Deutsche Bank needs to get a better grip on its hoots and squawks.
That was the finding of the Financial Industry Regulatory Authority, the self-policing watchdog for the securities industry in the US, which fined the German bank $ 12.5m on Monday for failing to exercise proper controls on the information pumped out over its internal speaker system.
Bulletins, or “hoots”, are disseminated over an intercom system known as a “squawk box”, with various channels broadcasting from various departments. For example, the equity research department would use a hoot to alert employees to a change of recommendation on a stock, while the trading floor would use it to tell people about a big block trade. Such systems are common on Wall Street, to help traders respond quickly to fast-moving situations.
But Finra found that from 2008 to 2014, Deutsche allowed hoots from the trading floor to be broadcast to employees of the private client division, which serviced very rich customers.
The bank took steps to restrict access to hoots in that division in 2014. But until then, Finra found, the bank repeatedly ignored red flags indicating that its supervision was inadequate. In July 2008, for example, a review by the internal audit department found that there was no way of knowing whether hoots were being heard by employees with “a need to know”, and recommended some curbs.
In March 2009, a rival broker was punished for lack of squawk-box supervision, prompting Deutsche to set up a working group to look into tightening its own processes. But in neither instance did the bank take any action.
As a result, said Finra, “at least one” employee of the bank “communicated potentially confidential and/or material nonpublic information to customers”, providing recipients with “a potential informational advantage”.
Deutsche declined to comment. In settling, the bank neither admitted nor denied the charges, but consented to the entry of Finra’s findings.
Monday’s fine is the latest in a series of regulatory blows for the bank, which has been trying to reshape its business in the US under the leadership of John Cryan, chief executive. Last week shares in the Frankfurt-based bank touched a multi-decade low, about a third lower than the post-Lehman trough, amid broad fears over asset quality and the profit-sapping effects of negative interest rates.
This year one of Deutsche’s US-based units failed the annual stress test carried out by the US Federal Reserve for the second time in a row. The Fed found “broad and substantial weaknesses” across the bank’s capital planning processes, and “insufficient progress” made in fixing flaws from last year’s test.
In July Deutsche organised its US units under a new structure called an intermediate holding company, which — like all the IHCs of non-US banks — will be subject to a full stress test in 2017. That dress rehearsal, carried out in private, will really start to matter in 2018, when the results are made public. Failures allow the Fed to block a US unit from sending any capital back to its parent.
Deutsche has been a member of Finra since 1940 but its recent rap sheet could cause the Fed some concern. Finra’s database of disciplinary actions includes 37 cases involving the bank stretching back to 2005; more than HSBC (25), Credit Suisse (27), BNP Paribas (27) and Barclays (31), for example.