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					Yearbook 2011




   financial cenTre mOdel




                                      frameWOrk fOr THe financial cenTre




                            HOW TO
                                                                 PersPecTives and Trends




                            financial cenTre infrasTrucTure




       Building Blocks of a Financial Centre
                                                                    Contents

We rePreSent tHe FInAnCIAl Centre FrAnkFurt
                                                                     4   Greeting                                         34   Bank Financing: Securing the Future
                                                                         By Volker Bouffier and Petra Roth                     By Markus Beumer

                                                                                                                          38   Paving the Way for Change
                                                                         FInAnCIAl Centre MODel                                By Herbert Hirschler

Regular Members                                                      6   Frankfurt – Partner and Consultant               40   Sound Finances for an
                                                                         for emerging Financial Centres                        Attractive Financial Centre
                                                                         By Dieter Posch                                       By Uwe Becker

                                                                     9   the Financial Centre’s Yellow Pages              42   Solvency II: Supervision Caught in the Crossfire
                                                                         By Lutz Raettig                                       Between Competition and Stability
                                                                                                                               By Wolfram Wrabetz
                                                                    10   Springboard to Germany and europe
                                                                         By Gertrud R. Traud and Stefan Winter
                                                                                                                               FInAnCIAl Centre
                                                                                                                               InFrAStruCture
                                                                         FrAMeWOrk FOr tHe
                                                                         FInAnCIAl Centre                                 44   Hubs of networked Financial Centres
                                                                                                                               By Frank Gerstenschläger
                                                                    12   „It won‘t quite work without ethics.
                                                                         We can‘t regulate everything.“                   48   eco-friendly It from the Cloud
                                                                         Interview with Wolfgang Schäuble                      By Hermann-Josef Lamberti

                                                                                                                          49   Frankfurt’s edge in Digital Infrastructure
                                                                         PerSPeCtIveS AnD trenDS                               By Peter Knapp

Sustaining Members                                                  18   Private Banking Is Here to Stay                  50   Safety through transparency
                                                                         Interview with Herbert Hans Grüntker                  By Stefan Mai
                                                                         and Hans-Joachim Tonnellier
                                                                                                                          52   Modern Auditing needs to Assess Future risks
                                                                    22   Private Banking Has to Be value-oriented              By Philipp Turowski and
                                                                         Interview with Lars Hille                             Claus-Peter Wagner

                                                                    24   Sights Set on the next Generations               54   europe needs a rating Agency
                                                                         Interview with Emmerich Müller                        By Markus Krall

                                                                    26   Middle-tier Companies Making their Way           56   europe Without Borders –
                                                                         to the Capital Markets                                Also for Payment transactions
                                                                         By Jochen Grossmann                                   By Michael Steinbach

                                                                    28   Asset Management – Made in Germany               58   Our Financial Centre Is enhanced
                                                                         Interview with Wolfgang Matis and Thomas Neiße        by transparent Information
                                                                                                                               By Edmund J. Keferstein
                                                                    32   location and Quality: Back to true values
                                                                         By Johann Berger                                 60   Imprint




                                              Version: 03/06/2011
4      GreetinG                                                                                                                                                                                                                                                       GreetinG          5




Ladies and Gentlemen,                                                                                                                        Ladies and Gentlemen,

We all know that the financial economy that has clustered around       national and interna-                                                 The financial economy has recently put some turbulent times be-         Still, it takes more than
Frankfurt and the Rhine-Main region is extraordinarily impor-          tional level. The House                                               hind it. This was the case worldwide, but also here in Frankfurt,       that to regain lost trust.
tant for the State of Hesse. The Hessian government is there-          of Finance, as an ex-                                                 where, besides the European Central Bank, 300 private bank-             As far as the public is
fore determined to continue to develop the Frankfurt financial         ample, is intended to                                                 ing firms, 160 of which are foreign, and numerous related service       concerned, the finan-
centre, which is the hub of European monetary policy. Our fi-          promote close collab-                                                 providers are resident. The past two years must not have been           cial economy will only
nancial centre is respected on account of its stable economic          oration between busi-                                                 easy in this sector, especially given the fact that the actual finan-   pass muster, if, in the
and social structures, which provide reliable legal frameworks,        ness and science. All                                                 cial crisis was trailed by a severe crisis of trust among customers.    course of its activities,
outstanding infrastructure as well as great potential in terms of      these strong points                                                                                                                           it pays close attention
customers and business. Frankfurt‘s strong points include its          that make up the                                                      An entire branch of industry, previously widely respected for its       not only to business-
qualified employees, its strong economy, its powerful capacity         Frankfurt financial centre, converge in great concentration at        solidarity, was suddenly plunged to the very bottom of the scale        related aspects, but also to the proper functioning of the national
for innovation and its excellent infrastructure – the key factors      the House of Finance, which supports us in our mission. Frank-        of social prestige. The city of Frankfurt suffered along with the       economy as a whole. That is, if it has a human face. If profit is no
in guaranteeing the success of the Rhine-Main region. One top          furt‘s strengths include things like business expertise, excellence   financial industry. How could a crisis of such proportions sweep        longer looked upon as being purely self-serving. Otherwise, never
priority in the state of Hesse‘s governmental policy is to secure,     in the sciences, and the basic infrastructure made available by       over the most important financial centre in continental Europe          again will government be able to channel sums in the billions to-
foster and expand this business location.                              the federal government in terms of buildings and staff, but also      without leaving its mark? This makes me all the more pleased to         wards resolving a banking crisis – any government that did would
                                                                       private sponsors, without whose commitment this institution           hear in recent months that many institutions – in a good many           most likely be digging its own grave.
Frankfurt is not only attractive as a centre of finance. Firms in      would never have been able to exert such influence outside the        cases thanks to state assistance – are already on the rebound,
other sectors, like telecommunications, nanotechnology, phar-          region. I am truly delighted at how successfully all these posi-      or even positively bursting with vitality. The balance sheet figures    The very fact that the “Frankfurt Main Finance” association has
maceuticals or the automobile industry, conduct highly suc-            tive factors have come together here in Frankfurt.                    are sound, in many cases far exceeding what could have been             been in existence for three years now, makes me very optimis-
cessful operations here. Almost a quarter of Hesse‘s economic                                                                                hoped for a year ago.                                                   tic that all this can still be accomplished. This alliance, which, in
power stems from this city. No other city in Germany enjoys            We can build our joint efforts on a sound foundation. Our com-                                                                                addition to the municipality of Frankfurt and the Hessian govern-
such prominence within a federal state. Frankfurt owes this eco-       mon goal is to claim Frankfurt‘s rightful place as a top-notch        This is also good news for Frankfurt, since the city is more tightly    ment, comprises so many financial institutions, and also financial
nomic power to the particular combination of industries it hosts:      financial and research centre among international competitors.        interwoven with its financial centre than any other in Germany          service providers and representatives of academia, is united by
The combination of its financial centre, international airport and     With these goals in mind, the decisive factor will be for us to       or on the European continent. We have the financial industry to         one great goal: Enhancing the Frankfurt financial centre.
reputation as a trade fair location creates a set of conditions not    attract and hold onto the best brains in the business, in order to    thank for a great deal of our cosmopolitanism. Frankfurt’s finan-
found elsewhere in Germany. The opportunities for the Rhine-           secure qualitative growth – growth with potential going forward.      cial economy makes it a magnet for highly qualified employees.          This goal also happens to be the title you have chosen for your
Main region do not solely concern high-power finance, but the          Frankfurt should not only be developed as a hub of the finan-         Work done in the service of the financial sector at Frankfurt’s         yearbook. This is naturally all about the future importance of this
German economy as a whole. Nevertheless, this prominent po-            cial industry, but also as a key agent in the global effort to reg-   education and research facilities has made the city into a cen-         city to the global economy. However, I see this as another sign
sition is also a prerequisite for ensuring that our financial indus-   ulate the financial markets. Here in the State of Hesse, we feel      tre of innovation for an industry whose reach spans the globe. In       that – as global as the reach of an industry may be – it actually
try and economic system are supported by broad consensus               that financial players and government policy makers should act        providing loans, banks help our economy shift into higher gear          does make a difference where you live or work. Just by mak-
in our society.                                                        in unison. The structures we have here at our disposal have the       and provide start-up financing for our enterprises. They help us        ing this clear, a great deal of the trust that has been lost could
                                                                       necessary potential. We are in an excellent position to embark        shape the future.                                                       be regained.
In order to preserve and expand the strengths of this location,        on this mission. Frankfurt today affords foreign and domestic
the Hessian State Government can be counted on as a reliable           players the best possibilities for pursuing their economic activi-
partner of the financial economy in making decisions at both the       ties successfully – and the same will hold true tomorrow.




Volker Bouffier                                                                                                                              Petra Roth
Minister-President of Hessen                                                                                                                 Mayor of the City of Frankfurt am Main
                                                                                                  FINANCIAl CENTRE ModEl              7




Frankfurt – Partner and Consultant
for Emerging Financial Centres
By Dieter Posch




Financial centres in the so-called emerging markets are gaining in importance worldwide. This pre-
sents great business opportunities for the Frankfurt financial centre. Outside Germany, however, only
Frankfurt‘s traditional strong points are well-known. A comprehensive marketing approach provides
a systematic overview of services available and facilitates initial business contacts – particularly with
middle-tier companies.


After remaining relatively stable during the crisis, now is the        Moscow likewise avails itself of the know-how of academ-
time to participate in the global upturn: This is currently one        ics in Frankfurt. Conditions are favourable for expanding co-
of the great challenges facing the Frankfurt financial centre,         operative projects with other financial centres. In this regard,
given the particularly fast pace of economic development in            many foreign contacts already have a firm concept of what
the emerging markets. New financial centres are gaining in             the Frankfurt financial centre has to offer them. When ask-
importance: Two years ago, for example, the Chinese city of            ing visiting experts about the image of the Frankfurt financial
Shenzhen was not even included in the Global Financial Cen-            centre, or inquiring at international conferences, the answers
tres Index (GFCI); it now regularly ranks among the top po-            are the same from Riyadh to São Paulo: The German finan-
sitions. Nonetheless, we do not perceive the momentum in               cial metropolis represents stability and quality work; tech-
these emerging financial centres to be threat for the Frankfurt        nological leadership in payment transactions; reliable, fully
financial centre – quite the opposite: Frankfurt stands to profit      integrated stock exchange trading; and, last but not least,
from it, by positioning itself as a reliable and knowledgeable         sound monetary policy.
partner for setting up financial centres in the emerging markets.
                                                                       Without a doubt, these advantages are among our financial
Know-how from Frankfurt respected the                                  centre‘s significant competitive factors, and it is not for noth-
world over                                                             ing that central bankers from all over the world are often ed-
Frankfurt already has a great variety of ties to emerging finan-       ucated in Frankfurt nowadays. Yet the firmly anchored con-
cial centres, as can be gleaned, for example, from its cooper-         cept of the services Frankfurt offers also has a flip side to it:
ation with the city of Moscow. As a case in point, our partners        Many of the financial centre‘s strong points remain obscure
there are working on establishing a scientific risk management         to potential business partners. This particularly applies to the
institute set up along the lines of the Frankfurt Institute for Risk   great number of middle-tier companies in the financial sec-
Management and Regulation (FIRM) set up by Frankfurt Main              tor, who often provide outstanding service in their respective
Finance. In putting together their own financial centre index,         niches, and whose specialized knowledge could be of
8      FINANCIAl CENTRE ModEl                                                                                                                                                                                                                                  FINANCIAl CENTRE ModEl                                9




                                                                                                                                          The Financial Centre’s                                                                                                   Custo-



                                                                                                                                          Yellow Pages
                                                                                                                                                                                                                                                                    dian

                                                                                                                                                                                                                                           Ex-                                                Card
                                                                                                                                                                                                                                         change                                              Services



                                                                                                                                                                                                                                                                            Govern-
                                                                                                                                          By Lutz Raettig                                                                                             Private &             ment &
                                                                                                                                                                                                                                                      Consumer              development
special interest to foreign business partners. These niches          would preferably link services on offer to specific companies.                                                                                                                   Banking               Finance

range from risk management to virtual datarooms, from cloud          The Hessian Ministry for the Economics has initiated a sys-          Certain strong points of the Frankfurt financial
computing to certificate rating.                                     tematic process in this context.                                     centre are well-known, yet many remain obscured.                                               Insurance
                                                                                                                                                                                                                                                                                          Corporate
                                                                                                                                                                                                                                                                                          Banking
                                                                                                                                                                                                              Transac-                                            Central
                                                                                                                                                                                                              tion Serv.                                                                                         Audit
                                                                                                                                                                                                                                                                  Bank
                                                                                                                                          Bringing Frankfurt’s advantages out into the open
Cataloguing competencies and marketing                               The “Financial Centre Model”, which is now available, and            in a comprehensive way and using them to attract                                                     Investment
                                                                                                                                                                                                                                                                                  Real Estate
                                                                                                                                                                                                                                               Banking,
                                                                                                                                                                                                                                                                                  & Mortgage
them better                                                          which was developed by Frankfurt Main Finance and Roland             new business partners is what the financial cen-                                                     Trading &
                                                                                                                                                                                                                                               Capital
                                                                                                                                                                                                                                                                                  Finance
                                                                                                                                                                                                                                               Markets           Asset
The Frankfurt financial centre has set itself the goal of exploit-   Berger Strategy Consultants and supported by the State of            tre model and its database of companies are for.                                 Informat.                             Management                             Rating
                                                                                                                                                                                                                           Providers

ing its own potential still further and marketing it even more       Hesse, is intended to provide a clear review of services
efficiently. The groundwork has already been laid in this re-        offered at the financial centre. It describes in detail the key      Who has not heard of the Yellow Pages? From A to Z, from
                                                                                                                                                                                                                                                     Consul-
                                                                                                                                                                                                                                                                                  R&D
                                                                                                                                                                                                                                                      ting
gard: Intensive discussions with emerging financial centres          business areas, relationships and interdependencies between          automobile mechanics to the local zoo, they help us master
all over the world, for example with Moscow and China have           individual players and illustrates the relevant value chains. The    our daily lives. Yet where to turn to for support in develop-
already been underway at the Frankfurt financial centre for          objective of the model is to grant foreign partners easy access      ing or improving a financial centre, or even for designing one
                                                                                                                                                                                                                                          IT                    Education                 Transport
years. The Hessian State Government expressly welcomes               to suitable cooperation partners at the Frankfurt financial cen-     from scratch? Here, Frankfurt holds the answer. With the help                                Telecomm.                  People                   Lifestyle

these contacts between financial centres. It regularly makes         tre. This is the way to effectively provide support for local        of the Financial Centre Model, all the players at the financial
these high-end platforms for dialogue available in its own           financial sector companies in establishing initial business con-     centre are mapped out and registered along with their busi-
activities like economic delegation tours. The plan is to fur-       tacts. It is particularly helpful for middle-tier firms, who often   ness models and ties to other players. At the centre of the       All the sections in the model comprise three levels. At the
ther intensify the connection between high-class discussions         do not run their own offices in the respective partner finan-        model stands the central bank, which as a source of liquidity     first level, the market segments themselves are shown along
      and specific initial business contacts in the future. This     cial centres, and who therefore seldom have the necessary            makes the financial system able to function in the first place.   with their mutual interactions. on a second level, the model
              will require and exploit the usefulness of a sys-      contacts at their disposal locally. And this kind of concrete        Regulation and consumer protection are likewise crucial to        shows the respective value chain. And at the third and final
              tematic and complete catalogue of the financial        support ultimately not only gives greater impetus to the Frank-      the system as a whole in that they provide the required de-       level, specific services are described along with relevant
              centre‘s strong points, which at the same time         furt financial centre, it also means sustained enhancement of        gree of stability.                                                companies, information on products and contact details.
                                                                     the entire Rhine-Main economic zone.                                                                                                   The requisite data pool is currently being complied: At www.
                                                                                                                                          All the elements of the financial centre at a glance              frankfurt-main-finance.de/datenbank interested companies
                                                                                                                                          Grouped around these elements are seven market segments:          will find information on how they can place an entry in the
                                                                                                                                          “Private & Consumer Banking”, “Government & development           database. As a result interested foreign partners can browse
                                                                                                                                          Finance”, “Corporate Banking”, “Real Estate and Mortgage          services on offer in a purposeful way – and look up who to
                                                                           Dieter Posch is Minister of Eco-                               Finance”, “Asset Management”, “Investment Banking, Trad-          contact. This also facilitates the efficient planning of delega-
                                                                           nomics, Transport, Urban and Re-                               ing & Capital Markets”, and “Insurance”. These market seg-        tion tours and visits.
                                                                           gional development of the German                               ments in turn avail themselves of a series of services. These
                                                                           State of Hesse.                                                services span everything from research and development to
                                                                                                                                          payment transactions to security deposits. last but not least,    Dr. Lutz Raettig is the Spokesman for
                                                                                                                                          the model also captures support infrastructure, such as IT in-    the Executive Committee of Frankfurt
                                                                                                                                          frastructure, education and training, or telecommunications.      Main Finance and Chairman of the Su-
                                                                                                                                          For example, nowhere near everyone knows that Frankfurt is        pervisory Board at Morgan Stanley Bank
                                                                                                                                          home to Europe’s largest internet exchange point (in terms        AG in Frankfurt. He is furthermore a Mem-
                                                                                                                                          of throughput).                                                   ber of the Frankfurt am Main City Council.
 10   FINANCIAL CENTRE MoDEL                                                                                                                                                                                        FINANCIAL CENTRE MoDEL              11




