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Deutsche CEO says low rates to ruin financial system in long term

The record-low interest rates will destroy the European financial system in the long term, Deutsche Bank AG CEO Christian Sewing has warned.

This creates a competitive disadvantage of about $40 billion for European banks compared to U.S. rivals, Sewing said at the Handelsblatt Banking Summit in Frankfurt, Germany, on Sept. 4.

The low rate environment is impeding European lenders' ability to invest in innovation, while U.S. rivals invest huge amounts in technology.

European banks have to pay a negative 0.4% interest rate for deposits held by the central bank every year. The sector has called on the ECB to help ease their cost burden by introducing a tiering system for deposit rates, charging different levels of excess cash held at different rates.

Measures such as a tiered deposit rate are necessary to mitigate the negative impact of the low-rate environment on banks, but this still does not solve the main issue, Sewing said. Banks have to do whatever they can to become more resilient, albeit in a challenging environment because stability has never been more important for the sector, he said.

Sewing highlighted digitalization as essential for achieving future growth and ensuring Europe's position in a world where the balance of power is rapidly shifting. The U.S.-China race is in full swing, especially in the area of technology.

Digitalization is a common responsibility of all society, state and businesses, he said. European states must invest in better tech education, research and data centers, while companies must invest in innovation, he said. As for banks, they need to digitize products and also provide companies with loans and access to the stock market to do their part to support tech development.

Europe may lose out if it does not use the chances created by digitalization, Sewing said. In the short term, Europe and its banks need to tackle three big challenges — stabilize the economy, take advantage of all opportunities presented by digitalization, and contribute to the preservation of societal integrity, Sewing said.

A disorderly Brexit is among the main risks for the European economy, according to Sewing. In Italy, the formation of new government is welcome news but it does not mean economic and financial issues have been solved, he said. Outside Europe, sovereign debt levels remain a worry with Argentina slipping into a new financial crisis, he said. Major geopolitical risks such as the protests in Hong Kong and the escalating trade conflict between the U.S. and China are also likely to affect Europe, Sewing said.