The European Central Bank (ECB) is assessing allegations that Deutsche Bank understated balance sheet risks and misrepresented its overall financial stability, the Financial Times reported, citing sources familiar with the matter. 

This review is based on claims by a former Deutsche Bank employee, Dario Schiraldi, who is seeking legal action against the bank regarding the lender’s application of netting practices. 

Netting is a method that banks use to consolidate and offset multiple financial obligations to reduce credit risk exposure and alter the calculation of regulatory capital requirements. 

In recent months, the ECB has enquired about Deutsche Bank’s netting practices to assess how the bank applies capital regulations and manages collateral. 

However, the agency has now started reviewing specific allegations outlined in the letter sent by Dario Schiraldi to the central bank in May this year. 

In his letter,  

Schiraldi alleged that Deutsche’s balance sheet was “materially affected by aggressive netting and off-balance-sheet accounting techniques.” 

This practice inflated the bank’s capital and leverage ratios, presenting “a misleading picture of the bank’s financial soundness to regulators and markets alike,” he added. 

Deutsche’s use of netting led to the “apparent understatement of leverage exposures by over €200bn ($231.5bn)” in its 2024 financial statements, the letter said. 

The ECB has not yet decided whether to take formal action in response to the allegations, such as opening an investigation. 

Deutsche Bank responded to the publication, stating: “We apply netting in accordance with the relevant accounting standards and generally aligned with common industry practice.” 

Separately, Schiraldi is suing Deutsche Bank for €152m relating to a probe the bank conducted that contributed to his criminal conviction by an Italian court. 

Previously, Deutsche Bank and the ECB clashed over concerns that the lender might be underestimating the number of loans likely to default. 

The current scrutiny comes amid ongoing legal disputes involving Deutsche, Schiraldi, and five other former employees. 

These employees were also convicted in Italy for false accounting and market manipulation in the Monte dei Paschi di Siena (MPS) case, but were acquitted later. 

In a Frankfurt civil case, Schiraldi claimed that Deutsche Bank chief executive Christian Sewing supervised a defective internal audit. 

This audit was used as a significant part of the evidence to convict Schiraldi and the other bankers in Italy in 2019. 

In his recent letter to the ECB, Schiraldi also requested the watchdog investigate Sewing’s role in overseeing the audit report. 

Deutsche Bank stated: “As we have previously stated, Deutsche Bank considers the legal claims by former employees in this matter to be entirely without merit and will defend itself against them robustly.”