Finance chiefs warn of economic stability risks

Fresh fears come in the wake of Deutsche crisis, plunge in British pound and weak global growth

Chairman of euro zone finance ministers Jeroen Dijsselbloem speaks at the IMF and World Bank annual meetings.
Chairman of euro zone finance ministers Jeroen Dijsselbloem speaks at the IMF and World Bank annual meetings.PHOTO: BLOOMBERG

WASHINGTON • World finance leaders issued fresh warnings about economic stability risks amid worries about a massive US fine for Deutsche Bank destabilising Germany's largest bank, a sharp fall in the British pound and weak global growth.

Mr Jeroen Dijsselbloem, the chairman of euro zone finance ministers, said that the United States Department of Justice's demand that Deutsche Bank pay US$14 billion (S$19 billion) for its role in the sub-prime mortgage crisis is too big and will undermine financial stability.

"These kinds of fines are completely oversized, and they are damaging to financial stability," Mr Dijsselbloem told Reuters in an interview on the sidelines of the International Monetary Fund (IMF) and World Bank annual meetings in Washington.

Deutsche Bank has been struggling to overhaul its business model that is built around trading activities that have become much less lucrative under new regulation enacted since the 2008-2009 financial crisis. "Here is a financial institution which needs to be restructured and strengthened, and needs to bring in new capital and we cannot then have an even bigger amount of capital being pulled out by the American authorities. That is really counterproductive to put it mildly," Mr Dijsselbloem said.

US Treasury Secretary Jack Lew declined to comment specifically on Deutsche Bank, but said that Europe needed to do more to ensure that its banks were adequately capitalised and ready to deal with future risks to stability.

"We've also been clear that Europe has not done as much as the United States and this is a case where sometimes doing more is better," Mr Lew told a news conference, referring to new capital requirements and regulations imposed on US banks after the last crisis.

German Finance Minister Wolfgang Schaeuble earlier said that a new financial crisis could not be ruled out and that the IMF is backing up his long-standing warnings about the risks to the banking system from "ultra-loose" monetary policy.

The British pound lost more than 10 per cent of its value early on Friday in a massive "flash crash" that underscored concerns about Britain's economic stability as it starts to negotiate an exit from the European Union (EU).

Mr Dijsselbloem said the sharp drop reflected investor disappointment in what he views as the British government's moves towards a "hard Brexit" - a divorce that would leave Britain without the full trade and economic benefits of full participation in the market of nearly 500 million people.

But British Finance Minister Philip Hammond told reporters that no decisions had been taken on Britain's negotiating stance after Prime Minister Theresa May said the two-year negotiating process would start next March.

Mr Hammond said the pound's drop earlier in the week was due to Mrs May's confirmation that Britain would definitely leave the EU and was "part of a pattern of turbulence that I would expect to see".


A version of this article appeared in the print edition of The Sunday Times on October 09, 2016, with the headline 'Finance chiefs warn of economic stability risks'. Print Edition | Subscribe