Europe’s banking woes are inherently political

Julian Harris
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Deutsche Bank has been asked to pay a massive $14bn fine by the US Department of Justice (DoJ)
Deutsche Bank has been asked to pay a massive $14bn fine by the US Department of Justice (DoJ) (Source: Getty)

We live in a time of political absurdity. At home, the opposition is led by an unreconstructed 1970s-style Marxist who spent the last three decades as a backbench irrelevance.

Throughout continental Europe, extremist parties remain worryingly popular. And across the pond, there is a genuine threat that Donald Trump, a dangerously reactionary authoritarian megalomaniac, could get hold of the keys to the White House.

Amid this circus, it is tempting to yearn for more predictable, centrist politicians and regulators. However, events of the last week remind us that they, too, are capable of wreaking havoc.

The market mayhem surrounding Deutsche Bank’s share price, and that of other global financial stocks, has its genesis in the leaking of the US Department of Justice’s initial proposal for the German lender to pay a whopping $14bn fine for mis-selling mortgage-backed securities.

Read more: Why is Deutsche Bank in such trouble?

The figure, relating to the bank’s practices between 2005 and 2007, was absurdly large and sent shivers through the financial sector (many other banks are braced for DoJ fines for the same alleged offence). It raised eyebrows partly due to its size, but also due to its timing (closely following, and matching, Brussels’ tax attack on Apple) and the unedifying fact that it was leaked.

Of course the final figure will not be anywhere near $14bn (a $5bn deal could be reached this week) but the episode has brought the state of Europe’s fragile banking system to the forefront of people’s minds. The continent’s financial giants are stuck in a rut. The ECB’s ultra-loose policies have made it near-impossible to make money, while mega-fines continue to take their toll. Meanwhile, regulators are imposing extremely high capital buffer requirements, with reports last week suggesting that “Basel IV” will unfairly impact Europe’s banks and thus prompt another trans-Atlantic rift.

Read more: Germany forced to deny Deutsche Bank bailout plans

Banker-bashing may still be a popular pastime in the US and Europe alike, but the authorities – especially stateside – need to understand the considerable danger of pushing lenders towards another crisis. A healthy financial sector is crucial to the world's economic prosperity and should not be endangered by heavy-handed politicians and regulators engaged in geo-political squabbling.

City A.M.'s opinion pages are a place for thought-provoking views and debate. These views are not necessarily shared by City A.M.

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