September 27, 2016 / 3:37 PM / 3 years ago

Political support for 'dinosaur' banks must end: Bundesbank's Dombret

VIENNA (Reuters) - Political support for Europe’s oversized banking sector must stop, a top official at Germany’s central bank said on Tuesday, comparing banks to dinosaurs facing a threat of extinction.

A sign is seen outside the headquarters Germany's federal bank Deutsche Bundesbank in Frankfurt, February 4, 2013. REUTERS/Kai Pfaffenbach

Concerns about German banks are mounting, with top lender Deutsche Bank (DBKGn.DE) forced to reassure investors this week that it did not need government support to cover a possible U.S. fine and about low interest rates eating into its profits.

Andreas Dombret, the Bundesbank board member in charge of supervision, said banks’ deficiencies should be tackled and the sector should be allowed to shrink further.

“Political support for the banking sector must finally come to an end - something that unfortunately I’ve only seen to a limited extent,” he told an audience in Vienna.

“Crucially, we cannot discuss away the structural deficiencies of the banking sector.”

Comparing banks to dinosaurs, Dombret said they should not hope size would save them from extinction due to threats such as a reduction in the overall amount of debt in the economy, competition from financial technology companies, an aging population and low interest rates.

“A lesson from the era of the dinosaurs is still true today: size is not a goal in itself,” Dombret said. “Neither is the size of a single bank a guarantee for their survival, nor can the size of the sector as a whole protect it from crises.”

Simply trying to adapt to the new environment may not always be enough, he argued.

“So far, the emphasis has been put too strongly on the lack of adjustment in business models,” Dombret said. “Perhaps the answer is that the banking sector has simply become too large.”

Deutsche Bank shares hit a record low on Tuesday and state-backed lender NordLB scrapped plans for a 500 million euro ($560 million) bond sale, underlining investor concern about the health of the financial industry in Europe’s largest economy.

Dombret said the situation of German and Austrian banks was not one of acute concern but cautioned they should not slow down efforts to become safer and more profitable.

While further consolidation in Germany was to be expected, Dombret argued that competitive pressures were already below average by international standards when measured by their ability to set prices.

Reporting by Francois Murphy; Writing By Francesco Canepa in Frankfurt; Editing by Hugh Lawson

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