I. European Financial Integration and Banking in Germany

I. European Financial Integration and Banking in Germany Prof. Dr. Detlev Hummel Chair of Banking and Finance Potsdam University, Germany Prof. Hummel, PoSA July 2008 1

Bank system in Germany ECB/ German Federal bank with state branches Universal banks Special purpose bank Private commercial banks Cooperative banks Public-sector banks Private banks Publicsector banks - big branch -Credit cooperatives banks - Regional- and (Volks- and other Raiffeisencommercial Banken) banks - Co-operative - private bankers Central -Branches of institutions foreign banks Postbank - Savings banks - Central giro institutions - Private mortgage banks - Ship mortgage banks - CI with special purposes - Investment companies - Private building and loan associations - guarantee banks - Residence firms with savings collections -Public Mortgage banks -CI with special functions -Public Building and loan association Prof. Hummel, PoSA July 2008 2

Bank system in Germany Prof. Hummel, PoSA July 2008 3

Bank system in Germany Prof. Hummel, PoSA July 2008 4

Bank system in Germany Quelle: Hartmann-Wendels/Pfingsten (2007), S. 28 Prof. Hummel, PoSA July 2008 5

Bank system in Germany Quellen: Bankenstatistik 04/08 Prof. Hummel, PoSA July 2008 6

Bank system in Germany In Deutschland sank die Bankstellendichte von 2004 bis 2005 um 3%, und von 2005 bis 2006 war abermals ein Rückgang von 9 % zu verzeichnen. Aktuelle Zahlen aus dem Ausland sind nicht verfügbar. Quelle: Bundesbank, Bankstellenbericht 2006, S.12 Prof. Hummel, PoSA July 2008 7

Bank system in Germany Quelle: Bundesbank, Bankstellenbericht 2006, S.10 Prof. Hummel, PoSA July 2008 8

Bank system in Germany Prof. Hummel, PoSA July 2008 9

Bank system in Germany Quelle: Monatsberichte der Bundesbank zur Ertragslage deutscher Kreditinstitute Prof. Hummel, PoSA July 2008 10

Bank system in Germany Prof. Hummel, PoSA July 2008 11

Bank system in Germany Quelle: Deutsche Bundesbank (2006) Prof. Hummel, PoSA July 2008 12

Bank system in Germany Quelle: Deutsche Bundesbank (2006) Prof. Hummel, PoSA July 2008 13

Bank system in Germany Spareinlagen insgesamt Spareinlagen mit dreimonatiger Kündigungsfrist Spareinlagen mit Kündigungsfrist von über 3 Monaten Quelle : Deutsche Bundesbank Prof. Hummel, PoSA July 2008 14

Universal Banks They offer many of the types of banking business referred to in Section 1 of the German Banking Act (KWG) Classic banking business includes in particular: Deposit and lending business, and Securities business Other banking services (e.g. saving through investment funds, investment in building and loan savings contracts). Prof. Hummel, PoSA July 2008 15

Commercial Banks: Big Banks Big Banks: Deutsche Bank, Dresdner Bank and Commerzbank, HypoVereinsbank Typical features: International orientation, Predominant position in underwriting business and corporate lending. They have substantial shareholdings in non-banks. They own subsidiaries which offer insurance, building and loan association and investment banking products. (exception: Dresdner Bank is owned by Alliance Group) They provide their services through a nationwide network of branches and their direct banking subsidiaries. Prof. Hummel, PoSA July 2008 16

Saving banks Saving banks are usually run as public-sector banks, i.e. they are owned by local or regional authorities. Typical features: Regional Principle: They normally operate in a particular region and rarely compete with other saving banks. predominant role in deposit business They hold a large share of the market for saving deposits. They offer the full range of banking services. Prof. Hummel, PoSA July 2008 17

Credit Co-operatives The credit cooperatives sector is comprised of a large number of small financial institutions, their regional institutions and a central bank. Typical features: business similar to that conducted by the savings banks customer base: small business and agricultural, also compete with all other banks for a share of the general public Prof. Hummel, PoSA July 2008 18

