Deutsche Bank needs to convince investors that its business model is viable in an extremely low-rate environment, a senior International Monetary Fund official (IMF) has said amid market concerns about the financial strength of Germany's largest lender.

“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,” said Peter Dattels, the IMF’s monetary and capital markets deputy director.

Deutsche Bank has been engulfed by a crisis of confidence since the US’s justice department last month demanded up to $14 billion (€12.5 billion) to settle claims that Deutsche mis-sold US mortgage-backed securities before the financial crisis, an amount seen as a major drain on its capital.

Mr Dattels said German authorities were closely monitoring Deutsche’s health and that the European financial system remained resilient.

However, in a new assessment of global financial stability released yesterday, the IMF said European banks needed “urgent and comprehensive action” to address legacy non-performing loans and bloated, inefficient business models that threaten to cripple them with too-low profits.

Weakening stability

Weak profitability in a low-interest-rate, low-growth environment could erode European banks’ buffers over time, undermining their ability to support an economic recovery and weakening stability.

While the IMF report does not single out banks by name, Deutsche's health is expected to be a key topic of discussion when commercial bankers, central bankers, finance ministers and other policymakers converge in Washington this week at meetings of the IMF, the World Bank and the Institute of International Finance, a global trade group. Among those in attendance will be Deutsche Bank chief executive John Cryan.

“In the euro area, excessive non-performing loans and structural drags on profitability require urgent and comprehensive action,” the IMF said in the report. “Reducing non-performing loans and addressing capital deficiencies at weak banks is a priority.”

The report said many European banks were still struggling with high levels of impaired assets and low profitability due to loan problems left over from the last financial crisis. Even if a cyclical recovery were to gain steam in the region, profitability would be too low for many banks to regain health and resolve problem assets, it said.

The report recommended that European regulators and policymakers strengthened insolvency regimes to allow banks to foreclose on legacy non-performing loans more quickly, while weaker banks needed to be consolidated into stronger ones and costs needed to be reduced.

– (Reuters)