                                                Frankfurt am Main has more to offer than merely a                   Helaba Landesbank Hessen-Thüringen in collaboration with            Central Bank all have their headquarters in the Frankfurt finan-
                                                lively banking community and quality of life. Thanks                the aforementioned association of foreign banks. The survey         cial centre. This is also in keeping with the opinion of the ma-
                                                to its central location, foreign banks prize the city               consulted foreign banks that have opened up offices for the         jority of the foreign banks in Frankfurt consulted in the survey,
                                                as an ideal base of their operations in Germany                     first time at Germany’s leading financial centre from 2003 on-      a majority that actively participates in the multifarious opera-
                                                and Europe.                                                         wards. In the results, the institutions in question confirmed       tions of the financial industry and frequently collaborates with
                                                                                                                    that this attractiveness stems from key location factors, and       the city’s native credit institutions. Foreign banks attach great
                                                                                                                    that these factors are of special relevance to institutions in-     significant to Frankfurt’s position as a transport hub. Thanks
                                                The Frankfurt financial centre is an attractive location for for-   stalling themselves in Frankfurt for the first time. They include   to its central location in Europe and favourable transport facil-
                                                eign banks. The financial crisis has not changed anything in        the reputation of the financial centre and the German econ-         ities, Frankfurt is a base from which to conduct business reach-
                                                this regard. In fact, the numerous foreign institutions oper-       omy, the proximity to key players in the financial markets, and     ing far beyond the German borders. From the personal stand-
                                                ating in Frankfurt turned out to be a stabilizing factor during     the fact that the city is also a main transport hub.                point of people employed by foreign banks in Frankfurt, good
                                                the crisis. This is borne out by employment statistics as well                                                                          infrastructure and short travel distances are among the city’s
                                                as the number of foreign banks represented in the city. Be-         Increasing significance for and on account of                       further advantages. Finally, Frankfurt scores points on account
                                                tween mid-2008 and mid-2009, Frankfurt banks laid off some          foreign banks                                                       of other bonuses, which include relatively low costs (not lim-
                                                3,500 people in total. Restructuring programmes at domes-           The main argument in favour of foreign banks having a pres-         ited to office space), the city’s cosmopolitan nature and ele-
                                                tic banks were a main contributing factor. In this regard, yet it   ence in Frankfurt is the metropolis’s importance in the world       vated quality of life. Despite favourable assessment of Frank-


Springboard to
                                                seems as if there were no significant job cuts at foreign banks.    of finance. Frankfurt always takes the uncontested num-             furt on the part of foreign credit institutions, those in positions
                                                                                                                    ber-two position behind London in the competition among             of responsibility for the area cannot afford to rest on their lau-


     Germany and Europe                                                                                             European financial centres, and this position even seems to be
                                                                                                                    growing increasingly secure in the wake of the financial crisis,
                                                                                                                                                                                        rels. International competition among financial centres is grow-
                                                                                                                                                                                        ing fiercer by the day, not only in the context of Europe but also
                                                                                                                    thanks to the more conservative lines of business conducted         on the global playing field.
        By Gertrud R. Traud and Stefan Winter
                                                According to the estimates of the Verband der Auslands-             there. The survey results also indicate that the German econ-
                                                banken in Deutschland e. V. (Association of Foreign Banks           omy enjoys an even better reputation than it already did. Ac-       Dr. Gertrud R. Traud is Chief Econo-




                                                                                                                                                                                                                                                              Source: Jochen Günther / BME
                                                in Germany), nearly 40 % of the recent figure of 72,500 peo-        cordingly, it is of crucial importance for foreign banks to be      mist and Head of Research at Landes-
                                                ple employed at the financial centre work for foreign banks.        represented in the largest national economy in Europe. The          bank Hessen-Thüringen. Prior to that, she
                                                The number of foreign banks with their main offices in Frank-       sound performance of the German economy since the end of            was Head of Institutional Equity Strategy
                                                furt has also remained fairly stable, given the magnitude of        the crisis is another important factor: Germany’s above-aver-       at Bankgesellschaft Berlin and European
                                                the financial crisis. The number is only 162 shy of its 2009        age economic growth means growing business potential to             Securities Network Strategy Coordinator.
                                                peak, the number of representative offices has even risen from      companies, which necessarily must be financed and shared
                                                40 to 41. However, this should on no account be interpreted         by banks domestic and foreign.
                                                as meaning that withdrawing institutions have completely
                                                disappeared from the financial centre on the river Main.            Existing community as key factor                                    Stefan Winter is Head of Investment
                                                Several instances involved acquisitions, in the wake of which       The second most important argument on the part of foreign           Banking and Member of the Board at UBS
                                                the business units involved continue to operate in Frankfurt.       banks in favour of being located in Frankfurt is its lively bank-   Deutschland AG and Chairman of the Ex-
                                                                                                                    ing community. This is reflected by the great number of banks       ecutive Board of Verband der Auslands-
                                                The attractiveness of the Frankfurt financial centre to foreign     and other financial service providers there, and by the fact that   banken in Deutschland e. V. (Association
                                                banks was recently confirmed by a survey conducted by               Deutsche Börse, the German Bundesbank and the European              of Foreign Banks in Germany).
                                                                                                         FrameWork For the FInancIaL centre                     13




                          “It won’t quite work without ethics.
                          We can’t regulate everything.”
                          Interview with Wolfgang Schäuble




                          German Minster of Finance Wolfgang Schäuble believes we are already halfway
                          towards creating a new system of financial market governance.




                          Mr. Schäuble, on the subject of reg­         How far along the road are we now?              requirements still need to be created.
                          ulation: Barely three years after the        That depends on whether you’re looking          That’s the main thing. We furthermore
                          Lehman bankruptcy, Germany has               at the measures that have been agreed           need to discuss whether we can come
                          accomplished a great deal in terms           on, or those that have been implemented.        up with and reach agreement on limi­
                          of financial market organization at          In terms of conception, we’re more than         tative legislation for the sake of further
                          the domestic and international level.        halfway there. Basel III, the European su­      reducing the threat of systemic risks.
                          How far are we along the road? Are           pervisory structure, and the resolutions
                          we nearly there, or do we still have a       of the G20 have all made good progress.         Limitative in terms of size …?
                          long way to go?                              In terms of all the things that still need to   Well, adequately determining and effec­
                          We have made good progress and have          be enforced – including Basel III, which        tively regulating an institution’s systemic
                          achieved a great deal. Worldwide, more       will take time – we probably haven’t even       importance is a complex task. It requires
                          has been set in motion than would have       reached the halfway mark, though.               a broad approach that involves not only
                          been dreamt possible a while back. We                                                        comprehensive monitoring of systemic
                          still have a great deal to do, though, if    Among issues still pending resolution           risks, but also greater precautionary
                          we wish to avoid a repeat of the crisis of   at the G20 level are how to handle sys­         measures for those risks. This is what
                          2008. What concerns me is that, as the       temically important financial institu­          we seek to achieve by means of greater
                          recovery picks up, we might run out of       tions (German: Sifis), derivates and            capital requirements and the introduc­
                          steam in learning our lessons. We need       the shadow banking system. Sifis are            tion of the Bank Levy (German: Banken­
                          to make sure we don’t lose our capac­        so large or so networked that they can          abgabe), with which to fund the German
                          ity for further reform. It would be well     blackmail governments into saving               Restructuring Fund (German: Restruk­
                          for us to press on with determination. If    them when problems arise. How can               turierungsfonds). This also includes
                          we do not, we stand to be outpaced by        this problem of an implicit state guar­         enhanced market mechanisms that will
                          future developments – more quickly than      antee be resolved?                              enable participants to exit markets in
Photos: Georg J. Lopata




                          we can or wish to imagine. So we can’t       The first step has already been taken           an orderly way without jeopardizing the
                          afford to let up.                            in Basel. Additional capital adequacy           system as a whole. We also need to
                                                                                                                                                                                                                                                                                                       Photo: Georg J. Lopata
                                                                                                                                             Angela Wefers, Börsen-Zeitung and Hubertus Väth, Frankfurt Main Finance, talking with the German Minister of Finance Wolfgang Schäuble (from the right)




find a way to draw clear lines between        because people happen to be imprudent         to make corrections to free governance         Board. But we shouldn’t throw the baby             everything would grind to a halt. When               London”. Whether we will arrive at a con­
the real economy and the financial econ­      a lot of the time. You could call that mar­   systems. This is after all why they are        out with the bathwater. Where corpo­               we prohibited naked short sales, we pro­             sensus, I don’t know. But one thing I do
omy where derivatives and the shadow          ket failure. The real problem lies in over­   superior. Free governance systems are          rate governance is concerned, those in             ceeded at the national level. We were                know is that we are not going to let up
banking system are concerned. The             estimating human capabilities.                capable of correcting mistakes; others         charge are asked to come up with their             heavily criticised for this. I took this criti­      on this issue where national regulation
question is easier to formulate than the                                                    are not. Now we need to step up the            own set of rules. But if those rules prove         cism very seriously. After carefully weigh­          really makes no sense at all. Regardless
answer, however. Whether large financial      The [Christian Democratic] Union              debate a little. Nor should we assume,         insufficient, then the government has to           ing the pros and cons, we decided to                 of how tedious it’s going to be.
institutions really have to be made into      has a longstanding tradition of deal­         however, that is merely a matter of lack of    help them along.                                   go ahead, because this step forward
commodities dealers, is a question that       ing with economic governance issues.          morals on the part of market participants.                                                        will accelerate the creation of European             Do you think taxpayers would feel
at least deserves to be asked.                What happened to policy debate on             But at the same time, a market organiza­       Germany competes at the global level.              regulations.                                         more fairly treated if a Financial Trans­
                                              economic governance within the party          tion that is solely dependent on partici­      Is the German Federal Government’s                                                                      action Tax were to be imposed?
What was more to blame for the crisis,        on how to deal with the crisis?               pants’ ethical conduct, rather than rules      financial markets policy a good one                Are you betting on Germany spear­                    It would help quite a bit, if the finan­
regulatory failure or mar­                                                                                  and institutions, will tend    for strengthening Frankfurt’s position             heading the movement?                                cial sector made a greater contribution
ket failure?                                                                                                to fail. Of course, it won’t   as a financial centre, or should regu­             You have to always weigh the pros and                to financing the state budgets that, af­
Are those the only possi­          “Free governance sys-                                                    quite work without eth­        lators be concerned about regulatory               cons. In the case of naked short sales,              ter all, have guaranteed that sector year­
bilities? Is not the theory of                                                                              ics either. We can’t regu­     arbitrage?                                         we certainly accelerated European devel­             in, year­out. It would not be altogether a
rational markets a big part         tems with no limits or                                                  late everything. We would      This is a dangerous argument. If abused,           opments. Judging by the state of affairs             bad thing either, if these greater contri­
of the problem? Does it not                                                                                 end up with an inefficient,    the buzzword “regulatory arbitrage” can            at the European Commission back then,                butions were to slightly curb the tendency
overlook the fact that mar­      rules are self-destructive.”                                               prohibitive system. So you     prevent us from learning any lessons               I was particularly under the impression              in the financial markets towards going
ket participants are human,                                                                                 have to find the right bal­    whatsoever. Or from making any kind of             that making the leap forward would be                to far. We used to have the Stock Ex­
and that humans do not                                                                                      ance. A physicist would        decision towards improvement. If new               worth it, to get the ball rolling. That’s why        change Sales Tax (German: Börsenum­
always act rationally? Human beings are       That debate took place, and we drew the       speak of a state of unstable equilibrium       regulatory legislation only meets with             I made that decision in that specific sit­           satzsteuer), but that kind of thing can’t be
susceptible. That’s why economics is a        correct conclusions from it. This is after    that has to be re­achieved over and over.      approval on the condition that it is intro­        uation. Other issues will be handled dif­            done anymore at the national level ­ par­
social science. The discipline has be­        all why we are so stubborn and so com­                                                       duced without loopholes, there will al­            ferently. Take the never­ending debate               ticularly if you don’t have your own cur­
come so intimately associated with math­      mitted in Europe and in the G20 where         In the German Corporate Govern­                ways be some corner in this wide world             on the Financial Transaction Tax: Those              rency. That’s why the smallest unit is the
ematics that nowadays it is understood        regulatory issues are concerned. Any          ance Codex, industry has set up its            where it does not apply. So does that              who advocate introducing it at the global            monetary union zone. I wouldn’t go any
as belonging to the natural sciences. I       economic governance policy has to be          own regulatory system. Does it work?           mean it won’t work? That can’t be right.           level know that in this way, it would never          smaller than that.
venture to question whether this assump­      premised on the assumption that it is in­     It was a good start. But a number of its       So you have to be careful with that argu­          come about. Let’s say at the European
tion is entirely valid. This is why we need   tended for human beings – as flawed as        authors promptly failed to adhere to the       ment. If we avoid any kind of regulation           level, most people would like for all EU             So then you can conceive of a Finan­
regulation – possibly more than we had        they may be. The important thing is the       principles in the Codex – for example as       on the grounds of regulatory arbitrage,            members to participate. But if you sug­              cial Transaction Tax without London?
assumed. Free governance systems with         ability to draw conclusions from failures.    regards the immediate switch from the          the slowest member of the convoy will              gest we limit ourselves to the Eurozone,             I have to admit that the argument against
no limits or rules are self­destructive –     This affords us the opportunity to continue   Management Board to the Supervisory            be the one to set the pace. Ultimately,            then you get “It would be tough without              such a bold step forward carries a
16     FrameWork For the FInancIaL centre                                                                                                                                                                                                                FrameWork For the FInancIaL centre                       17




lot of weight, due to the feared com­            You sometimes ask yourself whether the                                                                                be incorporated into the European su­          (Restrukturierungsgesetz) has passed
petitive disadvantage it would create for        people involved have any idea of how                                                                                  pervisory structure that entered into ef­      into law here. This at least means that
                                                                                                                                                                                                                                                                           “Supervision and
Frankfurt as a business location. But I          ordinary individuals perceive compen­                                                                                 fect on 1 January.                             at the national level we have learned the               parliamentary
think that the odds in favour of a sweep­        sations of that magnitude. Specifically,                                                                                                                             right lessons. Were there to be a “next
                                                                                                                                                                                                                                                                          responsibility must
ing European regulation would be bet­            we did two things: First, as per the rec­                                                                             When will this work be presented for           time” ­ hopefully there never will, but it
ter, were we to move ahead with de­              ommendations of the Financial Stability                                                                               public scrutiny?                               cannot ultimately be ruled out with abso­              reside with the
termination in the Eurozone – perhaps            Board, we reduced incentives for short­                                                                               I think we will be implementing it in the      lute certainty ­ we could avoid systemic              German ministry




                                                                                                                                              Photo: Georg J. Lopata
not right away, but soon. The non­Euro           term profit maximization among compen­                                                                                second half of the year.                       risk, without our being forced to assume
states in the EU are not interested in en­       sation elements. If incentives for short­                                                                                                                            liability as a state and tax­paying to the
                                                                                                                                                                                                                                                                               of Finance.”
larging the gulf between themselves and          term profit maximization are too great, it                                                                            Will BaFin be coming to Frankfurt at           same extent as in 2008. The Bank Levy is
the Euro countries. So, personally, I think      leads people into temptation. Christianity                                                                            that time?                                     highly significant in this context. It hasn’t   to stride to the fore and take care of fu­
that if we can’t introduce it all over the EU,                                                                                                                         No. Bonn and Frankfurt aren’t that far         killed anyone yet, either.                      ture problems in advance by means of
I would be in favour of Introducing a Fi­                                                                                                                              apart, after all.                                                                              legislation. That type of thing inevitably
nancial Transaction Tax in the Eurozone.            “We must not allow anything to                                                                                                                                    The announced legislation package in­           leads to inefficient, prohibitive systems. It