Equity Capital from German Banks (in (in% of of balance sheet total) 6,50% 6,00% 5,50% 5,00% 4,50% 4,00% 3,50% 3,00% 1999 2000 2001 2002 2003 2004 2005 Private Commercial Banks Saving Banks Credit Co-operatives Prof. Hummel, PoSA July 2008 19

Specialist banks provide only specific banking services operate either only in certain lines of business or through special distribution channels include mortgage banks, building and loan associations, direct banks, investment companies and banks with special functions are often affiliated to universal banks through equity or contractual ties Special bank services are often offered by universal banks as well Prof. Hummel, PoSA July 2008 20

Private Mortgage Banks Typical features: provide long-term loans and fund themselves by issuing bonds, which are secured in particular by mortgages and real property Their loans are used to finance house-building and house improvements. They are subject in their operations to the stringent provisions of the Mortgage Bank Act. Prof. Hummel, PoSA July 2008 21

Market Capitalization in in % of of Gross Domestic Product Quelle: Bloomberg Quelle: Ernst & Young: Finanzierungsstrukturen im deutschen Mittelstand - Wege zum Wachstum, 2005 Prof. Hummel, PoSA July 2008 22

Introduction Banking systems systems in in Europe Europe (I) (I) Country Major bank sectors Central bank Supervision DepositedInsurence Belgium Private banks Public-sector special credit institutes Sparbanken (savings banks) ECB Banque Nationale de Belgique Commission Bancaire (legal independent bank commission) Yes Denmark Banken (commercial banks) Savings banks Credit institutes Finance institutes Danmarks Nationalbank Aufsichtsamt für das Finanzwesen für Handelsbanken und Sparkassen, Industrieministerium für Realkreditinstitute Yes Finland Commercial banks savings banks co-oprative banks ECB Suomen Pankki (Finlands Bank) State finance control In connection with the Central bank Yes France Banks (Banks in narrow Sense) co-oprative banks savings and Postal savings banks Finance institutions with special branches Special purposes institutions ECB Banque de France Commission Bancaire, supported bybanque de France (three other Institutions for regulation) Yes Greek Commercial banks Special credit institutions Bank of Greek Central bank Yes Prof. Hummel, PoSA July 2008 23

Country Major bank sectors Introduction Banking systems systems in in Europe Europe (II) (II) Central banks supervision Deposit insurance UK Clearing Banks Merchant Banks Finance Houses Savings / Mortgage banks Bank of England Central bank Yes Ireland Associated Banks Non-associated Credit institutions (Merchants, Industrial banks) Savings / Mortgage banks ECB Central Bank of Ireland Central bank Yes Italy Public Credit intitutes Major banks and other private Credit institutes savings and Mortgage banks Agricultural - und Trade union institutions ECB Banca d Italia Central bank Yes Luxemburg State owned savings banks and banks as universal credit institutes Postal savings banks Specialized Credit istitutions ECB No Central bank, State own bank and Clearing house for Credit Institutes are the state owned savings bank Institute Monétaire Luxembourgeois (IML) Yes Prof. Hummel, PoSA July 2008 24

Länder Major bank sectors Introduction Banking systems systems in in Europe(III) Central bank supervision Deposit insurance Netherlands Austria General Banks (Privat banks) savings banks Stock exchange Mortgage banks Stock exchange/ Private banks Savings bakns co-oprative banks State-owned-Mortgage banks Building savings banks Other institutions ECB De Nederlandsche Bank N. V. ECB National Bank of Austria inc. Central bank Federal Ministry of finance in concetion with National Bank of Austria inc. Yes Yes Portugal Sweden Deposited banks Investment banks savings banks Specialized Credit institutions Merchants banks savings banks co-oprative banks ECB Banco de Portugal Sveriges Riksbank Central bank Finanzkontrollbehörde Yes Yes Spain Private banks savings bank co-oprative banks Public Credit institution with special purposes ECB Banco des España Central bank and Ministry of Finance and Economic Yes Prof. Hummel, PoSA July 2008 25

