Market Insider

Why you should be skeptical of that $5.4 billion Deutsche Bank settlement

Deutsche Bank and German regulation
Deutsche Bank and German regulation

Shares of Deutsche Bank were leaping in New York trade Friday on a report that it was near a settlement with the U.S. Department of Justice, but there's reason to be skeptical about the number being cited.

Shares of Deutsche Bank have extended their gains, up about 14 percent in afternoon trading, after an AFP report that Germany's biggest bank is close to a $5.4-billion dollar settlement with the Justice Department over mortgage bonds. CNBC has not independently confirmed the report.

But if the number was correct, under German capital market rules Deutsche Bank would be required to confirm the amount by now. Its failure to do so indicates the number is not correct. Any eventual settlement, however, would almost certainly be well below the reported $14-billion opening bid by the Department of Justice in its talks with Deutsche.

Deutsche Bank is not publicly commenting on the supposed $5.4-billion figure.

A statue is pictured next to the logo of Germany's Deutsche Bank in Frankfurt, Germany, September 30, 2016.
Kai Pfaffenbach | Reuter

The capital market rules say the bank would have to react almost immediately to a report on such a settlement. That's why two weeks ago, after The Wall Street Journal reported on the initial $14-billion figure, Deutsche Bank quickly put out a release confirming the news.

"The negotiations are only just beginning," Deutsche Bank said at the time. "The bank expects that they will lead to an outcome similar to those of peer banks which have settled at materially lower amounts."

The DOJ did not reply to a CNBC request for comment. The German Finance Ministry declined to comment on media reports of a settlement.

Germany's biggest bank fell under fresh scrutiny two weeks ago when it surfaced that the Department of Justice was demanding $14 billion to settle the bank's mortgage lending activities during the housing bubble, before the recession. Its market value was below $17 billion as of Thursday's close.

As of June 30, Deutsche Bank said it had 5.5 billion euros ($6.17 billion) in litigation reserves, according to a presentation the bank gave during quarterly earnings.

Shares of Deutsche Bank plunged Thursday on reports that a handful of its big hedge fund clients were limiting their exposure to Deutsche Bank, though the bank has characterized those media reports as "unjustified concerns."

—With reporting by CNBC's Annette Weisbach.