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Deutsche Bank is racing against time to renegotiate a $14 billion fine with the US Department of Justice (DOJ) for its misdealing during the sub-prime mortgage crisis. At the same time, Deutsche shares continue to flirt with record lows as the bank struggles to restore investor confidence.

The DOJ’s hefty penalty has dealt a swift blow to Germany’s oldest lender, undermining CEO John Cryan’s mandate of reducing costs and streamlining business. Since taking over the bank last year, Cryan has faced an uphill battle trying to convince investors that the bank is in sound financial standing. The fine also exposed a potential capital shortfall of up to €10 billion.

Deutsche confirmed last month that it was in talks with US regulators on lowering the amount it owed. It also made it clear that it had no intent to pay the full amount requested by US regulators.

“Deutsche Bank has no intent to settle these potential civil claims anywhere near the number cited. The negotiations are only just beginning. The bank expects that they will lead to an outcome similar to those of peer banks which have settled at materially lower amounts,” the company said on its website in a September 14 press release.[1]

More than four weeks later, a deal remains elusive. In fact, we may be no closer to a deal than we were this time last month. According to an anonymous source close to the negotiations, the bank is doing “everything possible” to cut costs in order to soften the impact of the DOJ fine.[2]

The bank maintains it has no solvency or liquidity issues and that it plans to increase capital to meet all its regulatory requirements. But several analysts have noted that Deutsche has just €5.5 billion set aside for settling litigation. If that’s the case, Deutsche will likely accelerate job cuts to raise enough cash to cover its expenses. Obviously, the more jobs that Deutsche Bank cuts, the weaker its position will appear in the eyes of investors.[3]

The company slashed another 1,000 job cuts in Germany earlier this month, adding to the 3,000 losses announced in June. To increase capital, Deutsche is also selling assets.[4]

Deutsche is just one of many troubled European banks that threaten to undermine the region’s nascent economic recovery. Italian banks are sitting on €360 billion worth of bad loans, equivalent to about a quarter of the country’s gross domestic product. About €200 billion of loans were issued to borrowers that are now deemed insolvent.[5]

German Chancellor Angela Merkel is reportedly weighing the possibility of bailing out Deutsche Bank after her administration said it would not consider state aid. Bailing out Deutsche could leave a permanent stain on Merkel’s record as her battered party prepares to face voters in the 2017 election.[6]

According to experts, settlement outcomes can vary widely depending on whether the German government decides to step in. One possible outcome is that the DOJ considers fines paid by other banks that issued a similar amount of residential mortgage-backed securities during the subprime mortgage crisis and were also subject to litigation. In this scenario, Deutsche would be looking at a penalty of between $4 and $7 billion.

Another possible, albeit less reliable, outcome would have the DOJ apply the same discount granted to US banks. This would likely lower the amount owed to between $9 billion and $10 billion.[7] Earlier this month, German media reports indicated that both sides had agreed to settle on a fine of between $4 billion and $5 billion. Similar reports also indicated that Deutsche was already planning to reduce its US operations.

While very little is known about the status of the negotiations, analysts warn that Deutsche must find an agreement as soon as possible to avoid further turmoil and ease growing concerns over its liquidity issues.

[1] Deutsche Bank (September 15, 2016). “Deutsche Bank confirms negotiations with DoJ regarding RMBS.”

[2] Spriha Srivastava (October 20, 2016). “Deutsche Bank vs. DOJ: Here’s why it’s all taking so long.” CNBC.

[3] Edward Taylor (October 17, 2016). “Deutsche Bank’s option to solve capital dilemma seen to be limited.” Reuters.

[4] BBC (October 6, 2016). “Deutsche Bank cuts another 1,000 jobs.”

[5] Simon Nixon (July 4, 2016). “Brexit Exposes Eurozone’s Weak Spot: Italy’s Banks.” The Wall Street Journal.

[6] Austin Davis (October 23, 2016). “Merkel weighs bailout as Deutsche Bank turmoil strains U.S.-Germany relations.” Washington Times.

[7] Spriha Srivastava (October 20, 2016). “Deutsche Bank vs. DOJ: Here’s why it’s all taking so long.” CNBC.

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