Bank loans in the manufacturing industry in Germany in % of total assets below 2,5 Mio. < 25 Mio. > 25 Mio. Total Limited liability company Business partnership Individual enterprises 28,5 24,6 5,4 6,1 40,3 31,4 18,4 20,4 56,5 48,8 8,1 21,6 Total 35,9 27,8 7,1 8,2 (nach Dr. Manfred Scheuer, Deutsche Bundesbank, November 2002) Prof. Hummel, PoSA July 2008 26

Turn-over of of Corporate Bonds from from domestic Companies --International Comparison Quelle: Bank for International Settlements Prof. Hummel, PoSA July 2008 27

The Market of of Funded Issuances Prof. Quelle: Hummel, Ernst & PoSA Young: July Finanzierungsstrukturen 2008 im deutschen Mittelstand - Wege zum Wachstum, 2005 28

Market Volume of of different Financing Forms --International Comparison Quelle: Ernst & Young: Finanzierungsstrukturen im deutschen Mittelstand - Wege zum Wachstum, 2005 Prof. Hummel, PoSA July 2008 29

Development of of Turnover: Companies with with classical pattern of of Finance and and Companies with with sophisticated pattern of of Finance Companies with classical pattern of Finance (32,5 % of interviewed Companies) Companies with sophisticated pattern of Finance (65,8 % of interviewed Companies) Total Turnover in Millionen 19.000 18.800 18.600 18.400 18.200 18.000 17.800 17.600 17.400 17.200 18.801 18.606 Growth Rate 2001-2004 -2,9% 18.500 18.256 Total Turnover in Millionen 140.000 120.000 100.000 80.000 60.000 40.000 120.136 124.836 125.253 Growth Rate 2001-2004 + 8,6% 130.470 17.000 2001 2002 2003 2004 20.000 2001 2002 2003 2004 Quelle: MARKUS: Ernst & Young: Finanzierungsstrukturen im deutschen Mittelstand - Wege zum Wachstum, 2005 Prof. Hummel, PoSA July 2008 30

Utilization of of classical and and alternative Forms of of Financing in in the the survey Classical Forms of Financing 98,3 % Innovative Forms of Financing 67,5 % Clasical Private Equity Instruments Classical Debt Capital Instruments 32,5 % Combination 65,8 % Combination 1,7 % Investor- Models Structured Concepts Mezzanine- Concepts Classical Companies sophisticated Innovative Companies Companies Quelle: Ernst & Young: Finanzierungsstrukturen im deutschen Mittelstand - Wege zum Wachstum, 2005 Prof. Hummel, PoSA July 2008 31

Unternehmen in Brandenburg Finanzierungsalternativen 12.912 Unternehmen Umsatz 1 Mio. 5 Mio. 10 Mio. Gewinnthesaurierung 50 Mio. Bankkredit Einlagen von Gesellschaftern, Familie und Freunden Lieferantenkredit Leasing Factoring 4622 Unternehmen 690 Unternehmen ab 500.000 Umsatz, 50.000 Forderungsvolumen Quelle: eigene Darstellung, in Anlehnung an Richter, Arno (2006): Die Rolle der Banken bei der Mittelstandsfinanzierung, Diplomarbeit am Lehrstuhl für Finanzierung und Banken von Prof. Hummel, Universität Potsdam, S.80. 502 Unternehmen 95 Unternehmen Mezzanine ab 5 Mio. Umsatz, von öffentl.-rechtl. Anbietern 500.000 Finanzierungsvolumen Mezzanine ab 10 Mio. Umsatz, von priv. Anbietern 2 Mio. Finanzierungsvolumen Private Equity ab 10 Mio. Umsatz, 2 Mio. Börsengang ab 20 Mio. Umsatz, Finanzierungsvolumen 25 Mio. Emissionsvolumen ABS ab 75 Mio. Umsatz, 25 Mio. Anleihe ab 150 Mio. Forderungsvolumen Umsatz, 50 Mio. Emissionsvolumen Prof. Hummel, PoSA July 2008 32