                                                   compromise the independence of
                                                                                                                                                                       Three of the five pillars of EU regula­        tended to protect investors and con­            is better for legislators to be a little more
How high are your hopes of not having                                                                                                                                  tion are seated in Frankfurt: the ECB,         sumers is nearly completed. Will it be          hesitant – while still being sufficiently vig­
to take Financial Transaction Tax rev­
enues out of medium­term financial
                                                     the Bundesbank in any way.”                                                                                       the Stability Board and the insurance
                                                                                                                                                                       industry supervisory body; the stock
                                                                                                                                                                                                                      enough?
                                                                                                                                                                                                                      Whether all these measures will suffice
                                                                                                                                                                                                                                                                      ilant in order to be able to promptly react
                                                                                                                                                                                                                                                                      at all times, should the need arise. We
planning after 2012 or 2013?                                                                                                                                           exchange and banking supervisory               in practice remains yet to be seen. The         proceed step­by­step. It’s better to dou­
If you look at how long European deci­           has a key prayer, the Lord’s Prayer. One      coordination with the Bundesbank and                                    bodies are not. A French member of             way I see it, legislators do not always         ble­check than to rashly do the wrong
sion­making processes take, I’m really           of the most important lines in it says “…     BaFin. The German Ministry of Finance is                                the European Parliament once sug­              know everything in advance. So we’re            thing. What we have set in motion is not
not optimistic about our achieving quick         and lead us not into temptation …”. This      currently working out a draft on this basis.                            gested bundling everything together            proceeding with caution. That there is a        excessive in terms of regulation for con­
results in Brussels. Nor would I neces­          is a strict fundamental principle of eco­     We must not allow anything to compro­                                   where the ECB is seated. Why did this          genuine need for regulation is borne out        sumer or investor protection.
sarily have used the Financial Transaction       nomic governance. On the other hand,          mise the independence of the Bundes­                                    idea meet with so little resonance?            by a series of legal proceedings. It has
Tax in medium­term financial planning …          those at financial institutions who avail     bank in any way. Supervision of the finan­                              We wouldn’t have vetoed it in Berlin. But      been attested that key institutions in the      If there were one lesson you could
                                                 themselves of taxpayer assistance have        cial sector as a whole, which falls under                               in Europe you always have to strive to­        German financial sector did not behave          have the financial sector learn from
Who was the originator then?                     to bargain with restrictions being placed     the competence of BaFin, must likewise                                  wards a certain balance. The decision          entirely in the interest of investors. The      the crisis, what would it be?
The chairpersons of the coalition par­           on them – for the sake of society’s ac­       be preserved. The unanimous line is to                                  to move the seat of the ECB to Frankfurt       number of legal proceedings pending             It would be for the financial industry to
ties prepared the federal cost­cutting           ceptance of the situation. To many, this      enhance the potential for macropruden­                                  was not an easy one. German Chancellor         domestically and internationally is noth­       learn from the crisis that the more it re­
and additional taxation package known            is a reason to quickly get out of public      tial supervision on the part of the Bun­                                Helmut Kohl was able to implement this         ing to be proud of, after all. Not all these    sists the temptation to wreak havoc by
as the “Zukunftspaket” prior to the June         assistance schemes. That’s as it should       desbank and to enhance macropruden­                                     decision using all his powers of persua­       cases end lightly. And some can only be         going to far, the less need we will have
2010 closed­door session, where it was           be. In the case of a key German bank, we      tial supervision on the part of the BaFin.                              sion as a firm believer in Europe. But this    avoided by paying large settlements. One        for regulation.
adopted. The Federal Government, and             have just seen how this incentive is by all   Implementation decisions that are not di­                               of course does not mean that we have           should therefore not be too quick to criti­
of course by extension the Minister of Fi­       means having the desired effect.              rectly related to the Bundesbank’s au­                                  to make compromises elsewhere. But, of         cize, if legislators perceive a certain need    You mean they should recite the Lord’s
nance, are sticking to it and fighting for                                                     tonomous monetary policy need to be                                     course, if everyone suddenly wants to          for regulation to be passed.                    Prayer more often?
it. But as I said, this is not an easy fight.    The Coalition has agreed to reform            democratically controlled and subject                                   move to Frankfurt, that’s fine by us.                                                          It’s always good to pray. But in my Chris­
                                                 financial supervision at the national         to judicial review. This means that su­                                                                                Are you alluding to the BGH verdict?            tian vision of humanity, one should not
Again, on the subject of perceived fair­         level and to centralize banking super­        pervision and parliamentary responsibil­                                One more question on the subject of            Do you perceive the need for further            limit responsibility in this life to prayer; it
ness: The various measures you have              vision at the Deutsche Bundesbank.            ity must reside with the German Ministry                                location: Will the Bank Levy remain            action on the part of legislators in this       has to actually be assumed.
adopted in order to limit executive              Things seem to have calmed down,              of Finance. In principle we are not going                               a peculiarity of the German system?            area?
compensations – are they sufficiently            correct?                                      to do anything new, but do seek to opti­                                We are working on similar legislation at the   No. Nor is it my fundamental understand­        the above interview was conducted by An-
effective and are they being imple­              Not at all. Within the coalition, we          mize the demarcation between the two                                    European level. I am extremely pleased         ing of us as legislators, political leaders     gela Wefers, managing editor of the Ber-
mented as quickly as you would like?             have agreed on key points – in close          institutions. In addition, this all needs to                            that the German Restructuring Act              and regulators that we necessarily have         lin editorial department of Börsen-Zeitung.
18       PErSPECTIVES AND TrENDS                                                                                                                                                                                                    PErSPECTIVES AND TrENDS                      19




Private Banking Is Here to Stay
Interview with Herbert Hans Grüntker and Hans-Joachim Tonnellier


         The private banking sector and its branch offices are facing many challenges. However, one thing will not
         change. For most customers, private banking remains a central requirement for their financial needs.
                                                                                                                                          4      Private customers are willing to change banks more than ever before. Why is that?




     Grüntker: Strong competition for the private customer guar-                                                                          Tonnellier: You have to differentiate here. Customers who          Grüntker: The market for financial services has become
     antees low prices and top customer service. This becomes          2      How have the demands of private cus-
                                                                              tomers changed over the last few years?                     are prepared to change banks tend to be those who received         more transparent. Some customers are looking specifically
     clear when you take a look at other European countries and                                                                           bad advice from their banks and who lost money during the          for individual products with attractive conditions and then
     the US. The comparison also shows that the private customer                                                                          financial crisis. These customers are looking for banks that       use a different credit institution for each product. At the start
     can choose from a large number of credit institutions with                                                                           give good advice. If you feel well looked after then you’re go-    of the financial crisis, however, we noticed the opposite hap-
     differing business philosophies – on a nationwide scale and                        Tonnellier: Since the financial crisis, private   ing to stay where you are – that’s something we have defi-         pening. Personal banking increased in importance. Both pri-
     not just in the main cities. Another advantage that comes                          customers are more aware of risks. They look      nitely noticed.                                                    vate and business customers appreciate having one contact
     from so many business models is a high level of stability in                       for a bank whose advice they can trust and                                                                           that stays with them over time to handle all financial services.
     the lending sector.                                                                that offers high-quality products. When look-
                                                                                        ing for a long-term relationship, the customer
                                                                                        places great importance on the business
            Germany is considered one of the toughest                                   model and the business strategy. The Frank-
                                                                                                                                                                                                             Tonnellier: Thinking long-term, solid collateral and a thor-
     1      banking markets in the world. How does
            the private customer benefit from this?
                                                                                        furter Volksbank is well established in the
                                                                                        region for almost 150 years – which means         5      What can the US learn from Germany
                                                                                                                                                 about property financing?
                                                                                                                                                                                                             ough credit check. Property loans with variable interest rates
                                                                                                                                                                                                             are less significant in Germany compared to the US. Long-
                                                                                        a lot to customers.
                                                                                                                                                                                                             term fixed interest rates are a safe planning basis and pro-
                                                                                                                                                                                                             tect the borrower from repayment problems. Solid collateral
     Tonnellier: Indeed, intense competition increases the supply.                                                                        Grüntker: Basically, 100% financing should be the maxi-            based on an up-to-date valuation of the property together
     Or, in more practical terms, competition improves the busi-       Grüntker: Many of our customers are also very nervous              mum when financing property. This upper limit should not           with a sensible interest and capital repayment plan would
     ness. Every bank tries to acquire and then retain a customer      about the financial crisis. For a long time they have opted        then be increased arbitrarily, if property prices are rising and   have meant no subprime segment and no subprime crisis
     by offering the best products and the best financial advice.      for more conservative investments. Overall they challenge          certainly not when it is to be used to finance consumer goods.     in the US.
     That’s why the availability of financial services in Germany is   our investment advice and think about it a lot more than in        The preference should be to agree on a sensible deposit as
     so above average to the advantage of private and business         the past.                                                          part of the whole financing arrangement.
     customers alike.




                                                                                                                                          6
                                                                                                                                                You have introduced multi-channel banking as a response to the direct banks –

     3
                                                                                                                                                what is the future of your branches?
            What can banks from emerging markets learn from German retail banking?



                                                                                                                                          Grüntker: Our branches remain the core of the retail busi-         Tonnellier: Distance precludes closeness, which is why the
     Tonnellier: Let me talk explicitly about the cooperative bank-    Grüntker: The experience of the financial crisis shows that        ness for the savings banks. Nonetheless, for some time now         branches of the Frankfurter Volksbank are essential. Here
     ing model at this juncture: Despite individual weaknesses, it     credit institutions are successful when they know their private    we have offered our customers a multitude of ways to con-          we can guarantee those attributes that are so important for
     is able, as a whole, to sustain innovative and strong busi-       and business customers and seek to maintain a close and            tact us. As with the direct banks, this includes telephone and     our customers – to be close and available with people and
     ness. This is how cooperative banks contribute effectively        long-lasting business relationship. Also important is a meas-      online banking. The success of our 1822direct bank shows           not with ATMs. We wouldn’t impose anonymous call cent-
     to helping each other to support themselves. Self-help, reli-     ured approach to risk-taking. Banks should never lend more         that many customers prefer to invest online.                       ers on our customers. We are there for them in person. Every
     ability, continuity and a consistent approach to regionaliza-     than the market value as happened in the US – an extremely                                                                            customer of the Frankfurter Volksbank has their own advi-
     tion are essential elements of this model.                        bad precedent.                                                                                                                        sor and contact. That’s how we understand direct banking.
20       PErSPECTIVES AND TrENDS                                                                                                                                                                                                              PErSPECTIVES AND TrENDS               21




                                                                                                                                             10         When will mobile phone banking become an issue in Germany?




                            8
                                     Financing new businesses is very desirable from an economic point of view                                 Grüntker: The market for payment transactions services is             Tonnellier: Paying by SIM card instead of chip card is cer-
                                     but risky for banks and rarely profitable. How do you handle this?                                        currently very fluid. Technological developments will deliver         tainly more convenient as long as security is guaranteed.
                                                                                                                                               alternatives like payments by mobile phone. One aspect how-
                                                                                                                                               ever tends to be forgotten. Payment transactions are more
                                                                                                                                               than just a chip in a phone. The trader needs tools to read
                                                                                       Grüntker: The Frankfurter Sparkasse be-
                                                                                                                                               these chips and an infrastructure needs to be in place to en-
                                                                                       lieves in handling all the financial issues of our
                                                                                                                                               sure that the money is credited to an account.
                                                                                       customers: from cradle to grave, from found-
     Tonnellier: There is no doubt that Basle III will intensify the
                                                                                       ing new businesses to clarifying succession
     search for favourable refinancing possibilities and conse-                                                                                                                                                               Investment advice is becoming much
                                                                                       issues. That’s why we also finance new busi-
     quently for customers’ deposits. But customers have learned
     from the financial crisis that the banks with the best savings
                                                                                       nesses. We try to be the sparring partner for                                                                               11         more regulated. How does that affect your
                                                                                                                                                                                                                              business?
                                                                                       the founders of new businesses and con-
     rates are not necessarily the most solid.
                                                                                       structively challenge the business concept
                                                                                                                                               Grüntker: We basically welcome all measures that contri-
                                                                                       and its implementation.
                                                                                                                                               bute to an improvement in the quality of investment advice. I
                                                                                                                                                                                                                     Tonnellier: The requirements and documentary obligations
                                                                                                                                               should like to mention two things: the measures must be re-
                                                                                                                                                                                                                     of the recent past are largely only a formal confirmation of
     7      Basle III: Will the competition for customers’
            deposits become even stronger?                             Tonnellier: The Frankfurter Volksbank is the bank for SMEs.
                                                                                                                                               alizable and not burdened down with bureaucratic require-
                                                                                                                                               ments – they shouldn’t scare off the customer into seeking
                                                                                                                                                                                                                     a practice that we have used for years ourselves: providing
                                                                                                                                                                                                                     advice for the customer that is transparent and comprehen-
                                                                       Not just for existing business financing but also for newly             any kind of investment advice. With all due respect for the
                                                                                                                                                                                                                     sible. We have always tended to give conservative advice and
                                                                       founded ones. New business financing is therefore part of our           demand for good advice, one aspect should not be over-
                                                                                                                                                                                                                     warned our customers away from experimentation and risks
                                                                       daily business. Our advisors have detailed knowledge of the             looked: even the best advice cannot protect someone from
     Grüntker: We have made the assumption that Basle III will                                                                                                                                                       that cannot be measured. Our investment advice reflects the
                                                                       market and can assess the risks when advising customers.                unforeseeable changes in the markets. Perfect advice does
     make the capital market less attractive and that refinancing                                                                                                                                                    traditional values of any honest business practitioner.
                                                                                                                                               not in itself automatically mean that the desired yields will
     via the retail market will become more interesting. On the
                                                                                                                                               be achieved.
     other side of the balance sheet, however, property financ-
     ing will become more interesting, because this financing can
     be used as security for issuing mortgage bonds. Just at the
     moment the regional private customer banks are experienc-
     ing stronger competition on both sides of the balance sheet.
                                                                                                                                            12         What will private banking mean in the future?




 9           Paying online has led to the advent of new financial providers such as PayPal.
            “The world needs banking but not banks”, Bill Gates once said. Will he be proven right?
                                                                                                                                               Tonnellier: The same as it means today for the Frankfurter
                                                                                                                                               Volksbank: a lifelong reliable partner in all financial matters.
                                                                                                                                                                                                                    Grüntker: I don’t expect any change here either because
                                                                                                                                                                                                                    the basic needs of the customer remain the same, from pro-
                                                                                                                                                                                                                    viding an account service, to investments and risk preven-
                                                                                                                                                                                                                    tion through to financing requirements. Personal banking re-
                                                                                                                                                                                                                    mains the first port of call in all financial matters.
     Grüntker: It’s rather short-sighted to limit the role of banks    Tonnellier: Bill Gates’ comment is 15 years old and I don’t
     to standardized payment mechanisms. Their function is             see that the value of banks to the economy has changed
     much broader than that. Banks advise customers on their           for one moment over this time. I agree with you: banks do
     savings, they provide financing for buying a house or to ex-      far more than simply handle payment transactions. Without
     pand a business. The new financial providers cannot do that.      them, there would be no accumulation of capital, no distri-
                                                                                                                                            Herbert Hans Grüntker is Chairman of the Board of Frankfurter         Hans-Joachim Tonnellier has been a Board Member of
                                                                       bution of capital and no maturity transformation, no loans,
                                                                                                                                            Sparkasse, the fourth-largest savings bank in Germany. He is          the Frankfurter Volksbank since 1981, and since 1997 has
                                                                       no financing of new businesses, and consequently no eco-
                                                                       nomic progress. Banks remain indispensible in the future.            also active in numerous social and cultural organisations, for        been the Chairman of Germany’s second largest Volksbank.
                                                                                                                                            example in the Society of Friends and Promoters of the Goethe         With many honorary activities in diverse institutions, he is a
                                                                                                                                            University and in the 1822-Stiftung.                                  role model for active social commitment.
22    PersPectiVes AND treNDs                                                                                                                                                                                              PersPectiVes AND treNDs              23


