Deutsche Bank AG (NYSE:DB) (ETR:DBK) kept billions of dollars of loans to other banks off its balance sheet by offsetting them with other assets even though the loans had not yet been paid, Bloomberg’s Elisa Martinuzzi and Vernon Silver report.

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Between 2008 and 2011 Deutsche Bank AG (NYSE:DB) (ETR:DBK), the largest bank in Germany and one of the largest in the world, made loans to Italian bank Banca Monte dei Paschi di Siena SpA (BIT:BMPS) and Brazilian bank Banco do Brasil SA (BVMF:BBAS3) totaling $3.3 billion but did not include these transactions in financial reports sent to investors. Similar loans were made to Dexia SA (EBR:DEXB) (ETR:DXB) (FRA:DXB), TT Hellenic Postbank SA( FRA:P7O), National Bank of Greece (ADR) (NYSE:NBG), and Qatari bank Al Khaliji.

These loans are part of $395.5 billion in liabilities that Deutsche Bank AG (NYSE:DB) (ETR:DBK) has offset with other liabilities, an amount equal to 19 percent of the company’s total reported assets. Deutsche Bank spokesperson Kathryn Hanes says that these accounting practices are proscribed by law and that Deutsche Bank’s actions are in line with the letter and intention of financial regulations. She also claims that this information does not impact the company’s financial health or key financial ratios.

Deutsche Bank – How netting obscures loans

Secured loans usually entail a company providing collateral in exchange for cash that a bank has on hand, and the collateral is held until the loan is repaid in full. Instead, Deutsche Bank AG (NYSE:DB) (ETR:DBK) sold its collateral, government bonds in this case, to come up with the cash to make the loan, leaving it with an obligation to return the bonds.

Under the terms of the agreement Deutsche Bank AG (NYSE:DB) (ETR:DBK) was only obligated to return the ‘cheapest-to-deliver’ equivalent of the bonds, protecting it from devaluation but leaving the bank exposed to default. This maneuver effectively put a short on the government bonds, exposing Deutsche Bank to greater risk than if it had simply held the bonds for the duration of the loans. Deutsche Bank then sold credit-default insurance to investors, recording an immediate €60 million profit at the outset of the Monte Paschi deal.

Lack of transparency raises difficult questions

Monte Paschi is currently being investigated by Italian prosecutors for using the loan to hide losses, and both Banca Monte dei Paschi di Siena SpA (BIT:BMPS) and Banco do Brasil SA (BVMF:BBAS3) continued to report ownership of the bonds that were used as collateral since they were due to receive them back. Prosecutors have not alleged any wrongdoing on the part of Deutsche Bank AG (NYSE:DB) (ETR:DBK) in this case.

However, analysts say that netting makes it difficult to accurately gauge the company’s financial health and that it goes against the spirit of financial regulations by hiding the real amount of risk that Deutsche Bank has on its books.

This isn’t the first time Deutsche Bank AG (NYSE:DB) (ETR:DBK) has been accused of obscuring financial information this year. In the aftermath of the Libor scandal the bank was previously investigated for possibly hiding $12 billion in losses by incorrectly valuing its derivative portfolio.