(Adds report on discussions with firms on options to raise
* Deutsche and other banks must change business model -IMF
* U.S. settlement needed, "the sooner, the better" -Lagarde
* German watchdog sees no evidence of Russia money
laundering lapses -sources
* German investor, businesses rally behind embattled bank
By David Lawder and Arno Schuetze
WASHINGTON/FRANKFURT, Oct 6 IMF chief Christine
Lagarde gave Deutsche Bank some tough advice on
Thursday, saying Germany's biggest lender needed to reform its
business model and rapidly reach a deal with U.S. regulators
over a potentially huge fine.
A senior European official tried to shore up confidence in
the continent's banking system, saying it was working well
overall, while sources said Germany's financial watchdog had
found no evidence so far that Deutsche violated money laundering
rules in Russia, possibly relieving one of its many headaches.
Meanwhile, the chief executives of several German blue-chip
companies have discussed Deutsche's problems and are ready to
offer a capital injection if needed to shore up the bank,
newspaper Handelsblatt reported on Thursday.
However, Lagarde did not mince her words about the problems
of Deutsch, which the International Monetary Fund has identified
as a bigger potential risk to the financial system than any
other global bank, in an era of ultra-low interest rates.
"Deutsche Bank, like many other banks, has to look at its
business model," she told Bloomberg Television during the IMF
and World Bank's autumn meetings in Washington.
"It has to look at its long-term profitability - given the
lower-bound interest rates we have around the world and probably
for longer than many expect - and decide what size it wants to
have and how it wants to strengthen its whole balance sheet."
Germany's flagship bank is under heavy pressure as it fights
a penalty of up to $14 billion that the U.S. Department of
Justice (DOJ) plans to impose for misselling mortgage
securities, its latest setback that sent its shares to a record
low last week and worried clients.
Deutsche is in the midst of a deep overhaul that includes
slashing a workforce of around 100,000, revamping information
technology and selling non-core assets. It struck another deal
on Thursday with its works council to cut a further 1,000 staff
in Germany, bringing total job losses there to 4,000.
Lagarde acknowledged that Deutsche was selling assets but
underlined the importance of reaching an out-of-court settlement
with the DOJ.
"A bad settlement is always better than a good trial," she
said, adding that Deutsche was "not in a trial mode."
"A settlement would ... deliver some certainty as to what
weight the bank will have to carry and whether it matches with
its provisions or not. So the sooner, the better," she said.
Deutsche has already spent 12 billion euros ($13.4 billion)
on litigation since 2012, and says it has put aside 5.5 billion
euros for its expected legal bill. This is far less than the top
end of a possible DOJ fine, although other banks have negotiated
their penalties down to much smaller sums and Deutsche hopes to
do the same.
In preparation for a higher-than-expected legal bill,
Deutsche has begun speaking with Wall Street firms about its
options to raise capital. Senior advisers at the firms are
offering to help underwrite a stock sale to raise about 5
billion euros, according to a Bloomberg report.
Deutsche Bank declined to comment on the report.
Nevertheless, uncertainty remains over the provisions
amount. "We reckon that ... may be insufficient to cover all
ongoing litigation cases," Scope Ratings said in note on
Deutsche's share price has staged a small recovery from the
record low but remains down 43 percent from the beginning of
A top shareholder, however, said the sell-off was overdone.
"To us, Deutsche Bank is not a bank in crisis," Frank Engels,
head of fixed income at Union Investment, said.
European Commission Vice President Valdis Dombrovskis said
that the bloc's banking sector was working well despite problems
at individual institutions in Germany or Italy. "Overall, the
banking sector seems to be heading in the right direction," he
told reporters in Washington.
Deutsche Bank also got some positive signals from its home
market on one of its other major litigation cases. The Bafin
financial watchdog has found no evidence to date that it
violated money laundering rules in Russia, people close to the
But regulators in Russia, Europe and the United States are
also investigating it over "mirror trades." These may have
allowed clients to move money from one country to another in
2014 without alerting authorities, potentially enabling them to
breach Western sanctions on Russia over the Ukraine conflict.
Bafin declined to comment on its investigation.
The British Financial Conduct Authority, the DOJ and the
Department of Financial Services have launched investigations
into whether any European or U.S. sanctions against Russian
individuals were violated.
Ratings agency Moody's said it does not expect Deutsche to
accept an excessive penalty for the U.S. mortgages case that
might prevent it from making interest payments on "AT1" debt
that forms part of its capital reserves.
"We don't think Deutsche would agree to a settlement that
would jeopardize their ability to make their AT1 coupon payments
in April 2017," said Laurie Mayers, a banking analyst at
Investors have been focused on the potential damage from the
U.S. mis-selling case in recent weeks, although German companies
have rallied behind the lender, which plays a key role in
financing their international operations and domestic needs.
In a source-based report, newspaper Handelsblatt said
several German companies discussed an emergency plan under which
they would purchase Deutsche Bank stock, in the low single-digit
billions of euros, to boost its reserves. The paper added that
Berlin welcomed the private-sector intervention.
Berlin is pursuing discreet talks with U.S. authorities to
help Deutsche secure a swift settlement and put the bank back on
a firmer footing, sources told Reuters.
Germany's influential industry association BDI said that as
an export-oriented economy Germany needs strong internationally
($1 = 0.8958 euros)
(Additional reporting by Kathrin Jones, Jan Strupczewski, Svea
Herbst-Bayliss, Jonathan Gould and Rene Wagner, Editing by
Soyoung Kim and Chizu Nomiyama)