More reforms, dose of inflation prescribed for Europe's sickly banks

European Central Bank President Mario Draghi is confident that unprecedented monetary policies - including massive bond purchases and below-zero interest rates - can stoke eurozone inflation within two years.

On the sidelines of the International Monetary Fund's annual meetings in Washington, he said Saturday that the unconventional measures to stave off deflation should lift price increases to the central bank's near-2-per-cent annual goal by early 2019.

European banks, which have been a consistent source of concern at IMF meetings since the 2010 eurozone sovereign debt crisis, would welcome a restoration of modestly rising prices.

The world economy is mired in slow growth, which is even more tepid in rich countries, and European banks have struggled to turn profits in an environment of extremely low interest rates.

The current poster child for Europe's banking woes is German financial giant Deutsche Bank.

The bank is known to be negotiating a multi-billion-dollar settlement with US regulators over its participation in mortgage-backed securities.

Since last month investors have been dumping the company's shares amid reports that Deutsche Bank is studying ways to raise capital.

Draghi himself emphasized that there were great differences among European banks, but insisted that few were short of capital. The sector's average capitalization jumped from 9 per cent to 13 per cent during 2012-15.

Draghi conceded that the banks still have too many bad loans on the books, and many need updated business models amid scarce profits.

German Finance Minister Wolfgang Schaeuble said Saturday that he "most certainly did not" discuss Deutsche Bank in meetings with US financial regulators and Treasury Secretary Jack Lew.

During the week in Washington, in a television panel interview which included IMF chief Christine Lagarde, Schauble said he was, implausibly, surprised to be asked about Deutsche Bank's woes, and dodged the question.

Michael Kemmer, chief executive of Germany's banking federation, insisted Saturday in Washington that German financial institutions are fit for global competition, despite being squeezed by "regulation and low interest rates."

The IMF's 25-country steering committee, which advises the Washington-based crisis-lender's Board of Governors, said in a communique Saturday that countries must "ensure that the financial sector is robust enough to support growth and development."

The communique called for monitoring of potential financial stability risks including those "associated with prolonged low or negative interest rates."

Netherlands Finance Minister Jeroen Dijsselbloem, who presides over the Eurogroup of eurozone finance ministers also called for the eurozone to complete its banking union and implement "a better functioning capital market union."

Better banking would improve investment and eventually economic growth, which would jump start the inflation and higher interest rates that the banks themselves need to start making money again.

Last update: Sun, 09/10/2016 - 09:54

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