LONDON (Reuters) - A Bank of England policymaker charged with overseeing the banking sector said he had big concerns about the risk of British banks being hurt by trouble among their peers elsewhere in the European Union.
Anil Kashyap, a newly appointed member of the BoE's Financial Policy Committee, made the comments in a submission to a British parliamentary committee.
"I am particularly worried about contagion from stress coming from the European banks and whether there might be linkages -- perhaps indirect -- between them and the largest UK banks," Kashyap wrote.
"The weak condition of some of the large European banks worries me most.... We do not really fully understand all the potential channels of contagion that could arise if a major bank on the continent required recapitalization."
His comments went further than the FPC has done about the potential impact on Britain of problems at euro zone banks and could reflect problems at Deutsche Bank <DBKGn.DE>, which faces a $14 billion fine from the U.S. Department of Justice for misselling mortgage-backed securities.
Speaking to lawmakers, Kashyap -- a U.S. academic who previously advised the Federal Reserve and other central banks -- said concerns among investors over Deutsche Bank were about its future profitability, not its current capital.
Kashyap said regulators had to enforce rules but "it does seem a little bit arbitrary as to how big these fines are and why some firms are being asked to pay this much and others are asked that much."
He said the recent sharp fall in sterling had not yet created risks to Britain's financial stability and a further substantial move would not cause concerns about the health of banks. He also said he did not see the country's large current account deficit as a big risk.
Sterling is being hammered on currency markets by fears Britain is heading for a "hard Brexit" that would stop its banks offering services across the European Union and threaten the City of London's role as the world's top financial center.
On Tuesday, financial services minister Simon Kirby said getting the best deal for the City would be an "absolute priority" in trade talks with the European Union, including the ability for banks to hire top talent from across the world.
Nearly 2.2 million people work in financial services in Britain and the sector contributed 190 billion pounds ($240 billion), or 11.8 percent of output, to the British economy in 2014, making it the UK's tax generator.
Kashyap is a professor of economics and finance at the University of Chicago Booth School of Business, and joined the FPC this month for a three-year term.
(Reporting by David Milliken and Michael Holden; Writing by William Schomberg; Editing by Catherine Evans)