Deutsche Bank’s Risk Controls Questioned as Single Trade Could Lose $60m

A single derivatives trade could end up costing the group $60m, casting doubt on the bank's risk control measures.

Deutsche Bank’s risk controls may be in need of further tinkering following a poorly timed trade that could leave the bank losing upwards of $60 million. Compounding these losses is the specter of a risk limit violation, which already drew a fine from the US Federal Reserve this year.

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The beleaguered lender finds itself in a troubled situation after a derivatives trade linked to US inflation threatens to spiral out of control and rack up nearly $60 million in losses, according to a Bloomberg report. Of more immediate concern is the facilitation of such a trade without any of the requisite risk control measures advocated by CEO John Cryan, who has been passionate about shoring up this area at Deutsche Bank.

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Deutsche Bank CEO John Cryan
Bloomberg

Asleep at the wheel?

Indeed, this is not the first time Deutsche Bank has breached risk limits on its trades, with this most recent episode already making its way to the lender’s supervisory board. The potential loss of $60 million in a single trade is a major blow to Deutsche Bank’s business, that had been struggling to best recent street estimates and maintain its 2017 momentum. Traders at the lender had initially made the transaction in anticipation of how clients were going to trade.

Deutsche Bank’s trading business earned $270 million in Q1 2017 – the prospect of such a catastrophic trade erasing 22 percent of an entire quarter’s profits would constitute a tremendous vulnerability for the bank’s risk controls. Mr. Cryan had been attempting to shore up this area for the past year, especially after an earlier fine in April by US authorities after Deutsche Bank traders failed to abide by the Volcker Rule.

Unfortunately for Deutsche Bank, this latest instance of lapses in its risk controls comes at a poor time for the group as it looks to turn the page on a past rife with fines, trading misconduct, and lax controls. That the trade focused on derivatives is also a sensitive area for Deutsche Bank, amidst recent concerns voiced by the European Central Bank as to how the group manages and values this segment.

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