WASHINGTON International Monetary Fund officials sought to play down the risk of an imminent crisis over Deutsche Bank (DBKGn.DE) on Wednesday and expressed confidence that German and European authorities were working to ensure stability.
Questions over the health of Germany's largest lender loomed large over the start of the IMF and World Bank annual meetings in Washington, dominating a news conference on risks to global financial stability.
Deutsche has been engulfed by a crisis of confidence since the U.S. Department of Justice last month demanded up to $14 billion to settle claims that Deutsche missold U.S. mortgage-backed securities before the financial crisis. The amount is viewed as a major drain on its capital.
Peter Dattels, the IMF's markets and capital markets deputy director, said Deutsche Bank was systemically important and needed to revise an outdated business model that has left it earning too little profit in an era of very low to negative interest rates.
"Deutsche Bank ... is among banks that need to continue to adjust to convince investors that its business model is viable going forward and has addressed the issues of operational risk arising from litigation," Dattels told reporters.
He added: "We are confident that the German and European authorities are monitoring the situation and working to ensure the financial system remains resilient."
IMF officials speaking on condition of anonymity said that while the institution was concerned about Deutsche's situation, they did not want to trigger further market disruptions with specific criticisms.
Dattels' comments came as the IMF released a new global financial stability report warning that European banks need "urgent and comprehensive action" to address legacy non-performing loans and inefficient business models that will not allow them to earn enough profits to stay viable and support economic growth.
Deutsche has seen its share price recover in the last few days amid reports that it may be able to negotiate a lower U.S. fine and on supportive statements from clients and rival banks.
Among those in attendance at the Washington meetings, which also include those hosted by the Institute of International Finance banking trade group, will be Deutsche Bank's chief executive, John Cryan, and German Finance Minister Wolfgang Schaeuble.
It was unclear whether Schaeuble planned to speak with U.S. regulators or the U.S. Treasury Department about the matter.
Jacob Funk Kierkegaard, a senior fellow at the Peterson Institute for International Economics, said that it would be "politically risky" for Schaeuble to try to intervene on Deutsche's behalf in the run-up to German elections in 2017.
"They would also like to see this just go away, and for them to preemptively get into the spending of political capital I find that highly unlikely," Kierkegaard said.
LONG LOW-RATE ERA
Dattels said the message from IMF officials on banks at the meetings is that the era of low and negative interest rates "could last a long, long time," and European banks need to adjust to that.
"Inefficiencies can no longer be tolerated," he said. "We can no longer wait for a cyclical recovery, so let's do the hard work now, and get the system in a position that it can continue to support the economic recovery through lending and maintain its resilience."
Banks in Europe are still choked with some 900 billion euros in bad debt ($1.01 trillion) left over from the last financial crisis, Dattels said, adding that many banks have too many branches collecting too few deposits, with costs far above those of U.S. rivals. Even if a cyclical recovery were to gain steam in Europe, profits would be too low for many banks to regain health and resolve problem assets.
The IMF's stability report recommended that European regulators and policymakers strengthen insolvency regimes to allow banks to foreclose on legacy non-performing loans more quickly, while weaker banks need to be consolidated into stronger ones and costs need to be reduced.
Adoption of these measures, along with regulatory changes that boost confidence without a massive increase in capital requirements, could boost European banks' profitability by $40 billion annually. Combined with a cyclical recovery, they could boost the share of European banks considered "healthy" to 72 percent from 17 percent last year, the report said.
(Reporting by David Lawder; Additional reporting by Lesley Wroughton; Editing by Leslie Adler, Andrea Ricci and Frances Kerry)