                                                                                                                                       … proximity to
                                                                                                                                     the customer with
                                                                                                                                       an underlying
                                                                                                                                       value-oriented
                                                                                                                                        philosophy …
                                Private Banking Has to Be                                                                                                                                                                              … and
                                                                                                                                                                                                                                   internationally
      Cooperative               Value-oriented                                                                                                                                                                                      oriented con-
     private banking            Interview with Lars Hille                                                                                                                                                                             sultancy
       combines …                                                                                                                                                                                                                  competencies.
                                In the midst of the financial crisis, the Genossenschaftliche FinanzGruppe                    through the crisis on its own merits, any-     relationship with the customer at all
                                cooperative banking alliance was successful in laying a new foundation for                    way. These are fruits of a sustained ef-       times and make their own decisions on
                                its private banking business and introducing the concept of cooperative                       fort that was value-oriented and down-         whether to use DZ PRIVATBANK ser-
                                private banking. Lars Hille, Member of the Board of Managing Directors                        to-earth from the very start – and that        vices and to what extent. This makes
                                at DZ BANK, defined this new range of services in an interview.                               pays off in private banking. Coopera-          us flexible and able to act according to    in the private banking business for years.
                                                                                                                              tive banks have a great edge in terms          our needs.                                  Now it also directs and coordinates
                                Mr. Hille, how can a decentralized               business. In order to offer the cooper-      of trust, particularly because they live by                                                domestic activities as well. DZ PRIVAT-
                                alliance like the Genossenschaftliche            ative banks the best possible service in     the central cooperative values of close        How does this benefit the private           BANK has set up branches in Germany
                                FinanzGruppe successfully offer pri-             this area, we started the nationwide “Pri-   association, transparency and proxim-          banking customer?                           and taken over UniCredit Luxemburg‘s
                                vate banking services?                           vate Banking Market Initiative” a while      ity to the customer. All this provides a       Like no other set of services in the mar-   private banking portfolio, including its
                                The key to our success is the interac-           back in collaboration with WGZ BANK          sound foundation for a market offen-           ket, cooperative private banking com-       customers and employees. The merger
                                tion between the German coopera-                 and set up a private banking business        sive doing business with wealthy private       bines proximity to the customer with an     between the two Luxembourgian firms
                                tive banks [referred to collectively as          along the lines of a subsidiary and in       customers. Cooperative banks across            underlying value-oriented philosophy        DZ PRIVATBANK S. A. and WGZ BANK
                                Volks- und Raiffeisenbanken] and DZ              keeping with our cooperative philosophy.     the nation are able to offer first-rate pri-   and international consulting competen-      Luxembourg S. A. is nearly completed.
                                BANK. As the Genossenschaftliche                 This business segment is coordinated by      vate banking services under the quality        cies. So the main thing we offer is an      In the course of the merger, the private
                                FinanzGruppe‘s central institution, our          our subsidiary, DZ PRIVATBANK, in Lux-       brand “VR-PrivateBanking”.                     approach to consulting that for the first   banking firm WGZ BANK AG in Düssel-
                                job is to provide optimum support to the         embourg. Our cooperative approach en-                                                       time can be called truly “holistic”. This   dorf will be integrated as the fourth
                                          cooperative banks in offering          ables us to tap the potential of existing    What‘s new about VR-PrivateBank-               makes it possible for us to flesh out the   branch of DZ PRIVATBANK. Further
                                                 their customers services        local customer relationships in collab-      ing compared to other services on              goals and needs of our private banking      expansion of the network in Germany is
                                                    of the highest qual-         oration with the Volks- und Raiffeisen-      the market?                                    customers and come up with individu-        already in the planning. This merger is
                                                     ity. We also see con-       banken and also to win over new cus-         “Cooperative private banking” is new, that     ally tailored solutions.                    the logical extension of our joint project,
                                                       siderable potential       tomers with our services. It‘s already       is, a united appearance on the nation-                                                     the Private Banking Market Initiative. It
                                                            for our organiza-    proving to be a very successful concept.     wide scene on the part of all the banks in     Has this new range of services also         bundles competencies and strengthens
                                                              tion in the pri-                                                the Genossenschaftliche FinanzGruppe           resulted in any structural changes to       the position of the Genossenschaftliche
                                                                vate banking     Your approach has, after all, al-            alliance. High net worth customers now         firms in the alliance?                      FinanzGruppe in this high-growth
                                                                                 ready passed its first major test …          see a competent private banking partner        The Genossenschaftliche FinanzGruppe        market.
                                                                                 That‘s right! We started up success-         in their local bank. The individual banks      has restructured its private banking ac-
                                                                                 fully in the middle of the great finan-      decide on the degree to which they want        tivities. The DZ PRIVATBANK Group           Lars Hille is Member of the Board of
                                                                                 cial crisis – there could hardly be bet-     to work with our DZ PRIVATBANK sub-            plays a key role here: With branches in     Managing Directors at DZ BANK AG and
                                                                                 ter proof of a sound business model.         sidiary according to their needs. They         Luxembourg, Singapore and Switzer-          he is in charge of the private customer
                                                                                 The entire cooperative organization got      remain the central managers of the             land, it has been successfully engaged      business segment of DZ BANK Group.
                                                                                                                                              “
24     PerSPeCtiveS aNd treNdS                                                                                                                                                                                                          PerSPeCtiveS aNd treNdS      25

                                                                                                                                                    Our customers appreciate the
                                                                                                                                                    clarity and consistency of our
                                                                                                                                                    investment philosophy.
Sights Set on the Next Generations
Interview with Emmerich Müller                                                                                                                                                                                                          It offers them reliability
                                                                                                                                                                                                                                        and orientation at a time
Emmerich Müller, Member of the Partners’ Committee of Metzler Bank, believes that in the long term, i. e.                                   No. This is where Metzler’s purity stand-    more in demand in the wake of the              when fads in the capital
over generations, capital can only be accumulated and secured by adherence to a kind of purity stand-                                       ard comes into play: We purposely            crisis in the financial markets?               markets come as quickly

                                                                                                                                                                                                                                                      ”
ard. Only equities, bonds and liquidity make their way into his portfolio. Müller explains why in this dis-                                 concentrate on equities, bonds and           Yes, definitely. The crisis in the financial
                                                                                                                                                                                                                                        as they go.
cussion of what constitutes truly long-term capital investment.                                                                             liquidity, because these asset classes       markets has made investors more
                                                                                                                                            are transparent, cost-efficient, and un-     acutely aware of the fact that the rela-
Mr. Müller, how have your investment          The most important thing for accumu-             businesses, also equities. Cash, fixed-      derstandable – they can also be traded       tionship between risk and return – a
strategies changed in light of the di­        lating and preserving capital in the long-       income securities and life insurance pol-    at any given time.                           relationship that merely seemed to have
saster in Japan and the political up­         term is to have a clear fundamental strat-       icies, on the other hand, count as nomi-                                                  become irrelevant – still holds. We know
heavals in many Arab countries?               egy. Once you‘ve found one that works            nal capital. They are constantly exposed     Does your refraining from making             from speaking with our customers that,
Where Metzler Private Banking is con-         for you, you can be much more uncon-             to the risk of inflation, though they also   other kinds of investments mean              this being the case, people appreciate
cerned, crises and upheavals have             cerned about crises – you can even               increase in value in a deflation sce-        your customers have to accept lower          the clarity and consistency of our invest-
never been any reason to change our           use them to your tactical advantage.             nario; with tangible capital it‘s the ex-    returns?                                     ment philosophy. It offers them reliabil-
fundamental investment strategy. This         In the meantime the idea is to remain            act opposite. There are also ways to re-     That might be the case over the short        ity and orientation at a time when fads,
has to do with the very long-term time        focused on elementary risks that might           duce political risk, especially by means     term, but long-term, our approach has        including those in the capital markets,
horizon we work with in our capital man-      jeopardize long-term capital preserva-           of broad diversification over different      proven highly successful. Our custom-        come as quickly as they go. Plus, they
agement. It‘s because our customers           tion, and to arrange the strategic allo-         countries and areas.                         ers get a far greater kind of security in    feel they are in good hands with us, be-
are not concerned with getting the best       cation of your total assets accordingly.                                                      return for sacrificing short-term gains:     cause we have already shown by our
return in the next quarter, but in preserv-   Elementary risks not only include things         What are your recommendations for            the ability to preserve their capital over   own example that we have mastered the
ing their capital long-term. This doesn‘t     like illness, family feuds, and company          sustainable and successful capital           the long haul. Those seeking the high-       art of long-term capital preservation –
mean over the next month, or over the         successorship issues, but also inflation         management?                                  est possible return at any given moment      we’ve been doing it for eleven genera-
next year, but over the coming decades        risk, deflation risk, or the risk of political   As far as trans-generational capital         have to structure their investments in       tions of Metzlers now. The surest sign
or generations. In other words, private       change – things like war, coups d‘etat or        management is concerned, our recom-          a completely different way; they have        of heightened risk awareness on the
banking, in the Metzlerian sense, is the      expropriations. These risks can only be          mendation – regardless of the current        to take greater risks. But because our       part of investors is the fact that even
art of controlling the kind of risks that     countered by means of a broadly diver-           circumstances – would be to invest a         investment philosophy is to always keep      our competitors are experiencing
threaten long-term capital preserva-          sified portfolio.                                third of one‘s capital in tangible capi-     an eye on the risks, our customers’ port-    a veritable Renaissance in the
tion. Not that we don‘t ever make slight                                                       tal and another third in nominal capital.    folios have survived the crisis almost un-   demand for this purist invest-
adjustments to our portfolios in times        What would this kind of diversifica­             That‘s the fundamental strategy we stick     scathed. So, if for no other reason than     ment approach.
of crisis, of course, but this doesn‘t        tion entail in your case?                        to, regardless of current market condi-      our responsibility towards our custom-
mean that the fundamental orientation         We hedge by scattering risks on many             tions. The remaining third of one‘s capi-    ers, our investment philosophy always
of these portfolios is being called into      different levels through the strate-             tal would be suitable for more short-term,   goes hand-in-hand with realistic expec-      Emmerich Müller is Mem-
question.                                     gic allocation of total assets. The first        tactical moves.                              tations where return is concerned.           ber of the Partners’ Committee
                                              thing we do is to categorize assets                                                                                                        and Personally Liable Partner of Metzler
What is your approach to ensure that          into tangible capital and nominal cap-           Do you also broadly diversify across         Have you noticed that your purist            Bank. His responsibilities includes the
your customers‘ capital can be pre­           ital. Tangible capital includes assets           the greatest possible variety of finan­      approach to capital management is            Metzler Private Banking segment.
served over generations?                      like real estate properties, stakes in           cial instruments?
 26     PERSPECTIvES AND TRENDS




 The German capital markets are always offering new and attractive instruments to
 middle-tier companies, both for obtaining equity and outside capital. The latest inno-
 vation is the Mittelstandsanleihe, a bond specially designed for medium-sized firms.
 Furthermore, international companies are discovering the advantages of launching
 an IPO in Frankfurt.




                            Middle-tier Companies Making
                           Their Way to the Capital Markets
                                                                                                               By Jochen Grossmann




 Is there a credit crunch in Germany? No! This is borne out        significantly less time and effort. This is why, from the start,     coverage is present in the German market, but is lacking in       companies are in the public eye. Above all else, an IPO in-
 by statistics compiled by Deutsche Bundesbank. A credit           this segment sparked a new capital market culture among              the respective company’s country of origin. This is the case      creases a company’s equity capital, thereby enhancing its
 crunch is nonetheless perceived when middle-tier compa-           German middle-sized companies.                                       particularly in the “green tech” and renewable energy indus-      creditworthiness. More and more middle-tier firms, in Ger-
 nies are consulted, since in that area there is growing need to                                                                        tries. An IPO in Germany also offers interesting possibilities    many and elsewhere, are recognizing these benefits. Yet the
 become less dependent on bank loans. Not the least reason         The pool of creditors in the capital markets willing to adopt        in other industries. For example, a listing on a German stock     costs also have to be considered. The responsibilities of the
 for this is the fact that banks seem to have grown more cau-      these instruments is far larger than the number of poten-            exchange can help a company gain a foothold in the German         CFO are increased, and experience a shift in the direction of
 tious in granting loans. Risk premiums on top of loan interest    tial banks granting loans. Service providers like Steubing AG        market and to exploit sales opportunities, since this consider-   public respectively investor relations. It is not uncommon for
 rates also appear to have risen. German capital markets have      support issuers in floating their bonds on the market and            ably enhances a firm’s public exposure. Moreover – with the       finance department staff to be enlarged, since a share in the
 responded to this demand and are now offering investment          finding subscribers for new issues. Bond investors generally         exception of legal supervisory requirements – the free capital    company is a new product on offer, which has to be sold. This
 capital segments especially suited to middle-tier businesses.     tend to be looking for repayment guarantees and attractive           markets in western democracies present no obstacles what-         is well worth the effort, however, as is demonstrated by the
                                                                   interest rates. Both these requisites are met by the issues          soever to an IPO. This is a far cry from the non-transparent,     continuously growing interest in the German capital markets
                                                                   of solid middle-tier companies in the German capital mar-            laborious and all-too-often fruitless approval processes re-      among German and foreign firms and investors alike.
Strong demand among investors                                      kets, where demand for them is accordingly strong. Equities,         quired in high-growth emerging markets.
 Following the Stuttgart Stock Exchange’s start-up of its          by contrast, enable investors to participate in a company’s
 “Bondm” segment about a year ago, through which over 15           “growth story” and profits. The German capital markets, where
 new issues have been floated, the Frankfurt Stock Exchange        equities market segments are tiered according to reporting
                                                                                                                                      Exchange listing creates confidence
 created an equivalent called Entry Standard for corporate         and transparency requirements, also offer suitable solutions         Following an IPO and thanks to the transparency that goes         Dr. Jochen Grossmann is Member of
 bonds in April 2011. The advantages for issuer firms are many:    in this respect. Here too, the Frankfurt Entry Standard offers       hand-in-hand with it, middle-tier firms can enjoy greater con-    the Management Board at Steubing AG.
 For example, as a rule, investment loans of 30, 50 or more        a newcomer segment that can already be used by smaller               fidence of domestic and foreign business partners. Moreover,      Prior to that, he was Head of Capital Mar-
 million euros are only obtainable through syndicates involv-      middle-tier firms looking to launch an IPO. The German cap-          exchange-traded public companies are attractive to potential      kets & Advisory at Commerzbank, after
 ing the participation of several banks – and the attendant        ital markets also present interesting avenues for foreign com-       new employees, a listing is also accompanied by increased         having worked extensively in that bank’s
 processing and reporting expenses. Issuing bonds involves         panies, for example in cases where a peer group and analyst          brand awareness and value. This is because exchange-listed        capital markets segment.
28      PersPectives And trends                                                                                                                                                                                                  PersPectives And trends                  29




Asset Management – Made in Germany
                                                                                                                                                   Question 2:
Interview with Wolfgang Matis und Thomas Neiße                                                                                                                                     Neiße: The German asset management industry is invested and will continue
                                                                                                                                          What role do German asset
                                                                                                                                                                                   to invest in the Eastern European convergence states and increasingly in
                                                                                                                                        managers play in the emerging
                                                                                                                                                                                   the Middle East. German investors have been able to profit from the growth
                                                                                                                                                    markets?
                                                                                                                                                                                   in these countries in recent years. This only works if investors can actually

                                                                                                                                                                                   gain access to these markets. The German fund industry is the key here. It is
The German investment fund industry is renowned for its international strengths and great capacity for                                                                             through us that money gets to where it’s needed for growth.
innovation. The government has also put the wind in its sails by finally recognizing the value of invest-
ment funds for retirement planning and fostering them through tax breaks. This adds extra thrust to asset                               Matis: We provided our customers with access to the emerging markets early
management, Made in Germany.                                                                                                            on and have continuously developed products along these lines, like our East-

                                                                                                                                        ern European, Russian, BRIC, Turkey and Africa funds. We have our own pres-

                                                                                                                                        ence in numerous emerging markets, or else we cooperate with local part-

                                                                                                                                        ners there. The assets under management there are still not as important as

                                                                                                                                        those here in the German market, but they’re growing at a much faster rate.



                                                                                                        Question 1:
                                                                                              Americans are considered
                                                                                                to be the leading asset
                                                                                              managers worldwide. What
     Neiße: The American asset management market is doubtless the leading mar-
                                                                                              do German managers have
     ket in the world. Here in Germany we still have a long way to go, particularly
                                                                                                to offer in this respect?
     as regards the affinity for equities and equity funds. In this respect, I’m quite                                                                                             Neiße: It’s important for us to understand the markets we invest in. Beyond
                                                                                                                                                   Question 3:
     happy to look to the American market as a role model for us. Now, as far as                                                                                                   that, there has to be a certain equivalence, for example with respect to com-
                                                                                                                                         What should asset managers
     actual asset managers are concerned, there are successful ones and less                                                                                                       pliance standards. There are doubtless countries with very attractive growth
                                                                                                                                       pay attention to in these markets,
     successful ones as much in the US as in Germany. Indeed, German accom-                                                                                                        rates, which are still not that attractive to us, simply because it is too difficult
                                                                                                                                                in your opinion?
     plishments in this area are considerable.                                                                                                                                     for us grasp how these markets are supervised. China, just to cite one exam-

                                                                                                                                                                                   ple, probably has some catching up to do in this area.

                                                   Matis: That’s right. The invest fund products of larger German firms are highly

                                                   accomplished. Take retirement planning, for example: In the US, there are                                             Matis: The first lesson is to forget about one-size-fits-all strategies - each

                                                   barely any products offering capital-back guarantees. In Germany it’s the                                             market is different. An asset manager’s success in the emerging markets

                                                   other way around – and demand for guaranteed retirement products is on the                                            has a great deal to do with adapting to local conditions and developing the

                                                   rise nowadays. Savings products that guarantee capital protection through                                             right business model for a given market. That’s why in some countries it is

                                                   hedging models, for example by means of suitable asset allocation, are par-                                           better to collaborate with local service providers; in others we opened up

                                                   ticularly attractive here, since the costs of the guarantee are less of a factor.                                     our own branches.
30      PersPectives And trends                                                                                                                                                                                                        PersPectives And trends               31



                                                                                                                                                                                                     Question 7:
     Neiße: Basically, a fund management firm like Deka Investment benefits from                                                            Matis: Regularly contributing to an
                                                                                                         Question 4:                                                                      The timing of investors is all-
     the structures provided by the German Savings Bank Association (Sparkassen                                                             investment plan does away with the
                                                                                            Is an asset manager’s associa-                                                             too-often off, in other words, they
     Finanzgruppe) and the possibility of being able to use its cross-disciplinary                                                          timing problem of bad entry and exit
                                                                                          tion with a bank or banking group,                                                          get on board too late and they get
     internal expertise. Deka Bank as part of a group additionally enhances trust in                                                        points. In the case of one-time invest-
                                                                                           as it is often the case in Germany,                                                           out too late. What do you do to
     the brand, and through its financing capacity it is better able to back up guar-                                                       ments we continuously provide our
                                                                                           an advantage or a disadvantage?                                                                           help them?
     anteed products than a small firm would be able to on its own. In individual                                                           sales partners and investors with reg-

     cases, being associated with a bank can also have a braking effect, but some-                                                          ular market commentary and infor-

     times this is also an advantage.                                                                                                       mation. In addition, more and more

                                                                                                                                            investors are delegating their asset        Neiße: Basically, there are three main things every investor is concerned about:

                                                  Matis: DWS enjoys enormous benefits from being part of the Deutsche Bank                  allocation to funds. We reacted to          First: Can I invest money in such a way that I can get my hands on it should I

                                                  Group. This association works out very well for us, not just as a sales chan-             the situation by starting up a multi-       need it in the short term? Answer: Invest in products that don’t tend to fluctuate

                                                  nel, but also in many other key functions.                                                asset segment last year, which is           that much; so that entry and exit point are not an issue. Second: How should I

                                                                                                                                            more heavily focussed on absolute           structure the way I invest my money? Answer: If investments are structured in a

                                                                                                                                            returns through cross-disciplinary          balanced way, upturns and downturns are likewise only of secondary concern.

