Deutsche Bank made huge bet, and profit, on Libor

10 January 2013

Deutsche Bank made at least €500m ($654m) in profit in 2008 from trades pegged to the interest rates under investigation by regulators worldwide, internal bank documents show.


Regulators have been investigating allegations that more than a dozen banks, including Deutsche Bank, rigged Libor and other interest rates underpinning trillions of dollars in loans and other financial contracts. The probe has already produced settlements totalling nearly $2bn with Barclays and UBS.


Large banks routinely engage in such trading, and there is no indication that the moves in 2008 by Deutsche Bank, Europe's largest bank by assets, affected the market or were illegal. The bets illustrate the size of the risks one bank was prepared to take in trading on tiny rate moves.

Deutsche Bank calculated that as of September 30, 2008, it could gain or lose as much as about €68m for each one-hundredth of a percentage point change in the gap between different rates related to Libor and the euro interbank offered rate, the documents reviewed by the Journal show.

Mark Williams, a former Federal Reserve bank examiner, said the bets represented an "extremely large risk," even for a company as big as Deutsche Bank.

Deutsche Bank said its strategy on the trading was subject to the bank's risk limits and used by many others in the marketplace. It said the trades "diversified and lowered the bank's portfolio risk during the peak of the financial crisis." The bank said the strategy was "based on a market view about the likely direction of interest rates and not on any belief that the bank could inappropriately influence interbank lending rates."

Deutsche Bank hasn't publicly disclosed the trading strategy or its profit on the bets, except as part of a €5.9bn profit posted in 2008 by the bank's global-finance and foreign-exchange unit. Company officials said it is typical for banks not to disclose confidential trading strategies.

The documents from the former Deutsche Bank employee set out how traders in London and New York working for the German bank's global-finance unit successfully bet that borrowing costs in euros, US dollars and British pounds over three- and six-month periods would rise faster than one-month interest rates because of deepening stress throughout the global financial system.

The interest-rate bets included an estimated potential profit of €24m for each hundredth of a percentage point that the three-month US dollar Libor increased compared with the one-month US dollar Libor, according to the documents.


A Deutsche Bank spokesman said those allegations were "categorically false."

So far, an internal inquiry by Deutsche Bank aimed at uncovering evidence of Libor manipulation has found misconduct by just a few individuals, people close to the bank said. As part of its cooperation with investigators, Deutsche Bank still is checking all the trades for any suspicious signs.

Regulators have alleged a conspiracy by global banks to rig interest rates, with some traders brazenly boasting about their prowess at moving the influential rates up or down at their whims. Libor is determined daily using bank-submitted estimates of how much it would cost the banks to borrow in different currencies and over different time periods.

As previously reported, additional regulatory settlements are expected this year, with Royal Bank of Scotland Group aiming to reach a deal by the end of February, according to people close to the talks.

Deutsche Bank traded on Libor-related movements in 2008 even though interest rates were soaring as credit markets froze and investors panicked over the worsening financial crisis. The overnight US dollar Libor rate jumped by more than three points the day after Lehman Brothers sought bankruptcy protection.

At the time, the German bank didn't include the interest-rate bets in the main measurement of trading risks, known as value-at-risk, or VAR. People familiar with Deutsche Bank's thinking said it was common practice to exclude such bets, and including them would have lowered the company's overall VAR.

In 2009, Deutsche Bank made "significant methodology improvements" to the value-at-risk, adding to the measure the interest-rate risk related to "different money-market instruments and swaps based on them," according to a securities filing by the company.

Deutsche Bank hopes to persuade regulators to delay talks on a potential settlement until the bank completes its internal probe later this year, according to the people close to the bank.

Regulators have ordered banks to trawl through emails, chat messages and phone records dating back at least several years. The internal probe by Deutsche Bank began in May 2011, about three years after US regulators began probing Libor.

The internal probe has been arduous because Deutsche Bank is inspecting thousands of trades between 2005 and 2011, including the big interest-rate bets detailed in the documents from the former employee.

The internal inquiry goes beyond looking for "smoking gun" emails or messages such as those exposed by regulators in their settlements with UBS and Barclays. Deutsche Bank is trying to match traders' emails and chats with messages from clients and outside brokers, aiming to detect any subtle conspiracy to fix rates, said the people close to the bank.

The hunt to essentially prove the negative—that a specific person wasn't trying to rig rates—explains why the bank-led internal probes are taking so long, said one of those people.

At first, the review focused on the bank's top managers, including co-chief executive Officer Anshu Jain, who was head of the investment bank at the time. Deutsche Bank said last year it was confident as a result of the review that none of its senior executives had any involvement with rate-rigging.

– Write to Jean Eaglesham at


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