Deutsche Bank will pay $55 million to settle SEC charges that the bank did not disclose in its financial reports the full risk of a derivatives portfolio.
Beginning in 2008, Deutsche Bank “steadily altered its methodologies for measuring the gap risk” of a portfolio of leveraged derivatives trades through which the bank purchased protection against credit default losses, the Securities and Exchange Commission said in a news release Tuesday. The collateral posted for the positions was only about 9% of the $98 billion total in purchased protection, creating the gap risk.
The SEC charged that each change in methodology reduced the value assigned to the gap risk until Deutsche Bank eventually stopped adjusting for gap risk entirely. Deutsche Bank estimated it was exposed to a gap risk ranging from $1.5 billion to $3.3 billion during that time period.
“At the height of the financial crisis, Deutsche Bank's financial statements did not reflect the significant risk in these large, complex illiquid positions,” Andrew J. Ceresney, director of the SEC's enforcement division, said in the news release.
According to the SEC, Deutsche Bank did not admit or deny the SEC's findings. In a statement, Deutsche Bank said the settlement will have no impact on previous financial reports and the bank did not sustain losses attributed to the gap risk.