                                                                                                                                            asset management.                           And third: How can I exploit opportunities? And this last point actually is a

                Question 5:                       Neiße: Nothing has changed in terms of our fundamental recommendations:                                                               matter of finding the right entry and exit points.

     Two enormous setbacks in the                 Investors should sufficiently diversify their investments according to their own

     stock markets in a decade have               risk tolerance and shouldn’t put all their eggs in one basket. Also, even cau-

 scared investors off. What would                 tious investors should have equity funds in their portfolios. Particularly for            Matis: Indeed we will. The Bundesverband Investment und Asset Manage-

           you advise they do?                    long-term investment horizons, there still is no better investment. Besides,              ment (BVI), has long been pointing out the unequal treatment of investment
                                                                                                                                                                                                                                               Question 8:
                                                  the large corrections in the past ten years were quickly followed by massive              fund savings plans compared to insurance products and has finally been able
                                                                                                                                                                                                                                         The investment fund
                                                  rebounds – sometimes just having a little patience is enough.                             to get through to government policy-makers about it. According to the latest
                                                                                                                                                                                                                                      industry has for a long time
                                                                                                                                            discussions, plans are underway to cut the personal income tax on invest-
                                                                                                                                                                                                                                complained of being discriminated
     Matis: The vagaries of stock prices in recent years have been a real                                                                   ment fund savings plans for retirement planning down to half, just as with in-
                                                                                                                                                                                                                                against the insurance sector. Will
     trial for all investors. The current market climate with huge sovereign                                                                surance plans – provided certain conditions are met.
                                                                                                                                                                                                                                      we be seeing any changes in
     debts, incipient inflation, political upheavals in the Arab nations and
                                                                                                                                                                                                                                              this regard?
     finally events in Japan are a call to sobriety. But in times of increased                           Question 6:                           Neiße: Particularly where long-term capital accumulation is concerned, there can

     uncertainty, it is crucial not to be closed-minded about capital invest-                 There don’t appear to be any                     be no success without investment fund products. Small investors, for example,

     ment, but instead to use price corrections to one’s own advantage for                   safe harbours any more in the                     can only save in limited amounts and therefore depend on more efficient means

     repositioning and purposeful investment.                                               capital markets. Where do you                      of capital appreciation. This is why private retirement planning through funds has
                                                                                                see the next trouble spot?                     to be actively encouraged. Government policy makers are sending out signals that

                                                                                                                                               make us more optimistic than we could afford to be in the past, and there is hope

                                                                                                                                               that, in the future, fund products will no longer be discriminated against tax-wise.

Neiße: I wouldn’t exactly speak of a “trouble spot”, but I do

think that one new dimension is the fact that we have to be           Matis: Currently, there are a number of issues that could

concerned about the solvency of sovereign nations - or even           potentially develop into a new crisis, such as the balloon-        Wolfgang Matis is Global ceO and                                   Thomas Neiße is chairman of the Man-

state bankruptcies. A few years ago, this was totally incon-          ing public debts of key industrial nations or political unrest     spokesman of the Board of directors at                             agement Board at deka investment GmbH.

ceivable, but today it’s a possibility that is being openly dis-      in Africa and the Middle East. Plus the fact that globaliza-       dWs investments.                                                   He is furthermore a Member of the execu-

cussed. This represents a paradigm shift, which of course             tion is giving rise to inflationary trends for the first time in                                                                      tive Board of deutsches Aktieninstitut and

will have a great bearing on the markets and entail new risks.        30 years. Big fluctuations in the markets are here to stay.                                                                           President of Bvi Bundesverband invest-

                                                                      In light of these issues, concentrating more on tangible                                                                              ment und Asset Management e. v.

                                                                      assets strikes us as the right thing to do.
32     PERSPECTIVES And TREndS                                                                                                                                                                                                       PERSPECTIVES And TREndS            33




Location and Quality: Back to True Values                                                                                                with restructuring efforts. In this climate, greater demands
                                                                                                                                         have been placed on both banks and their customers in equal
                                                                                                                                                                                                           These changes in basic terms and conditions are giving rise
                                                                                                                                                                                                           to three important developments in commercial real estate

By Johann Berger                                                                                                                         measure. Against the backdrop of a dried-up syndication mar-      financing:
                                                                                                                                         ket, banks are increasingly acting as balance sheet lenders       1) Cooperation between banks and customers is becoming
                                                                                                                                         and exposing themselves to credit risks on their own books.       increasingly important. Until the syndication market recovers,
Long-term relationships with the customer based on trust, the quality of the object to be financed and                                   These traditional real estate loans have to be backed by the      club deals remain the preferred instrument for large-scale
adequate equity capital coverage are some of the traditional values that have recently been gaining                                      banks’ own equity, further restricting any leeway for granting    financing. Project developers will likewise be collaborating
renewed traction in the commercial real estate lending business. This has led to changes in the market.                                  new loans. In tandem, the traditional values of the real es-      more frequently in order to be able to meet increasingly more
                                                                                                                                         tate lending business have been gaining new traction. Last-       stringent demands in terms of the equity capital that has to
                                                                                                                                         ing relationships with the customer based on trust are now        come in.
The commercial real estate markets were hard-hit by the             availability of the CMBS market as a source of financing con-        once more an acknowledged basis for real estate business          2) Because German banks are increasingly concentrating on
global financial crisis, which has also led to lasting changes      tinues to be limited. While the first securities issues are start-   with long-term horizons. Quality and good risk management         the domestic market, while at the same time the quality of the
in the climate for financing commercial properties. Certain         ing to reappear in the US, in Europe the market has far from         are taking precedence over short-term opportunities in terms      real estate to be financed is becoming more significant, the
property values and rents have gone down drastically in             recovered. The market for syndicated loans came to a stand-          of volume and return.                                             core real estate business is becoming more competitive.
many countries, posing great challenges to many real estate         still during the crisis and has still not loosened up. Financing                                                                       Applications for less attractive properties or development
investors and their financers. However, individual areas and        on a larger scale has thus far remained possible almost the          Due to a significant increase in risk aversion, partly            projects, on the other hand, are more frequently being re-
sectors in the real estate market have performed quite differ-      exclusively through club deals. It has become significantly          attributable to increased charges to equity capital, credit in-   jected than before, due to greater risk of default. Either that,
ently: While the German commercial real estate market has           more difficult for investors, and especially for project devel-      stitutions are placing more stringent demands on borrowers        or else banks are taking the greater risks into account in the
proven relatively stable, other markets, like the UK or the US,     opers, to carry out large projects in this climate. The basic        nowadays than they used to in the past. Investors are required    form of higher margins.
completely collapsed.                                               terms and conditions under which financing can currently be          to have a business model conceived for the long term, since,      3) Select foreign markets will continue to present significant
                                                                    obtained for commercial real estate are furthermore marked           now more than ever, the quality of the object to be financed,     and attractive opportunities for banks going forward, if only
For banks, the outbreak of the financial crisis has led to          by increasingly stringent liquidity and equity requirements in       sustainable cash flow resulting from the loan and appropriate     on account of the diversification they can add to a loan port-
a noticeable deterioration in the terms attached to obtaining       the context of Basel III, growing demand of funding on the part      levels of equity capital commitment are key considerations in     folio, beyond diversification in terms of customers, countries
funds. Funding spreads have become a significant factor in          of banks and changing competition. Many foreign institutions         decisions on whether to provide financing or not.                 and the intended purposes of the loans. This is particularly
this regard. Restricted access to the capital markets result-       that were active in Germany prior to the crisis have                                                                                   true against the backdrop of the recovery that is already un-
ing from the crisis has curbed banks’ room to manoeuvre.            now withdrawn. At the same time, some German                                                                                           derway in most commercial real estate markets, as the global
Parts of the financial markets that played an important role for    banks have had to scale back new busi-                                                                                                 economic upturn progresses.
larger real estate lending still lie idle today: For example, the   ness in connection
                                                                                                                                                                                                           Johann Berger is Vice Chairman of the
                                                                                                                                                                                                           Management Board of Landesbank Hes-
                                                                                                                                                                                                           sen-Thüringen. Among other things, he is
                                                                                                                                                                                                           in charge of the bank’s real estate lending
                                                                                                                                                                                                           business, its property management and
                                                                                                                                                                                                           real estate lending sales management.
34           PERSPECTIvES AND TRENDS                                                                                                                                                                                                                                                                                                                        PERSPECTIvES AND TRENDS                             35




Bank Financing: Securing the Future                                                                                                                                                                                                                                                                     3: Patent applications
                                                                                                                                                                                                                                                                                                        Domestic and foreign applications, 2008
By Markus Beumer
                                                                                                                                                                                                                                                                                                              Japan                                                                   502,054       -0.1

                                                                                                                                                                                                                                                                                                                USA                                                     400,769                     -4.1
The German economy, and the German small and                                                                    Germany appears to have experienced a small economic mir-
                                                                                                                                                                                                                                                                                                               China                         203,481                                                26.7
medium-sized enterprise (SME) sector in parti-                                                                  acle. True, the country is still feeling the effects of the finan-
                                                                                                                                                                                                                                                                                                        South Korea                     172,342                                                     -1.6
cular, has recovered impressively from the finan-                                                               cial market crisis, and the debt crisis of some EU states repre-
                                                                                                                                                                                                                                                                                                           Germany                 135,748                                                          2.5
cial market crisis, and steps must now be taken                                                                 sents a major challenge for the European Union, also in terms                                                                                                                                 France               47,597                                                           2.5
to secure its long-term global competitiveness.                                                                 of economic policy. But German economic growth has steamed                                                                                                                              Great Britain              42,296                                                           -0.3
The investments in know-how and machinery and                                                                   ahead: It is surprisingly robust, and we are currently witnessing                                                                                                                             Russia               29,176                                                           1.5

equipment necessary to achieve this require a fa-                                                               growth rates that have not been recorded for nearly 20 years.                                                                                                                            Switzerland               26,640                                                           -1.9

vorable business and regulatory environment, as                                                                 This is due to buoyant global demand, particularly from Asia, as                                                                                                                      The Netherlands              25,927                                                           -2.9

well as appropriate financing conditions.                                                                       well as a pick-up in domestic consumption.                                                                       Although most of the decline is attributable to weak construc-                  Italy             21,911                                                           -4.1

                                                                                                                                                                                                                                 tion investment, the share of the other investment component –              Canada                21,330                                                           -3.5

                                                                                                                There is a widespread consensus that the main reasons for Ger-                                                   plant and equipment investment – has stagnated at 8 percent                Sweden                 17,051                                                           3.0

1: German GDP growth                                                                                            many’s high degree of international competitiveness include: An                                                  of GDP. At the same time, German expenditure on Research &
                                                                                                                                                                                                                                                                                                                         0         100.000        200.000     300.000       400.000       500.000     600.000


                                                                                                                                                                                                                                                                                                                             Source: WIPO, 2010 Edition
In real terms                                                                                                   extended period of moderate wage growth; high quality prod-                                                      Development stood at 2.5 percent of GDP in 2009, only slightly
6                                                                                                               ucts; the multifaceted structure of the SME sector; and not least,                                               above the OECD average of 2.3 percent, and considerably be-
4                                                                                                               reforms of the country’s social welfare system. All the same, de-                                                low the three percent targeted by the European Commission’s
                                                                                                                                                                                                                                                                                                                                                              YoY change in %
2                                                                                                               spite the successes enjoyed so far, we must continue to work                                                     “Europe 2020” strategy. Germany now ranks only fifth in terms
0
                                                                                                                hard to remain competitive internationally. The investment ratio                                                 of foreign and domestic patent applications, behind China and
-2
                                                                                                                is a good indicator for this: The fact that this measure has fallen                                              South Korea, among others.                                                                       Number of patent
                                                                                                                                                                                                                                                                                                                                    applications
-4
                                                                                                                on average over the long term in Germany, highlights the need
-6
                                                                                                                for action. The ratio of gross fixed investment as a percentage                                                  This trend is important to monitor, given Germany’s declining
-8
     1992 1993 1994 1995 1996 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011   of gross domestic product (GDP) has fallen from approximately                                                    population: Germany’s labor force potential is expected to fall
     Source: Federal Statistical Office
                                                                                                                22 percent in the early 1990s to around 18 percent at present.                                                   by four percent from 2008 to 2020 alone; by 2030, this fig-
                                                                                                                                                                                                                                 ure is projected to fall by as much as 15 percent. Depending
                                                                                                                                                                                                                                 on the level of immigration to Germany, this could amount to a
                                          YoY change in %
                                                                                                                2: German investment ratio                                                                                       decline of 350,000 people each year, or more. To maintain the
                                                                                                                Gross fixed investment as a percentage of GDP                                                                    standard of living, this means that less and less people will have
                                                                                                                 25                                                                                                              to continuously produce more and more per capita. This can

                                                                                                                 20                                                                                                              only work if Germany remains innovative and competitive. It is
                                                                                                                                                                                                                                 therefore becoming increasingly important to invest in know-
                                                                                                                 15
                                                                              Gross fixed
                                                                             investment in                                                                                                                                       how as well as in machinery and equipment. Germany needs
                                                                                                                 10
                                                                                 1991:
                                                                                                                                                                                                                                 cutting-edge products, the best machinery and the most effi-
                                                                              356.75                              5
                                                                                 EUR bn                                                                                                                                          cient production processes. Most of all, however, we must at-
                                                                                                                 0
                                                                                            Gross fixed               1991 1992 1993 1994 1995 1996 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
                                                                                                                                                                                                                                 tract and retain the best brains, particularly in engineering and
                                                                                           investment in
                                                                                               2010:                  Source: Federal Statistical Office                                                                         the natural sciences.
                                                                                             448.14
                                                                                               EUR bn
36           PERSPECTIvES AND TRENDS                                                                                                                                                                                                                                                    PERSPECTIvES AND TRENDS               37




                                                                                                                   2010


                                                                                                                  11 %                                                                   6: Corporate finance in Germany:
                                                                                                                                                                                         Corporate and loans bonds
                                                                                                                                                                                                                                               Bonds
                                                                                                                                                                                         in EUR bn
                                                                                                                                                                                                                                                       Loans
4: Savings rate of
                                                                                                                                                                                                100
German households                                                                                                                                                                        2006
                                                                                                                                                                                                1,204
Percentage of disposable income                                                                                      One fundamental requirement for investment and investment                                                                                 Above all, better regulation aims to remove and prevent wrong
                                                                                                                                                                                                96
 14                                                                                                                  financing is met – Germans tend to save a lot. Without savings      2007                                                                  incentives. Only in this way can it bring about more stability in
                                                                                                                                                                                                1,260
 13
                                                                                                                     there can be no investment over the long term, and Germans                                                                                the German financial sector, and, in the long term, secure
 12
                                                                                                                                                                                                179
                                                                                                                     put aside more than 11 percent of their disposable income on        2008                                                                  financing for companies to make necessary investments. This
 11                                                                                                                                                                                             1,333

 10
                                                                                                                     average each year. Americans, in contrast, save only around                                                                               will be no simple task: First, any regulation must avoid giving
                                                                                                                                                                                                227
  9                                                                                                                  six percent.                                                        2009                                                                  rise to competitive distortions in the financial sector. Second,
                                                                                                                                                                                                1,327
  8
                                                                                                                                                                                                                                                               an in-depth study ought to be made of the combined impact of
  7                                                                                                                                                                                             251
       1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010           So, the money is there. But there apparently is a lack of invest-   2010                                                                  all planned regulatory measures on the financial system and its
                                                                                                                                                                                                1,317
       Source: Federal Statistical Office
                                                                                                                     ment projects which offer an attractive return; hence, savings             Source: Deutsche Bundesbank
                                                                                                                                                                                                                                                               clients. For instance, loans to the SME sector should no longer
                                                                                                                     are flowing out of the country, and this trend is clearly on the                                                                          be considered as risky as highly volatile trading positions and
                                                                                                                     rise. The volume of German direct investments (stocks) abroad                                                                             securities in terms of banks’ capital requirements. Experience
                                                                                                                     rose from EUR 197 bn in 1995 to EUR 985 bn in 2009. Includ-         accounted for 78 percent of corporate financing in the European       shows that, in times of crisis, loans to small and medium-sized
                                                                                                                     ing financial assets and foreign exchange reserves, Germany         Monetary Union, and only 40 percent in the USA. However, this         enterprises exhibit significantly lower losses than securitized as-
5: German direct foreign investment                                                                                  holds approximately EUR 5 trillion (in 2009) in gross foreign       is changing slowly in Germany. In 2006, the volume of corpo-          sets on banks’ trading books. The SME sector should not be
Volume in EUR bn                                                                                                     assets. Nevertheless, there are many key factors, which argue       rate bonds issued was just under EUR 100 bn, equaling a mere          forced to bear a disproportionate part of the costs of the finan-
1200                                                                                                                 in favor of Germany as a place to invest, the main one being its    8 percent of corporate loans. In 2010, corporate bond issuance        cial market crisis. Regulation must be implemented using sound
1000                                                                                                                 extremely productive SME sector.                                    stood at EUR 251 bn, or 19 percent of the volume of corporate         judgement; otherwise, it can easily lead to competitive
 800                                                                                                                                                                                     loans. Nonetheless, looking at this figure reveals that, despite      distortions for Germany – for both the banking sector and
 600
                                                                                                                     SMEs make up 99.7 percent of all German companies. They             companies increasingly tapping the capital market, bank loans         companies alike.
 400
                                                                                                                     dominate the labor market, employing more than 75 per-              by far remain the most important source of external finance.
 200
                                                                                                                     cent of all workers subject to social insurance contributions –
   0
       1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
                                                                                                                     21 million people. These companies also train more than             If the German economy is to continue to grow and remain com-
       Source: Deutsche Bundesbank                                                                                   80 percent of all apprentices.                                      petitive, Germany has to have a globally competitive banking
                                                                                                                                                                                         sector. But this also means that large internationally operat-
                                                                                 2009:

