German regulators said to review off-balance-sheet loans

Staff Writer
Columbus CEO

(c) 2013, Bloomberg News.

BERLIN — German regulators will review how the country's banks made loans that didn't appear on their balance sheets, obscuring the risk to investors, said two people briefed on the talks.

The inquiry, led by the Bundesbank and Bafin, will focus on whether banks properly applied accounting rules when making the loans, said one of the people, who asked not to be identified because the investigation hasn't been made public. The review is likely to take several months.

Regulators are scrutinizing the practice after Bloomberg News reported that Deutsche Bank AG, the country's biggest financial firm, extended billions of dollars to banks since 2008 and made the loans disappear from its balance sheet even though it is still owed the money. Borrowers included Banca Monte dei Paschi di Siena SpA, which is being bailed out by the Italian government, and state-controlled Banco do Brasil SA.

Regulators "should take a closer look at these activities," said Klaus Nieding, vice president of DSW, a proxy-voting agent representing small investors in German firms. "The crucial question is: Why did the bank hide these loans?"

To keep loans off the balance sheet, Deutsche Bank used International Financial Reporting Standards that allow certain financial instruments to cancel each other if obligations are settled simultaneously or net throughout the life of the deal. The Bundesbank is examining how banks applied the guidelines, known as IAS 32, the person said.

An official at Bundesbank declined to comment. Officials at Bafin and at the Financial Reporting Enforcement Panel, which examines the accounts of publicly traded companies, both declined to comment.

"We apply the accounting rules under IFRS meticulously, conservatively and taking into account their intended spirit, including for enhanced repurchase transactions, when we are obligated to report our positions net of the high-quality collateral that we hold," said Kathryn Hanes, a spokeswoman for Deutsche Bank in London. "Reporting on a net basis is an obligation, not an optional accounting treatment."

Deutsche Bank Chief Financial Officer Stefan Krause defended the practice last month, saying it's common among securities firms. Speaking on a conference call with analysts on July 30, he said the transactions are "offered by banks internationally as part of normal course of business." The impact of the loans is "negligible" for Deutsche Bank's capital ratios and the portfolio has never been "material" since 2008, he said, without elaborating.

Thomas Blees, a spokesman for KPMG in Berlin, Deutsche Bank's auditor since 1990, didn't have an immediate comment on the review. Simon Steiner, a spokesman for Commerzbank, the country's second-biggest bank, also declined to comment.