U.S. securities regulators have settled allegations that Germany-based bank Deutsche Bank AG misstated the value of a derivatives portfolio and the credit protection it provided at the height of the global financial crisis.

The Washington, D.C.-based U.S. Securities and Exchange Commission (SEC) charged Deutsche Bank on Tuesday with filing financial reports that failed to properly account for the material risk of potential losses on a derivatives portfolio. The bank agreed to pay a US$55-million penalty to settle the charges without admitting or denying the regulator’s findings.

The SEC’s investigation found that Deutsche Bank overvalued a portfolio of derivatives that were purchased as protection against credit default losses. The collateral posted for these positions by the sellers was only 9% of the US$98 billion in purchased protection, the SEC said, noting that this created a “gap risk” that the market value of the bank’s protection could exceed the available collateral and the sellers could decide to unwind the trade rather than post additional collateral.

When the credit markets started to deteriorate in 2008, Deutsche Bank “steadily altered its methodologies for measuring the gap risk,” which reduced the value assigned to the gap risk until it eventually stopped adjusting for gap risk altogether, according to the SEC’s order settling the case.

“For financial reporting purposes, Deutsche Bank essentially measured its gap risk at US$0 and improperly valued its [derivative] positions as though the market value of its protection was fully collateralized,” the SEC said.

However, the bank’s internal calculations at the time estimated that it was exposed to a gap risk ranging from US$1.5 billion to US$3.3 billion, the regulator said.

“At the height of the financial crisis, Deutsche Bank’s financial statements did not reflect the significant risk in these large, complex illiquid positions,” said Andrew Ceresney, director of the SEC’s division of enforcement. “Deutsche Bank failed to make reasonable judgments when valuing its positions and lacked robust internal controls over financial reporting.”