                                                                              985
                                                                               EUR bn
                                                                                                                     All the same, one should not overlook the fact that the vast
                                                                                                                     majority of these companies have an annual turnover of less
                                                                                                                                                                                         ing companies must have access to large, globally networked
                                                                                                                                                                                         banks. To ensure this, the business models of the German
                                                                                                                     than EUR 50 m. Owing to their small size, only a low proportion     banking industry must be geared to the needs and the struc-
                                                                                                                     of small and medium-sized enterprises tap the capital markets       ture of the industrial sector, i.e. of both the SME sector and
                                                                                                                     as a source of financing. Moreover, additional factors, such as     large corporations. It is therefore essential that the new regula-
                                                                                                                     transparency requirements, are keeping them away from the           tory framework for banks and the financial markets reflects this.
                                                                                                                     capital market. This is the reason why so many German SMEs                                                                                Markus Beumer Member of the Board
                                                                                                                     remain dependent on bank loans for external finance. Not only       While the financial market crisis has shown that the financial        of Management of Commerzbank since
                                                                                                                     in Germany, but in the Eurozone as a whole, companies are fi-       sector does indeed require better, and in some cases, more            2008, responsible for the business
                                                                                                                     nanced to a far greater extent through bank loans than in capital   regulation, there should only be more regulation where gaps           segment Mittelstandsbank. He studied
                                                                                                                     markets-based systems, such as that of the USA. In 2010, loans      have to be closed to prevent a further rise in shadow banking.        economics at the University of Münster.
38      PERSPECTIvES AND TRENDS                                                                                                                                                                           PERSPECTIvES AND TRENDS   39




Paving the Way for Change
By Herbert Hirschler

In Germany, public development banks (German: Förderbanken) finance projects for which no funds, or
insufficient funds, are otherwise forthcoming from the market. They offer financing in collaboration with
commercial banks, so as not to compete with them. By doing this, they pave the way for new ideas and
technologies to be widely adopted. They set an accomplished example for development financing.



Financing from German public development banks is provided         only the case in times of economic or financial crises or other
within a clearly defined framework: They perform public devel-     functional disruptions in the markets. This is because the task
opment functions and participate in projects for the common        of development is never completed, not even in highly devel-
good. They finance territorial entities (German: Gebietskörper-    oped nations. The aim here is to respond, within the context
schaften) and special-purpose associations (Zweckverbände)         of Government & Development Finance, to challenges posed
under public law, as well as programmes of a purely social na-     by change, for which the market, at least thus far, offers no
ture. They also make certain types of financing available, such    solutions. Buzzwords like coping with demographic change,
as export financing. This is how their purpose was formal-         environmental protection, or energy efficiency provide cur-
ized in 2002 in coordination with the European Commission.         rent examples. Because Germany belongs to the vanguard in


Facing the                               In order to be able to
                                         perform these func-
                                                                   these areas, partner nations can also benefit from solutions
                                                                   found here, should they find themselves facing similar chal-                                         multiplier effect, but also how
challenges                               tions, these develop-     lenges in the future.                                                                               to make the service available

posed by                                 ment banks benefit
                                         from statutory guar-      Finding the right focal points for development is not the
                                                                                                                                                                    in an efficient way.


change                                   antees and mainte-        only challenge in the area of Government & Development                                      The success of individual pro-
nance obligations, i.e. joint liability agreements with German     Finance. Another key consideration concerns the approach                                 grammes can be measured by whether


                                                                   Providing
federal states. This affords them first-class credit ratings and                                          to setting up carefully                        German public development banks, in col-
a competitive edge, in that they can obtain funds under better                                            targeted development                         laboration with commercial banks, are able
terms. Since there is a general consensus that the activities      the desired                            programmes in such                        to shape the future in socially relevant areas in
of public development banks must not give rise to compet-
itive distortions, they usually adopt a house-bank approach,
                                                                   incentive in                           a way as to provide
                                                                                                          the desired incen-
                                                                                                                                                 a carefully targeted and efficient way. If they are,
                                                                                                                                               they make a valuable contribution to the economy
whereby they offer their products through commercial banks.        a carefully                            tive, avoid free-                 and financial system in Germany – and far beyond.

                                                                   targeted way                           rider effects
This approach is owed to the realization that, beyond the                                                 or    keep                 Herbert Hirschler is Spokesman of the
range of products and services already covered by the market,      them to a minimum, and, if possible, use funds                    Executive Board at Wirtschafts- und In-
there must clearly be financing needs for which no offers are      in a rotating fashion so as to increase their                     frastrukturbank Hessen. A trained econo-
forthcoming. The question whether such arrangements are            reach. The attendant cost-benefit analysis                        mist, prior to that he was State Secretary at
necessary even in highly developed countries like Germany          must take into account not only a given                           the Hessian Ministry of Economics, Trans-
may be unequivocally answered in the affirmative. Nor is this      development programme‘s intended                                  port, Urban and Regional Development.
40     PERSPECTIvES And TREndS                                                                                                                                                                                                        PERSPECTIvES And TREndS              41



                                                                                 Investments in …


                                                                                                                                                … Education
                                                                                                                                                                                                       130 €
           118 €
                                                                               … Sports
                                                                                                                                                                                                              MIllIon
                MIllIon                                                            14 €
                                                                                    MIllIon




                                                                                              … Urban Planning
                                                                                                                                                                                                 … Environment                                     29 €
                                                                                                                                                                                                                                                    MIllIon




       … Urban Transport


                                                                                                           46 €
                                                                                                           MIllIon
                                                                                                                                              … Culture



Sound Finances for an
Attractive Financial Centre                                                                                                                          35 €
                                                                                                                                                     MIllIon


By Uwe Becker




Other cities are amassing record-breaking debts;                    location in great shape in terms of its ability to compete both     stood at around EUR 18.6 bn. Outstanding liabilities and provi-       Particularly given that the German Federal Government will
Frankfurt breaks records in reducing them. This is                  domestically and internationally.                                   sions came to EUR 7.3 bn, equity capital to EUR 9.8 bn. What          be assuming the costs of providing basic social assistance
the stated budgetary goal of the Frankfurt munici-                                                                                      this balance sheet shows is that the city of Frankfurt and its        for the elderly, which amount to around EUR 90 m annually.
pal council (German: Magistrat).                                    The city‘s solid financial position can also be appreciated in      companies are the guarantors that public services will re-            This improves the odds of getting by without assuming fresh
                                                                    its financial reporting: At the close of 2009, the municipali-      main at high levels, thereby also assuring Frankfurt’s future         debts. Because avoiding budget deficits remains a priority for
For the first time in 25 years, the City of Frankfurt am Main can   ty‘s capital assets stood at EUR 12.22 bn. This confirms the        viability. Frankfurt is and remains an attractive location to live,   the time being. At the same time new reserves have to be set
report that its municipal debt has dropped below the one-bil-       continuation of the growth trend in municipal assets – at the       work and invest.                                                      aside for times of crisis, as do reserves for maintaining infra-
lion-euro mark. It was EUR 983 m at the end of 2010. Between        end of 2007, the figure was still EUR 11.95 bn. This continu-                                                                             structure and investing in assets.
2006 and 2011 alone, Frankfurt paid off around EUR 500 m            ous asset growth further attests to the fact that Frankfurt‘s               Sound foundation for the future
in debt. At the same time, and unlike many other municipal-         budgetary policy is sound.
ities, the city has been maintaining high levels of investment.                                                                         Solid policy consists of reducing debt and setting aside re-
These are important signs for the Frankfurt financial centre                        Frankfurt in the black                              serves in the good years – this has been shown. That way,
in two respects: On the one hand, because it means the city                                                                             even the repercussions of such severe crises as the global fi-        Uwe Becker is the Treasurer of the City
council can work on making the location more attractive with-       Frankfurt am Main is the first major city after the city-state of   nancial and economic crisis can be dealt with without the             of Frankfurt am Main. As department
out having to cut corners; on the other, because the city‘s         Hamburg to publish consolidated annual accounts – not un-           need for cuts. This concept of sound financial policy must            head, he is also in charge of munici-
budgetary position also reflects the economic vitality of Frank-    like the consolidated balance sheet of a business group. Ac-        continue to be adhered to, especially in light of the nascent         pal shareholdings, the Frankfurt Rhine-
furt companies – especially the financial industry. The global      cording to these accounts, at the end of 2009, total munici-        economic upturn. Although avoiding new debts is as great a            Main Region, and the city’s ecclesiasti-
economic crisis, of all things, has left Frankfurt as a business    pal assets including divested businesses and special funds          challenge as ever, it is a challenge that can be mastered.            cal affairs.
42     PErSPECTIvES AnD TrEnDS                                                                                                                                                                                                   PErSPECTIvES AnD TrEnDS            43




Solvency II: Supervision Caught in the
Crossfire Between Competition and Stability
By Wolfram Wrabetz




The EU insurance supervisory authority is currently working in Frankfurt on its Solvency II Directive. Its
goal: To assure the greatest possible level of consumer protection, at the same time preserving com-
petition among insurance companies in Europe – quite a challenge, since the higher the standards, the
fewer insurers can meet them. An undesirable consolidation in the industry would be the consequence.



The European Insurance and Occupational Pensions Author-             ing and survival system resting on three pillars: Capital          able to meet its capital requirements. This is because inves-     be endured with great difficulty for another ten years. EIOPA
ity (EIOPA), which just moved to Frankfurt in early January          adequacy with respect to risk, appropriate risk management         tors expect a reasonable return, which will hardly be achiev-     therefore now has to rework the model it most recently put
2011, is required to resolve what appears, superficially at least,   and demonstrable transparency on the part of market par-           able in light of the exorbitant capital requirements. Should a    forward, on the one hand in order to provide maximum
to be a dilemma: Those who advocate unfettered competi-              ticipants concerning the first two pillars. In the five “Quan-     significant number of insurance companies prove incapable         guarantees to insurees, and on the other, to obtain a market
tion in the insurance business must also accept its ultimate         titative Impact Studies” conducted so far, the EIOPA calls         of raising fresh equity capital in the presumably required vol-   with a relatively large number of participants, which is what
consequence: the elimination of unprofitable market partic-          upon insurers to base their calculations on the new rules          umes, it would necessarily lead to a shakeout in the market       makes true competition possible in the first place. These are
ipants as an inherent feature of the system. If, on the other        and to properly assess the consequences of this supervi-           and a more or less extensive oligopoly. This type of market       the challenges facing both insurers and regulators in equal
hand, one seeks to avoid the annulment of insurees‘ claims           sory paradigm shift. The latest study, “QIS 5” now clearly         has long existed in other sectors of the economy, but in the      measure. Frankfurt am Main, as the European capital city of
in the event of one or more insurers going bust, this could          shows that the system has become very exigent and that             case of the insurance markets, it would preclude the pos-         insurance industry supervision, remains at the heart of these
only be achieved by imposing restrictions on competition.            even large market participants will be hard pressed to adhere      sibility of widespread competition continuing to exist. How-      developments.
                                                                     to it – to say nothing of small and middle-tier insurers. The      ever, it cannot be the goal of any state supervisory authority,
In this sense, the intended aims of Solvency II are akin to          reason: Insurers have to put up considerable amounts of eq-        whether theoretical or in terms of its policy on competition,
squaring the circle: The directive is based on the assumption        uity capital commensurate with their risks both on the as-         to deliberately induce a shakeout – not even providing the
that insurers should also act competitively. In other words,         sets and liabilities sides of their balance sheets. As a result,   greatest possible safeguards against system failure could be
the idea is to preserve the competition that entered the mar-        under the new system, large investments in equities or real        cited as a justification for doing so.
ket as it was deregulated in the 1990s. True competition,            estate must be backed up by an insurer‘s own equity cap-
however, is all too necessarily attached to the risk of individ-     ital in amount of up to 25 % of the investment. Even large         Currently being reworked
ual market participants proving incapable of surviving it and        insurers will have difficulty investing more heavily in equities   The EIOPA supervisory authority and the European Commis-
being eliminated. Solvency II is meant to avoid undesirable          than previously. This would not be very desirable in terms         sion have acknowledged these problems and are reworking           Prof. Dr. Wolfram Wrabetz is the CEO
collapses on the part of insurers in the interests of insurees.      of potential returns or the financing of a national economy.       Solvency II. Moreover, transition periods are meant to be long    of Helvetia Germany, and, among other
                                                                                                                                        – up to ten years. Given the dynamic evolution of the finan-      things, Honorary Professor of Business
Weak spots have already been identified                              There are, moreover, doubts as to whether the capital markets      cial markets, however, there will hardly be time for such long    and Insurance Law at the House of Fi-
The framework has already been established: Starting in              would be at all prepared to significantly increase their commit-   transitions. In the absence of Solvency II, there exists a su-    nance, and a Delegate of the Hessian
2013, every European insurer must set up an early-warn-              ments in the insurance industry, merely for that industry to be    pervisory vacuum in the insurance industry; this could only       State Government for Insurance Affairs.
44      FiNANCiAL CENTRE iNFRASTRuCTuRE                                                                                                                                                      FiNANCiAL CENTRE iNFRASTRuCTuRE                45




Hubs of Networked Financial Centres                                                                         The globalisation of capital markets and German financial cen-
                                                                                                            tres – how do they fit together? The answer is: very well –
                                                                                                                                                                               this regard, thanks to its cosmopolitan character and its abso-
                                                                                                                                                                               lutely reliable and highly sophisticated technologies, financial
                                                                                                            provided they are networked with one another. The time has         products and services. Frankfurt has many important com-
By Frank Gerstenschläger
                                                                                                            come to take leave of the idea that financial centres are purely   petitive advantages over metropolises like London, New York
                                                                                                            in predatory competition with one another. On the contrary,        or Tokyo, from which both the local region and its partner re-
Frankfurt‘s strength lies in the symbiosis between elements that are separated elsewhere: marketplaces      global networking creates win-win situations for them all. The     gions all over the world can benefit. This is because Frank-
for private and institutional investors as well as for national and international investors and issuers,    only losers are those who, fearing global competition, feel they   furt has always been able to bring together the best of many
state-of-the-art technology in combination with a human factor, capital for large companies, but also for   must withdraw to the safety of their fortresses. The Frank-        worlds. Frankfurt is no monoculture – not as a city, not as
middle-tier entrepreneurs from Germany, Europe – and far further afield.                                    furt Rhine-Main region in particular has much to offer as a        a region and not as a financial centre. Frankfurt offers mar-
                                                                                                            partner, especially to financial centres in the world‘s emerg-     ketplaces for private and institutional investors as much as
                                                                                                            ing nations, whether in Eastern Europe, Africa, Asia or South      for national and international investors and issuers. Frank-
                                                                                                            America. And Deutsche Börse Group can play a key role in           furt offers state-of-the-art technology combined with a
46     FiNANCiAL CENTRE iNFRASTRuCTuRE                                                                                                                                                                                       FiNANCiAL CENTRE iNFRASTRuCTuRE                 47




