World Economy

Deutsche, Credit Suisse Reach Deal Over Toxic Mortgages

Deutsche, Credit Suisse Reach Deal Over Toxic MortgagesDeutsche, Credit Suisse Reach Deal Over Toxic Mortgages

Deutsche Bank will be hoping for a fresh start in 2017 after reaching a $7.2 billion deal with US authorities to settle allegations of the mis-selling of mortgage-backed securities.

Germany’s largest lender said on Friday morning it had agreed ‘in principle’ to pay a $3.1 billion civil fine to be supplemented with the payment of $4.1 billion in consumer relief overtime, CNBC reported.

The announcement of the fine comes amid a raft of banking stories related to the mis-selling of MBS which hit the wires before Friday’s European market open. This included news that US federal prosecutors would sue Britain’s Barclays bank and that Credit Suisse had reached a provisional $5.3 billion deal, meaning the Swiss bank will take a pre-tax charge of about $2 billion.

Of the total amount demanded of Credit Suisse, $2.48 billion would be an immediate fine to settle the claims and an additional $2.8 billion would be paid over five years for consumer relief.

Deutsche Bank’s agreement follows months of negotiations with the US’s Department of Justice and ranks as the third-highest penalty imposed to date on a bank to settle claims of mis-sold mortgage-backed instruments.

Although the $7.2 billion payment is far from negligible, investors may take some cold comfort from the fact it is less than $16.7 billion that Bank of America was required to stump up in August 2014 and the $9.0 billion charged to JPMorgan Chase in November 2013.

Furthermore, of the full amount, only the $3.1 billion civil fine component is required to be imminently delivered in cash. The full penalty measures approximately half of the $14 billion figure claimed by the DoJ in late September, which spooked traders into sending the German bank’s share price to a record low of €10.55.

Since that nadir the stock has staged a bounceback to the tune of 68% to Thursday’s close, although it still languishes over 20% below its price at the start of 2016.

According to Filippo Alloatti, senior credit analyst at Hermes Investment Management, this settlement is important as it has comes in lower than the worst-case scenario.

“For Deutsche Bank, it’s a relief to be rid of such an overhang. Now back to executing and tweaking the strategy please,” he told CNBC via email.


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