchange markets.”

Yet the Fed wasn't the only regulator examining the currency chat rooms. New York's Department of Financial Services, which has a track record of demanding stiffer penalties than the Fed, has been preparing to sanction the firm as well, a person familiar with the matter said last month.

“We are pleased to resolve these civil enforcement matters with the Federal Reserve,” said Renee Calabro, a Deutsche Bank spokeswoman, declining to comment further on Thursday's cases. In December, the lender agreed to settle a U.S. mortgage-backed securities probe for $7.2 billion.

The Volcker rule, named for former Fed Chairman Paul Volcker, seeks to make the financial system safer by barring banks with federally insured deposits from betting their own money. Such wagers once drove epic profits and bonuses in the years before 2008's financial crisis.

Now, traders are largely relegated to helping clients buy and sell securities, profiting mainly on the spread or price moves. And banks are supposed to ensure such market-making doesn't bleed into outright wagers — a line that can be blurry.

The Fed credited Deutsche Bank for taking steps to identify and shore up its policies and controls. It didn't accuse the bank of engaging in banned proprietary trades.

Senior financial officials in the Trump administration have said they intend to rethink the Volcker Rule, which was created by the Dodd-Frank Act of 2010. Treasury Secretary Steven Mnuchin has said Volcker went too far in choking off trading and should be made simpler to understand.