      Privatanleger und Profis


human factor. Frankfurt offers capital for large groups, but        components of Deutsche Börse Group – from derivatives trad-            that seems to be desired politically. This only really boils down   can tap capital with the same ease as middle-tier compa-
also for middle-tier entrepreneurs from all over the world, par-    ing to clearing to securities custody – enjoy even broader in-         to exchanges making sufficiently sophisticated systems and          nies, which perceive better treatment in the hands of Frank-
ticularly the emerging markets.                                     ternational reach, with Clearstream even spanning the globe.           security features available – and Deutsche Börse does just          furt‘s bank and exchange professionals than they would in
                                                                    One product for risk management in the interbank market that           that. Arbitrage is an international phenomenon today. 70 per-       the world‘s metropolises. This is particularly the case for Ger-
Private investors and pros                                          has stood the test at the Frankfurt Rhine-Main financial centre        cent of the order book volume on Xetra comes from outside           man middle-tier companies seeking to obtain equity capital
With floor-trading and its specialists, Frankfurt is home to one    and that can be used worldwide is Clearstream‘s GC Pooling        ®
                                                                                                                                           Germany. This means that Deutsche Börse is importing liquid-        by means of an iPO or capital increase, or that seek to bor-
of the leading stock exchanges in Germany; it is also home          market for banks, which was developed jointly with Eurex Repo.         ity to Frankfurt. in this context “importing” means that this       row capital in the form of bonds. And this also increasingly
to Europe‘s leading cross-border securities trading system,         GC Pooling‘s outstanding volume crossed the EuR 100 billion            does not just happen by itself – something has to be done           applies to medium-sized firms from all over the world, espe-
Xetra®. These two market systems have been merged into              mark in the first quarter of 2011, an increase of 25 percent year-     for it to happen. Metaphorically speaking, a series of motor-       cially those from Asia.
one since 23 May 2011. This affects nearly 40,000 securi-           on-year. in cooperation with central banks, GC Pooling offers a        ways needs to be built to make Frankfurt a transport hub of
ties – equities and bonds alike. Particularly where the highly      collateralised solution for trading in the interbank market, which     international capital markets. in August 2009, Deutsche Börse       in a study published in January 2011, the Chief Economist at
liquid shares in the German DAX blue-chip index are con-
                                    ®
                                                                    has suffered from a sustained lack of confidence as a result of        began to operate a new data connection with a capacity of           the Landesbank Hessen-Thüringen, Gertrud Traud, stresses
cerned, Xetra has been and remains the best trading platform        the financial crisis. Without GC Pooling, the financial crisis would   ten gigabits per second between London and Frankfurt. Be-           Frankfurt‘s cosmopolitanism as one of the area‘s special ad-
for all, regardless of size or analyst capacity; access is stand-   have been considerably more severe than it already was and             sides sending trading data, it is also used to distribute mar-      vantages as a financial business location. This is why, accord-
ardised and the same rules apply to all. Thanks to the Xetra        continues to be, at least in Germany.                                  ket data and it sets a new standard in terms of speed. in April     ing to the same study, Frankfurt is second only to London
specialists whose role is inspired by the traditional floor trad-                                                                          2011, Deutsche Börse also made additional improvements to           among European financial centres – and this, without being
ers, investors continue to enjoy personal attention and hu-         Man and machine                                                        the network connections between the two cities.                     as heavily dependent on the financial sector as the British
man know-how also on Xetra. This model has been tried and           Another point that the migration of floor trading to Xetra makes                                                                           capital. What is better, to be globally networked in a globalised
tested for fund trading in structured products at the Frankfurt     clear is that the specialist lends Xetra a human element, which        DAX and middle-tier companies                                       world, or to be locally isolated? To me the answer is clear:
Stock Exchange as well as at its German/Swiss subsidiary            gives it the best of both worlds. At the same time, Deutsche           The strength of German financial market technology makes            every step towards internationalising financial service provid-
exchange, Scoach. Therefore, the switch to Xetra does not           Börse is operating state-of-the-art high bandwidth data cen-           a strong case for the strength of the German economy as a           ers and infrastructure providers based in the Frankfurt Rhine-
mean that Deutsche Börse is shutting down its trading floor         tres for its customers. On Xetra, the average execution time           whole: namely that Germany is not primarily a financial centre      Main region strengthens the Frankfurt financial centre as
that still provides a very special atmosphere and unique dis-       from order placement to order confirmation has been reduced            at all; Germany is an industrial centre, and is increasingly be-    much as the partner regions involved. Those who seek
play window on exchange trading, which is otherwise such            to a few milliseconds. incidentally, financial centres are once        coming a hub for service providers – as are many emerging           success in the age of global markets must build bridges, not
an abstract affair. Rather, the Frankfurt Stock Exchange has        more gaining in significance on account of this, since geo-            markets in Eastern Europe, Africa, Asia and South America.          fortresses.
introduced a new technological infrastructure, which opens it       graphic proximity − which, with the advent of remote access,           The financial industry generally plays the role of service pro-
up to all Xetra participants – at present “only” all over Europe,   had for a long time taken a back seat − is again a competitive         vider. This particularly applies to exchanges that enable in-
but in terms of technological possibilities, all over the world.    factor among market participants. At greater speeds, a firm‘s          vestors to participate in growth of the real economy, and
                                                                    physical distance from the exchange computer on which                  conversely provide companies with access to capital under
it is not for nothing that after holding a bidding competition of   orders are matched becomes an increasingly decisive factor.            conditions that are regulated, transparent and above all equal
great scope, the Shanghai Stock Exchange chose a system             Behind it all lies an effort to connect different markets and in-      for all. Companies from all over the world can likewise ben-        Frank Gerstenschläger is member of the
based on Xetra years ago – as did the Dublin, Vienna, Ljubljana     formation flows at lightning speed through arbitrage. The fact         efit from this beacon function, particularly those from coun-       Executive Board of Deutsche Börse AG
and Sofia stock exchanges. And our continuing to develop Xe-        that these tasks are largely automated at this point in no way         tries where capital market structures are not yet sufficiently      and Chairman of the Management Board
tra with new partners is not going to change anything in this       jeopardises the system‘s stability – on the contrary: it is the        mature to keep pace with the dynamics of the real economy.          at Frankfurt Stock Exchange. in this ca-
respect – quite the opposite: the system‘s connectivity, per-       only way to determine a universal price-per-instrument-traded          This also leads to a win-win situation. What makes Frankfurt        pacity he is in charge of development,
formance and reliability can only be improved. Plus, the other      within the system of fragmented, competing marketplaces                special in terms of its financing function is that multinationals   sales and operations in the cash market.
48     FINANCIAl CENTRE INFRASTRUCTURE                                                                                                                                                                                 FINANCIAl CENTRE INFRASTRUCTURE               49




Eco-friendly IT from the Cloud                                                                                                       conditions. Moreover, the Frankfurt Cloud is an outstand-
                                                                                                                                     ing example for the implementation of the European Union’s
                                                                                                                                                                                                         computing project. The advantages include the largest Inter-
                                                                                                                                                                                                         net exchange point featuring excellent data links to all over
By Hermann-Josef Lamberti                                                                                                            “Digital Agenda”, which aims, among other things, to cre-           the world, outstanding data centre facilities and a high con-
                                                                                                                                     ate a European cloud computing infrastructure for research          centration of IT firms. This makes Frankfurt one of the world’s
When banks and companies share storage space and computer power on third-party servers, it is called cloud                           and innovation.                                                     most important digital hubs, but also a central and attractive
computing. As a result, they no longer have to build up their own IT resources, but can lower their costs and                                                                                            location for information technology. The Frankfurt Cloud is
help protect the environment. Although this new technology is still just starting out, the “Frankfurt Cloud” is a                    Looking ahead, the Frankfurt Cloud sets the Frank-                  right on track for the future. The city is therefore well posi-
pioneering pilot project in this area, one that already sets Frankfurt apart in the competition among financial centres.             furt financial centre apart from its global competitors. The        tioned to play a decisive role in shaping the technological
                                                                                                                                     next expansion stage will consist of building out the Cloud’s       and commercial development of the cloud computing model,
Two key factors are decisive for the success of today’s mod-      that is unlike any other in Germany, Europe and the world:         capacity and bringing new participants on board. Once the           thereby enhancing Frankfurt’s competitiveness a financial
ern financial centres: innovation and efficiency. This applies    the Frankfurt Cloud. The project partners are Deutsche Bank,       tests have been successfully completed, financial service           centre over the long term.
now more than ever to IT at banks and companies located           Frankfurt’s Goethe University, Gesellschaft für Schwerionen-       providers, mid-cap companies and start-ups from all sectors
in the world’s leading financial centres – and both factors are   forschung (GSI), a research centre focussing on heavy ions,        will be able to tap into the Frankfurt Cloud’s state-of-the-art,
turning out to be crucial advantages as global competition        and Interxion, a service provider whose Frankfurt data cen-        flexible and efficient IT infrastructure, with only a brief lead
intensifies. But how is it possible to implement pioneering in-   tre houses Europe’s largest Internet hub, DE-CIX.                  time. The Frankfurt Cloud will make it easier for banks and         Hermann-Josef Lamberti is member of
novations in what is considered to be today’s mature IT envi-                                                                        companies based in Germany and abroad to launch or ex-              the Management Board and the Group Ex-
ronment, while noticeably increasing efficiency and without       The four project partners have state-of-the art, effi-             pand their business in the Frankfurt financial centre.              ecutive Committee of Deutsche Bank. As
generating disadvantages for the firm’s business operations?      cient IT systems and solutions at their disposal to cover not                                                                          COO, he is responsible for Deutsche Bank’s
                                                                  only their base IT capacity needs, but also what is some-          The Frankfurt Rhine-Main metropolitan region and its infra-         global information technology, operations
The answer is cloud computing – IT from “the                      times their highly volatile demand for IT and their peak           structure offer the ideal environment for a successful cloud        management and process management.
cloud.” Using the cloud model, computer power and stor-           loads. Resources are available for the extremely complex
age capacities are requested using an online, self-service        calculations of high-tech research projects as well as banks’
portal from external server companies and flexibly allocated      processing applications on days of peak volumes in market          Frankfurt’s Edge in Digital Infrastructure
within minutes. Cloud computing avoids the potential bottle-      trading. The Frankfurt Cloud also serves as an ideal lab for       By Peter Knapp
necks in a firm’s in-house IT systems. The new technology         the partners to test this relatively new technology. Under ex-
also makes the excess capacities that often exist in a com-       amination are availability, reliability, performance, resilience   Nowadays digital infrastructure in the form of data centre ca-      scalable electrical power supply combined with high-end data
pany’s own IT landscape unnecessary, just like expensive          and security. Initial results are promising, suggesting that the   pacity, fibre optic connections and adequate electrical power       centre space and scalable bandwidth for cloud-based appli-
new investments in hardware and software. Not least, the IT       Frankfurt Cloud will be a great success.                           facilities is as important for a business location as the availa-   cations. The same goes for the Frankfurt Cloud, which is
infrastructure becomes more efficient for everyone involved,                                                                         bility of traditional infrastructure. Not many companies can        operated in Interxion’s Cloud Hub in Frankfurt.
as unused resources in the cloud can be made available to         Furthermore, the Frankfurt Cloud also represents a valuable        afford to do without high-end digital infrastructure. In order
other users. Power consumption and costs are thus reduced,        symbiosis between the business and research communities.           to do justice to the idea of “computing from a wall socket”,
while CO2 emissions are also lowered, which helps to pro-         As Goethe University and GSI have been able to use the IT          the key factors in cloud computing are scalability and high         Peter Knapp is the Managing Director of
tect the environment.                                             infrastructure free-of-charge, renowned researchers contrib-       availability in general and low latency at data centres in par-     Interxion Deutschland GmbH, a leading
                                                                  ute their support to finding answers for unresolved questions      ticular. Interxion’s 13 European cloud hubs provide access to       European provider of carrier-neutral data
Cloud computing is already a reality in Frankfurt. In 2010,       relating to optimum usage and pricing models, efficient ca-        over 350 communications networks and 20 internet exchange           centre colocation services.
four partners joined forces to create an innovative project       pacity utilization, security as well as the legal and regulatory   points. Its cloud hub services are underpinned by highly            www.interxion.de
50   FInAnCIAl CEnTRE InFRASTRuCTuRE                                                                                                          FInAnCIAl CEnTRE InFRASTRuCTuRE                 51




                                                         Since the outbreak of the financial crisis in 2008,                    in shaping international market policies. Competition plays
                                                         the financial sector has come under criticism as                       an important role in this context. Deutsche Börse is not only
                                                         heavy as last was during the Great Depression.                         in competition with regional stock exchanges on a national
                                                         Exchanges were able to avoid the worst thanks to                       level, but it is also and above all in competition with other


             Safety Through Transparency                 the clearing facilities affiliated to them. Neverthe-
                                                         less, they too, are affected by changes underway.
                                                                                                                                exchange organisations on a global level – and increasin-
                                                                                                                                gly with over-the-counter trading systems. In derivatives tra-

                                       By Stefan Mai     One thing is clear: the age of deregulation is over.                   ding and the post-trade business, this competition has long
                                                                                                                                since taken place on a global scale. This competition provi-
                                                         We live in an age of re-regulation of the financial markets –          des incentive to continuously expand the range of products
                                                         and one of the consequences is that greater importance is              on offer and to invest in technology; it is therefore in the best
                                                         attached to the role clearing houses play, particularly in deri-       interests of customers.
                                                         vatives trading. This is merely consistent with the fact that ex-
                                                         change organisations all over the world, which are committed
                                                                                                                                  Acting in the interest of both parties
                                                         to transparency and neutrality and which organise the regu-
                                                         lated markets in the global financial economy, have always             Stock exchanges can make markets safer and lend them gre-
                                                         argued in favour of intelligent regulation orientated towards          ater integrity – thereby making future financial crises at least
                                                         the needs of the real economy and ultimately those of soci-            less likely to occur. The heads of state of the world‘s leading
                                                         ety as well. An analysis conducted by Deutsche Börse reveals           nations have repeatedly stressed the need for reforms in over-
                                                         that there are two clear priorities for the intelligent regulation     the-counter derivatives markets at the G-20 level. They have
                                                         and the restructuring of the financial sector. These are safety        also pointed to the role of clearing houses in this regard: at
                                                         and integrity. Previously, the main guiding principle for the de-      stock exchanges worldwide, including Deutsche Börse, clea-
                                                         regulated financial sector was greater efficiency. But without         ring houses provide a hedge against the risk of a counter-
                                                         safety mechanisms for managing risks, and without the inte-            party default in securities and derivatives trading. With Eurex
                                                         grity − provided by regulation and supervision − that protects         Clearing based in Frankfurt and Zurich, Deutsche Börse runs
                                                         investors against market abuse, it will not be possible to es-         the largest clearing house in Europe. What makes exchanges
                                                         tablish trust in the markets. The trust of the public in govern-       unique in the financial sector is their neutrality – both at the
                                                         ment policy makers will also depend on how successful they             clearing and trading level. On account of their intermediary
                                                         are in their efforts to intelligently regulating the financial mar-    function, stock exchanges safeguard the interests of issuers
                                                         kets, without stifling their capacity to innovate.                     and investors in equal measure. They do not speculate. Much
                                                                                                                                rather, exchanges bring their customers together on neutral
                                                                                                                                ground, where they share equal rights to accessing market
                                                       Transparency and integrity through infrastructure
                                                                                                                                information and liquidity.
                                                         Reliable infrastructure is of crucial importance in guarante-
                                                         eing integrity and safety on the financial markets. Deutsche
                                                         Börse Group brings all these aspects together under one um-
                                                         brella. In doing so, it lays the foundation for liquidity, transpar-   Dr. Stefan Mai is Executive Director,
                                                         ency, efficient price-discovery and effective risk management.         Head of Market Policy & European Pu-
                                                         Thus, the Group is of central importance not only to Germany           blic Affairs at Deutsche Börse AG. He is
                                                         as a financial hub, but also in terms of Europe‘s competitive-         in charge of Deutsche Börse Group’s po-
                                                         ness and the euro zone. And only a location with its own in-           licy strategy as well as the representative
                                                         dependent financial infrastructure will be able to participate         offices in Berlin and Brussels.
52    FINANCIAl CENTRE INFRASTRUCTURE                                                                                                                                                                               FINANCIAl CENTRE INFRASTRUCTURE                   53




                                                                                                                                   independent auditors‘ report does not fulfill the expecta-         performance of the financial concern. This requires the
                                                                                                                                   tions of an interested public. In particular the need to provide   auditor to carefully consider how sustainable the business
                                                                                                                                   financial support for some financial institutions stands in        model of a financial institution is. To do this, the auditor has to
                                                                                                                                   contrast to the unreserved statements that had been pub-           evaluate the entire product range as the operational element
                                                                                                                                   lished some months before. Considering the relevance of the        of the business strategy. Do the products reflect the image the
                                                                                                                                   financial markets for the global economy, the extent of their      financial institution presents to the outside world? Have the
                                                                                                                                   global network and the consequences arising from the col-          financial products undergone a sufficiently objective internal

                                          Modern Auditing                                                                          lapse of large banks, there is an urgent need to satisfy these     review? What is the substance behind the risk indicators and
                                                                                                                                   expectations.                                                      what are their limitations? These are just some of the ques-
                                          Needs to Assess                                                                                                                                             tions to be answered.

