Deutsche Bank (DB) has reached an agreement-in-principle with the US Justice Department (DoJ) to pay $3.1 billion (2.9 billion euros) in civil penalties and provide $4.1 billion relief to consumers. The bank's shares rose 4 percent in early trading on Friday on news of the settlement. The DoJ had earlier sought a settlement about twice as big.

It is the DoJ's first accord with a European bank over misconduct that contributed to the US housing-market collapse. The department has faced criticism for its perceived failure to hold senior executives to account following the financial crisis. No major figures have suffered criminal conviction.

The agreement should resolve a years-long US investigation into the German lender's dealings in residential mortgage-backed securities (RMBS) and other activities during 2005 to 2007 - removing a major legal hurdle for the bank. This is not the final legal agreement, however, and it is not yet assured that the DoJ and the bank will agree on the final documentation, the bank cautioned on Friday.

Not alone

DB has been among several financial institutions investigated for selling low-quality residential mortgages. US investment bank Goldman Sachs agreed in April to pay more than $5 billion to settle similar allegations. Other major banks implicated in the crisis include the Royal Bank of Scotland and Credit Suisse.

Credit Suisse on Friday reached an agreement-in-principle with US authorities to pay $5.28 billion to settle disputes over the sale of mortgage-backed securities, the Swiss-based global bank said in a statement. 

The three biggest US banks - JPMorgan Chase, Bank of America and Citigroup - have likewise each reached settlements with the US government totaling billions of dollars recently.

The US DoJ is not finished pursuing banks for their malfeasance during the run-up to the 2007-8 global financial crisis. On Thursday it sued the British bank Barclays, accusing it of massive fraud in the sale of mortgage-backed securities and contributing to the global financial crisis of 2008. Federal prosecutors argued that Barclays sold $31 billion in securities which packaged poor-quality subprime and Alt-A mortgages to investors around the world, more than half of which defaulted after Barclays deliberately and systematically lied to investors about the loans.

Thursday's move to sue in open court stood out, with the DoJ choosing not to seek a mutually acceptable resolution, as it has in most cases when taking enforcement action against major financial institutions.

Less than expected

The DoJ ruled DB misled investors about the quality of its loans. It had demanded $14 billion, which would have been the largest ever inflicted on a foreign bank in the US, surpassing the $8.9 billion that French bank BNP Paribas paid in 2014 for Iran sanctions violations.

The $14 billion figure had caused DB's share price to fall and raised questions about the bank's stability and the risks it posed to the financial system.

According to securities filings, DB had set aside $5.5 billion to resolve pending legal matters. In the mortgage-backed securities matter, the bank had been aiming for an amount between $2 billion and $3 billion.

In recent years, DB has found itself mired in litigation and enforcement actions around the world. Last year, US market regulators fined the German lender $55 million, concluding that it had overvalued its holdings of credit derivatives by at least $15 billion during the financial crisis.

In April 2015, DB also paid a record $2.5 billion to settle American and British charges that it had manipulated the London Interbank Offered Rate, or Libor, affecting commercial interest rates. The bank also settled with the US Fed and New York's Department of Financial Services of alleged sanctions violations in Syria and Iran.

Not yet out of the woods

Three major probes remaining for DB, namely a probe into alleged manipulation of foreign exchange rates, suspicious equities trades in Russia, and alleged violations of US sanctions on Iran and other countries.

Investors fear their stakes will be diluted if DB, which is already struggling with a massive restructuring and a morass of legal entanglements around the world, is forced to raise fresh capital to cover the fine.

jbh, nz/jm (AFP, Reuters)