Prof. Hummel, PoSA July 2008 33

Parameter/ Value Market structure Comparison of of the the bank and capital market orientated financial system (I) (I) Bank orientated fiancial system Developement status of the financial markets low high importance of buy-outs as policing instruments low high Return assumptions low high Capital market orientated financial system Capital structure of companies Level of internal financing low high Debt/ equity ratio high low Prof. Hummel, PoSA July 2008 34

Parameter/ Value Comparison of of the bank and capital market orientated financial system (II) Creditor structure of companies Bank orientated fiancial system Level of concentration high low Importance of bond financing low great Contingent of bank credits measured by total liabilities high low Owner structure of companies Level of concentration high low Capital market orientated financial system Contingent of commercial banks significant marginal Intercompany capital integration popular unusual Change frequency of control packages low high Prof. Hummel, PoSA July 2008 35

Market capitalization in in percentage of of the the gross domestic product Source: Bloomberg Quelle: Ernst & Young: Finanzierungsstrukturen im deutschen Mittelstand - Wege zum Wachstum, 2005 Prof. Hummel, PoSA July 2008 36

Financial Integration All potential participants in a market for a given set of financial instruments or services are subject to a single set of rules have equal access to his set of instruments and services are treated equally when they operate in the market Prof. Hummel, PoSA July 2008 37

Functional mechanism of of the financial system Deposits Financial intermediaries Loans Depositors/ creditors (especially private households ) Surplusses Securities Acquisition Deficit Investors (especially companies and public authorities) Savings Financial markets Financial resources Prof. Hummel, PoSA July 2008 38

Degrees of financial integration varies between market segments quantitative measure: check the validity of the law of one price a fully integrated market risk-adjusted prices should be equal irrespective of the place of transaction Prof. Hummel, PoSA July 2008 39

Money market nearly full integrated it is a prerequisite for the function of the single monetary policy The euro area has been supported by developments in the payment systems infrastructure The Trans-European Automated Real Time Gross settlement Express Transfer (TARGET) system was established Prof. Hummel, PoSA July 2008 40

The bond markets are nearly as integrated as the money market elimination of exchange rate risks convergence of inflation expectations across the euro area the standard deviations of government bond yield spreads have declined the corporate bond yield spreads have no systematic country components Prof. Hummel, PoSA July 2008 41

The equity market still much more fragmented increasingly homogeneous reactions of stock prices to euro-area-wide factors and news particularly from the monetary policy country effects still have an important explanatory role for the variance of equity returns Prof. Hummel, PoSA July 2008 42

Banks A bank is an enterprise that engages in banking business as a trade or to such an extent that it requires the setting up of a commercially organized business operation. Prof. Hummel, PoSA July 2008 43

Economic functions of banks Banks are referred to as financial intermediaries Banks perform three main functions: offering finance services, investment services and payment services Transformation functions: Lot-size transformation Maturity transformation Risk transformation Prof. Hummel, PoSA July 2008 44

Integration of the European banking markets? degree varies across the various segments of banking business: Cross-border activities have increased significantly in Inter-bank and Whole sale business low degree of integration in the retail banking segment Prof. Hummel, PoSA July 2008 45

Banking business 1. Deposit business 2. Lending business 3. Discount business 4. Financial commission business 5. Safe custody business 6. Investment fund business 7. Incurring an obligation to acquire claims in respect of loans prior to their maturity 8. Guarantee business 9. Giro business 10. Underwriting business 11. Cash card business 12. Electronic money business Prof. Hummel, PoSA July 2008 46

Thank you for your attention! Prof. Hummel, PoSA July 2008 47