Deutsche Bank has agreed to a $7.2 billion (€6.89 billion) settlement with the US Department of Justice over its sale and pooling of toxic mortgage securities in the run-up to the 2008 financial crisis.
The agreement in principle, announced by Deutsche Bank's Frankfurt headquarters early this morning, offers some relief to the German lender, whose stock was hit hard in September after it acknowledged the Justice Department had been seeking nearly twice as much.
It also highlights the Justice Department's recent efforts to hold European banks accountable for shoddy securities that contributed to the US housing market collapse.
The department sued Barclays yesterday over similar claims, after having reached $46 billion (€44.04 billion) in settlements with US banks over the last three years.
Deutsche Bank does not plan a capital increase to cover the settlement, a person close to the bank said.
The lender expects the agreement to be finalized in early 2017, before President-elect Donald Trump takes office, said the source, who spoke on the condition of anonymity.
Deutsche does expect to record a pre-tax charge of about $1.17 billion (€1.12 billion) in its fourth quarter because of the civil monetary penalty, according to its press release.
As part of the agreement, Deutsche Bank would pay a civil monetary penalty of $3.1 billion (€2.97 billion) and provide $4.1 billion (€3.92 billion) in consumer relief, such as loan forgiveness.
The bank cautioned that there is "no assurance" the two sides will agree on the final documents.
A spokesman for the Justice Department declined to comment.
Settling the mortgage-securities case would mean Deutsche Bank has shaken off one legal headache.
Three major probes remain.
Deutsche faces investigations into the alleged manipulation of foreign exchange rates, suspicious equities trades in Russia, as well as alleged violations of US sanctions on Iran and other countries.
Since 2012, Deutsche Bank has already paid more than €12 billion for litigation, including a deal with US mortgage-finance giants Fannie Mae and Freddie Mac.
Deutsche Bank's "troubling practices" were widespread, including when trader Greg Lippmann told colleagues that many home loans the bank was packaging into securities were "crap" and "pigs," according to a 2011 US Senate subcommittee report.
Mr Lippmann has declined to comment on the report.
There has been fear among investors, companies and regulators that the penalties are too much for Deutsche Bank to withstand.
Its shares plunged to a record low of €9.90 in September, after the bank confirmed the Justice Department was demanding $14 billion (€13.4 billion).
The stock has recovered substantially, but is down from the beginning of 2016.
The Justice Department is still pursuing mortgage allegations against other lenders in addition to Barclays.
Credit Suisse is in late-stage negotiations and has resisted a demand by the agency that it pay between $5 billion and $7 billion (€4.79 billion and €6.7 billion) over its sale of mortgage securities, sources have said.
Royal Bank of Scotland, Wells Fargo, UBS and HSBC are also under investigation, according to company disclosures.
US banks have paid tens of billions of dollars over the past three years to settle with US authorities over misleading investors about the quality of mortgages underlying securities.
In 2013, JPMorgan Chase agreed to pay $13 billion (€12.44 billion).
The following year, Bank of America agreed to pay $16.65 billion (€15.94 billion), while Citigroup cut a deal for $7 billion (€6.7 billion).
In February this year, Morgan Stanley agreed to pay $2.6 billion (€2.49 billion), and in April, Goldman Sachs Group negotiated a $5 billion (€4.79 billion) deal.
Deutsche is not the first bank to announce a settlement amount before both sides have agreed on the final documentation.
Morgan Stanley disclosed its agreement a year before it was finalised and formally announced.
