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Market Challenge: All Eyes On Deutsche Bank

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IMF chief Christine Lagarde

"The focus of investors has shifted from the level of capital to the business model, and that is why banks are under pressure", said Peter Dattels, deputy director in the I.M.F.'s capital markets division.

Germany's largest lender has been engulfed by a crisis of confidence after the U.S. Justice Department said it should pay up to US$14 billion to settle claims that it missold U.S. mortgage-backed securities before the financial crisis.

Dattels, who was speaking at a presentation of the IMF's report on global financial stability, added that German authorities are closely monitoring Deutsche's health and that the European financial system remains resilient.

International Monetary Fund 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.

But in a new assessment of global financial stability released on Wednesday, the International Monetary Fund said European banks need "urgent and comprehensive action" to address legacy non-performing loans and bloated, inefficient business models that threaten to cripple them with too-low profits. Among those in attendance will be Deutsche Bank's chief executive, John Cryan.

Shares fell to an all-time low last week on concern about the future of the bank.

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.

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German banks have found their profits squeezed by the European Central Bank's (ECB) ultra-low interest rates.

"Inefficiencies can no longer be tolerated", he said.

"Since the crisis, enhanced regulation and oversight have strengthened banks' capital and liquidity buffers, making them safer".

"European banks need to become more efficient".

In advanced economies, 25 percent of banks, holding $11.7 trillion in assets, would remain weak even in a cyclical recovery, it said.

While many say increases in regulatory capital played a role in weak profitability, the overall return on equity fell by 11.4% for large European banks and 3% for USA banks.

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