                                           Future Risks                                                                            Auditors are only legally obliged to verify the proper prepara-
                                                                                                                                   tion of the accounts. The duties of the auditors are based on      An international network is needed in today‘s world
                                           By Philipp Turowski and Claus-Peter Wagner
                                                                                                                                   a review of past figures to establish their conformity to ac-      If the auditor is to present to the Supervisory Board and the
                                                                                                                                   counting and publication regulations. The legal regulations        Board of Directors a meaningful report as the basis for infor-
                                                                                                                                   for international standards alone comprise over more than          mation and decision-making, then it is necessary to under-
                                                                                                                                   1,000 pages. A further 2,000 pages deal with their interpre-       stand the company in the context of the financial sector and
                                                                                                                                   tation. The regulations governing banking supervision are sig-     to provide appropriate benchmarks. It therefore goes without
                                                                                                                                   nificantly more than that and require the auditor to consider      question that today‘s auditor must look beyond the domestic
                                                                                                                                   and assess them as part of his duties. In the light of the com-    market and seek international cooperation in a global network
                                                                                                                                   plexity and sheer numbers of regulations the standards ex-         within a global market. When considering these challenges
                                                                                                                                   pected of a year-end audit are set extremely high. To satisfy      every interested party needs to be clear that a quality audit has
                                                                                                                                   these requirements there is a need for high quality expertise      its price. If the year-end audit is still considered a “commod-
                                                                                                                                   in understanding financial products, risk controlling and man-     ity”, then this in no way reflects what is actually required.
                                                                                                                                   agement as well as accounting. It is necessary to have an in-
                                                                                                                                   depth understanding of the banking sector and a network            Philipp Turowski is in charge of the Ernst
                                                                                                                                   similar to that of the global financial market. The governing      & Young office in Eschborn / Frankfurt. Un-
                                                                                                                                   bodies of the financial regulators also expect an audit to pro-    til 2009, he was Managing Partner of Au-
Supervisory Boards and the public expect more                     crisis of 1934 that the American Stock Exchange regula-          vide the necessary transparency of inherent risks.                 dit and Advisory Business Services and
from auditors than confirming that the accounts                   tor, the SEC, was established and shortly afterwards re-                                                                            Chief Operating Officer for Ernst & Young
have been properly prepared. They need to un-                     vised accounting regulations were introduced. In Ger-            The year-end report to support the Supervisory Board               in the CIS.
derstand the extent of the risks that are inherent                many the auditing of annual accounts became mandatory            Beyond the legal requirements, the Supervisory Board
within the business model of a financial institution.             for public listed companies. The recent crisis in the finan-     expects the auditor to support its control responsibilities in     Claus-Peter Wagner is a partner and re-
It is worth the time and money invested.                          cial markets has also led to a call for change. Account-         an efficient and effective manner. For the year-end audit a        sponsible for the Financial Services Organ-
                                                                  ing and banking regulation are once again under scrutiny.        forward-looking element is expected – a retrospective re-          ization (FSO) of Ernst & Young in Germany.
The challenges facing auditors and the demand for more            The role and regulation of auditors is also the subject of in-   view of the accounting issues no longer suffices. The Su-          He has worked for more than 15 years in
regulation have always been at their highest at times of eco-     tense discussion within the EU Commission. The crisis in         pervisory Board requires the audit to consider risks and to        preparing financial statements and consoli-
nomic crisis. It was immediately after the great economic         the financial markets has clearly demonstrated that the          highlight any indicators that could endanger the operating         dated accounts as well as in consulting.
54     FINANCIAl CENTRE INFRASTRUCTURE                                                                                                                                                                                                                                                55
                                                                                                         1. Monopoly structure
                                                                                                          Three agencies split 95 % of
                                                                                                          the global market among them-
                                                                                                           selves. The lack of competi-



Europe Needs a
                                                                                                             tion is manifest in a return
                                                                                                               on turnover of 40 % and an                                                                                           8. Domestic bias on the part of US agencies
                                                                                                                 overlapping shareholder                                                                                            European firms often feel discriminated against where


Rating Agency
                                                                                                                   structure.                                                                                                         credit ratings are concerned. This is partly politically
                                                                                                                                                                                                                                         motivated, but also attributable to US agencies’
                                                                                                                                                                                                                                            lack of understanding of European balance-
                                                                               2. Remuneration model                                                                                                                                           sheet and management conventions.
                                                                               The issuer of a bond is the client and
By Markus Krall                                                                pays for the rating. Yet a security’s
                                                                               classification is primarily intended to
                                                                                assist investors in decision making.



One of the key institutions in the capital markets,
                                                                                                                                                                                                  redit rating agency
the credit rating industry, failed in the financial                                                                                                                                     rop ean c
                                                                                                                                                                                   Eu
crisis – that much is beyond dispute. The decisive                                                                                                                          fa
                                                                                                                                                                         ro
                                                                                                                                                              ou
                                                                                                                                                           fav
factors in that failure were the business models
                                                                                                                                                                                                                                                7. Regulatory discrepancy
                                                                                                                                                         n
                                                                                                                                                       si
and roles played by the dominant agencies.                                                                                                                                                                                                      Although countless regulations for
                                                                                3. Additional services                                                n                                                                                         banks, insurers and even central banks
They allowed the US real estate bubble to occur                                 Thus far, the agencies have also
                                                                                                                                                   aso                                                                                          have previously been predicated on

                                                                                                                                                 re
                                                                                                                                                                                                                                                credit ratings, the ratings themselves
in the first place and further exacerbated the cri-                             provided consulting services on
                                                                                                                                                                                                                                                have remained practically unregulated.
                                                                                how securitizations are to be




                                                                                                                                             8
sis. Regulation is only part of the solution.                                   structured, with a view to obtain-
                                                                                ing the best rating possible. Thus,
                                                                                the agencies were ultimately
                                                                                valuing their own products.
Without the seal of approval of the credit rating agencies, the
bubble in real estate could never have developed. The rat-
ings – paid for by issuers – tempted investors and banks into
accepting risky investments as being safe without question-
ing the securities’ first-class creditworthiness. This division                                                                                                                                                      6. Economic cycle myth
                                                                                                   4. Liability loophole                                                                                             The myth of a rating existing independently of the eco-
of responsibilities likewise made it possible and attractive for                                   The rating is legally considered an                                                                               nomic cycle falsely portrays ratings as being stable, yet
                                                                                                  “opinion”, which automatically does                                                                                this is not supported by reality. Keeping ratings constant
US mortgage banks to grant large numbers of loans without                                                                                                                                                                       throughout the economic cycle not only pre-
                                                                                                   away with any product liability. This
                                                                                                                                                                                                                                supposes that the agency knows in advance
adequately inspecting the quality of the loans.                                                    misrepresents the fact that the rat-                   5. Quality problems                                                how long and severe a recession will be, but
                                                                                                   ing is actually a product that has been                Severely limited competition along
                                                                                                   paid for, practically shielding the                                                                                     also that the sensitivity of creditworthiness
                                                                                                                                                          with a lack of transparency result in
                                                                                                   agencies from any liability whatsoever                                                                                   to booms and recessions is the same for
This misallocation was preceded by a series of institutional                                                                                              quality problems: rating algorithms
                                                                                                   for faulty ratings.                                                                                                      all companies and industries. In severe
                                                                                                                                                          are not published, data is not subject
                                                                                                                                                                                                                           crises, this leads to downgrades occurring
weak spots in the rating industry. The interplay of these weak-                                                                                           to quality control, and results are                            too late (and being all the more radical for it)
                                                                                                                                                          rarely monitored systematically at                            and being perceived by the markets as coming
nesses gave rise to considerable systemic risk, ultimately                                                                                                the portfolio level.                                         at the worst possible time.
borne by the taxpayer.




Significant risks still present
While current steps towards stricter regulation of the rating      be achieved if a European rating agency with global reach is              and be afforded the greatest possible independence in or-          Dr. Markus Krall is a Senior Partner
industry do involve some good approaches, they are only            able to establish itself in the markets. Its influence would have         der to avoid conflicts of interest. It should introduce a remu-    and Global Head of Risk Management at
capable of diffusing some of these risk factors. The issues        to be sufficiently great to be able to change the rules in this           neration system for which investors are responsible, and           Roland Berger Strategy Consultants.
of competition and remuneration models remain unaffected.          market by offering a new governance and remuneration                      which is exposed with the greatest possible transparency to        Prior to that, he held positions at Allianz,
The monopolistic rating agency structure needs to be aban-         model as an alternative to the systemically dysfunctional sta-            the controlling effects of public scrutiny. This is the only way   McKinsey and the strategic consultancy
doned, and a new business model introduced. This can only          tus quo. The agency should be incorporated as a foundation                to create incentives for ratings of the highest quality.           firm KDB, which he co-founded.
56     FINANCIAl CENTrE INFrASTrUCTUrE                                                                                                                                                                         FINANCIAl CENTrE INFrASTrUCTUrE                  57




                                                                                                                               the entire settlement process, simplify liquidity management      Various different proposals have been under discussion at
                                                                                                                               and reduce transaction costs. Further savings would result        these EU bodies. Suggestions range from a transition period
                                                                                                                               for companies in the SEPA-zone, given that SEPA payments          following the law’s entering into effect to prescribing a fixed
                                                                                                                               are only to cost as much as domestic payments. Starting in        date for migrating to SEPA.
                                                                                                                               2012, customers will have transferred amounts at their dis-
                                                                                                                               posal after a maximum settlement period of one business               Experienced partners helping to implement
                                                                                                                               day, which will additionally improve their liquidity. SEPA fur-                     the standard
                                                                                                                               thermore affords banks the possibility of offering their cus-
                                                                                                                               tomers additional services, such as managing SEPA direct          For banks and internationally active companies at the Frank-
                                                                                                                               debit mandates or prior communication of direct debits that       furt financial centre, including Equens’ majority shareholder,
                                                                                                                               have already been received by the bank.                           DZ BANK AG, these discussions in the EU bodies form the cor-
                                                                                                                                                                                                 nerstones of important decisions. This is because mandatory
                                                                                                                                        SEPA will be more widely adopted                         introduction of a standard format for payments within the SEPA
                                                                                                                                                                                                 zone is going to require investment in internal infrastructure, in
                                                                                                                               But we are not quite there yet: Up until the present, frame-      order for it to be possible to settle payments in SEPA format.
                                                                                                                               work condition such as formats, processing procedures and         While planning their implementation processes, banks and
                                                                                                                               rules for cashless payment transactions have varied con-          companies may consider whether they could decrease or even
                                                                                                                               siderably from country to country. The single nations still       avoid internal investment by entering into a partnership with
                                                                                                                               regulate their payment transaction markets themselves. The        service providers like Equens. As is always the case when new
                                                                                                                               standardized format has therefore not taken hold to the de-       product and processes are introduced there is going to be
                                                                                                                               sired extent since SEPA credit transfers and direct debits        competition among service providers in the area of process-
                                                                                                                               were introduced. According to research conducted by the           ing SEPA transactions, which will determine not only the price,
                                                                                                                               European Central Bank, SEPA credit transfers currently con-       but also the scope of service and the overall usefulness for the

Europe Without Borders –                                                                                                       stitute a mere 9.6 % of total credit transfers in the eurozone.
                                                                                                                               The transaction figures of payment service provider Equens
                                                                                                                                                                                                 customer. Banks will benefit, as will their business customers
                                                                                                                                                                                                 in Europe by extension. Intensified competition will presuma-

Also for Payment Transactions                                                                                                  bear this out: In 2010, they processed over 100 million SEPA
                                                                                                                               transactions. However, this constitutes an infinitesimal per-
                                                                                                                                                                                                 bly be accompanied by consolidation among payment trans-
                                                                                                                                                                                                 action service providers, after which the 25 clearing houses

By Michael Steinbach                                                                                                           centage of the 9,7 bn in transactions processed by the com-       settling payments in the SEPA zone today will be reduced to
                                                                                                                               pany annually.                                                    four or five. As the largest payment transaction service provider
A unified eurozone for cashless payment transactions has been a reality since 2008 – only that it is not                                                                                         in Germany, Equens intends to be one of these companies –
mandatory and is therefore little used. Now SEPA direct debits and transfers are to become obligatory.                         The reasons were many: In the case of direct debits, a le-        in order for Frankfurt to continue to play a leading role in Euro-
This will require investment in new infrastructure and present many opportunities.                                             gally reliable transition scenario from the old procedures        pean payment transactions in the future.
                                                                                                                               to the new SEPA direct debit process has long been lack-
Six years after the euro was introduced on 1 January 2002,     Europe. Banking customers will no longer experiencee any        ing. Only slight adoption of the new standard for transfers       Michael Steinbach is Chairman of the
the standardization of cashless payment transactions be-       differences between domestic and cross-border payments          had been observed due to the obligatory use of the new            Board of Directors at Equens SE. He was
gan in January 2008. The aim is to create a Single Euro Pay-   in euros. This will be particularly advantageous to compa-      but longer IBAN (International Bank Account Number) and           Spokesman of the Board of Directors of
ments Area (SEPA) – a unified European payment transac-        nies active all over Europe. They would be able to centralize   BIC (Bank Identifier Code) instead of the customary bank          the firm’s predecessor company, before
tion zone. Cashless payments in euros are to be settled in     all their European payment transactions in a single country     account number and sort code. The European bodies                 becoming Deputy Chairman of the Board
a standardized format between participating nations across     and settle them through a single bank. This would streamline    therefore wish to make SEPA payment obligatory by law.            of Directors at Equens.
58   FInAnCIAl CEnTRE InFRASTRUCTURE                                                                                                                                                                 FInAnCIAl CEnTRE InFRASTRUCTURE                   59




                                                      Our Financial
                                                     Centre is                                                   kinds of instruments are not that widespread among issuers.          provisions of law and the recommendations of the German in-

                                                    Enhanced by                                                  All this will have changed by the end of 2011, when the EU Di-
                                                                                                                 rective known as “UCITS IV” and citing clear regulatory provi-
                                                                                                                                                                                      dustrial association known as the Central Credit Committee
                                                                                                                                                                                      (Zentraler Kreditausschuss, ZKA).

                                                   Transparent                                                   sions for investment funds will be incorporated into German law.
                                                                                                                 This directive defines the requirements securities funds must        Not only are both documents prescribed by law, they
                                                  Information                                                    meet in order to be legally sold all over the EU. Use of the so-     will also be of great significance in the competition to curry fa-
                                                                                                                 called “Key Investor Information Document” (KIID), constitut-        vour with investors. This is because they enable those inves-
                                              By Edmund J. Keferstein                                            ing a whole new generation of consumer information, will be          tors to obtain fast, comprehensive information on investment
                                                                                                                 mandatory going forward. While the EU exclusively intends for        products on offer, and also to compare them on an interna-
                                       Providing consumers with comprehensive informa-                           investment funds to be legally bound to the document, Ger-           tional level. If the Frankfurt financial centre seeks to recuperate
                                       tion on financial products is not only the law, it is                     man legislation goes a step further. The Investor Protection and     lost confidence in the markets, then greater transparency and
                                       also becoming a decisive factor in the competition                        Functionality Improvement Act (Anlegerschutz- und Funktion-          verifiability for individual services are called for above all other
                                       to curry favour with investors. New services allow                        sverbesserungsgesetz, abbreviated AnSVG) cites an equiva-            considerations. KIIDs and PIBs provide employees with ready-
                                       private investors to obtain fast, comprehensive in-                       lent document, the Product Information Sheet (Produktinfor-          made information for the consultancy process.
                                       formation on investment products and even to com-                         mationsblatt, PIB), which is prescribed for a variety of financial
                                       pare them internationally.                                                instruments. Both documents, the KIID and the PIB, are in-           People in Germany would go back to investing in se-
                                                                                                                 tended to provide a simple and effective basis for comparison        curities, if only there were more transparency, and they had
                                       In the ongoing debate on greater regulation of the sale of fi-            among financial products, transparently elucidating their risks      a better feeling for the actual risks involved. With KIIDs and
                                       nancial products, consumer protection agencies and govern-                and characteristics, and thereby providing investors with clear      PIBs those needs are now satisfied – now it is up to investors
                                       ment policy makers are demanding greater transparency in                  and relevant information for investing.                              to use the information. However, it would be delusional to think
                                       the European markets. The prices, quality and risks of financial                                                                               that there will be no more fluctuations in the markets and
                                       products are to be clearly described and provided with a basis            The introduction of this simplified product informa-                 crises going forward. Investors who expect elevated returns
                                       for comparison. Regulators are convinced that this is the only            tion format is a done deal. Before 2011 is out, financial ser-       and assume elevated risks to get them would do well to mon-
                                       way for the market to function efficiently. Yet the fact that risks       vice providers will have to make PIBs and KIIDs available to         itor the evolution of those risks and to react promptly. Suitable
                                       can change over the term of an investment product – some-                 their customers in Germany as part of their consulting services.     tools for doing so are already available in the form of KIIDs and
                                       times to an enormous extent – presents one of the greatest                While the provisions coming out of Brussels on the use of KIIDs      PIBs – they should be used towards further enhancing the
                                       challenges in this respect. The only information services able            are relatively strict, significantly more leeway is afforded where   Frankfurt financial centre and to keep the “grey-zone” capital
                                       to model changes of this nature are those that rate capital in-           PIBs are concerned. The PIB came under fire early on, since          markets at arms length.
                                       vestment risks according to a dynamic system. European De-                the information sheets currently in use at different institutions    www.derivatives-group.com
                                       rivatives Group AG (EDG), a subsidiary of the vwd group, offers           can only be mutually compared with great difficulty. They em-
                                       precisely this kind of dynamic risk rating, which is already be-          ploy greatly varying terminologies and are often bundled with        Edmund J. Keferstein is Chairman of
                                       ing used on a voluntary basis by some large issuers. They per-            promotional info. The vwd group has therefore set itself the         the Management Board of vwd Vereinigte
                                       ceive a competitive advantage in doing so, because EDG con-               task of standardizing the information sheets in collaboration        Wirtschaftsdienste AG, a listed company;
                                       tinuously monitors the risks and quality of the issuers‘ products         with its partners – Allen & Overy, WM Datenservice and EDG –         European Derivatives Group AG (EDG) of-
                                       and makes the information available in transparent form. How-             in order to provide customers with a basis for comparison for        fers finance-related quantitative analysis
                                       ever, the financial industry is still in its infancy, and so far, these   KIIDs and PIBs. The solution is closely aligned with the             and is a subsidiary of the vwd group.
60      IMpRINT




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Circulation        3.500
Frankfurt am Main, June 2011

				
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