NEW YORK • Heavy market pressure on Deutsche Bank eased as a knowledgeable source said the US fine over toxic debt it sold would be US$5.4 billion (S$7.4 billion) and not the US$14 billion originally demanded.
A person familiar with the talks between Deutsche Bank and the Department of Justice on Friday said a deal could come in the next few days to settle the US government charges that the bank knowingly sold high-risk mortgage securities ahead of the 2008 financial crisis.
The final amount of the settlement could also be slightly different, said the person.
The news powered the shares of Germany's biggest lender dramatically higher as worries about its financial stability under the pressure of a potentially massive US fine ebbed.
US-traded shares of the bank closed 14 per cent up at US$13.09, while in Frankfurt, in part due to different market hours relative to the timing of the news, the shares added 6.4 per cent at €11.57.
Deutsche Bank and the US Justice Department declined to comment on the news of a deal, as did the German Finance Ministry.
But worries about the impact of the case on Deutsche Bank had spread through markets and into the political realm over the past week, unnerving investors.
Adding to the rising concerns were conflicting reports in German media on whether Berlin would come to the troubled bank's aid if necessary.
Then, late on Thursday, the bank's US-traded shares plunged on news that a number of hedge funds that clear derivatives business through Deutsche Bank had pulled out money.
The shares fell by over 9 per cent at one point in Frankfurt, hitting a historic low of €9.90.
This sparked fears that a banking meltdown reminiscent of the 2008 crisis was in the making, potentially dragging other European banks and global markets down with it.
Deutsche Bank chief executive John Cryan managed to lift the mood with a letter to staff on Friday insisting the bank was not at risk. "At no time in the last two decades has Deutsche Bank been as safe as it is today," Mr Cryan wrote. "In a situation like this, the most important factor is our liquidity reserves. Currently they still amount to more than €215 billion (S$329 billion).
"This is an extremely comfortable buffer... (and) proof of how conservatively we have planned.
"There is therefore no basis for this speculation. Nor can uncertainty about the outcome of our litigation cases in the US explain this pressure on our stock price, if we take the settlements of our peers as a benchmark."
The bank has suffered for months from perceptions of a weak capital base. In June, it flunked the US Federal Reserve's stress test.
A month later, Deutsche was among the worst performers in a European Banking Authority stress test, although Mr Cryan insisted the exercise had demonstrated the institution's resilience to future crises.
A settlement with the US authorities of US$5.4 billion would be just shy of the total Deutsche Bank has set aside in provisions for outstanding legal actions.
CMC Markets analyst Jasper Lawler said that improved match of figures "may make a rights issue more palatable and makes a government bailout much less likely".
Still, the US toxic mortgage-securities case is just one of 8,000 legal challenges burdening Deutsche Bank. An investigation by New York regulators over allegations of money laundering at its Moscow office looms.