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CFS-Index takes a clear downturn

The CFS Index, which measures the business climate of the German financial sector on a quarterly basis, falls by 4.5 points to 113.9 points in the third quarter of 2018. The significant decline is primarily due to weaker growth in earnings and employee numbers among service providers as well as slower growth in revenues and investment volume throughout the financial sector. Among the financial institutions, however, the downturn in revenue growth is offset by an increase in earnings, while sentiment regarding employee numbers is neutral.

“Given the contrary trends in the earnings of banks and service providers – rising for the former, falling for the latter – the question arises as to why their investment behaviour is so similar. It appears that macroeconomic and political uncertainties (Brexit, Italy, USA, China) are the primary cause of the slowdown in investment,” Professor Jan Pieter Krahnen, Director of the Center for Financial Studies, interprets the results.

The future international importance of the Financial Centre Germany is still rated positively, albeit to a lesser degree.

Since the Brexit vote in 2016, the future international importance of the Financial Centre Germany had been rated at historically high levels. In the third quarter of 2018, the corresponding figure of 126 points remains at a good level, despite recording a significant decline of -5.3 points.

“The downward trend in the assessment of Germany’s future international significance as a financial centre is seeing the glass half empty. In recent months, other financial centres in the European Union have indeed also benefited from Brexit. In this context, the positive developments in Frankfurt could seem less significant,” comments Hubertus Väth, Managing Director of Frankfurt Main Finance e.V., on the survey results. “But when you look at it closely, the decisions by more than 30 financial institutions to move their European headquarters to Frankfurt speak for themselves. In 2019, the Financial Centre Frankfurt will gain considerably in international importance.”

Financial industry revenue growth declines / Positive earnings growth among financial institutions, negative among service providers

As forecast by the financial institutions in the previous quarter, growth in revenues/business volume declined in the third quarter. The corresponding sub-index for the financial institutions falls by 6.1 points to 112.7 points. Service provider revenues are 5.3 points down on the previous quarter at 123.7 points. Both groups are anticipating a further slight decline in the current quarter.

There is a stark contrast between the earnings growth of the two groups. After a weak second quarter, the financial institutions have returned to a good level. The corresponding sub-index rose by 9.8 points to 111.6 points. The service providers, on the other hand, recorded a sharp decline of 11.3 points to 116.3 points. For the current quarter, both groups expect a slight decline in their earnings growth.

Investment volume down

Contrary to expectations, the growth in investment volume in product and process innovations at the financial institutions fell by 5.3 points to 110.8 points. This low level is expected to persist in the current quarter. The sub-index for the service providers also fell by 3.4 points, though at 118.9 points it still remains at its third-highest level since the surveys began in 2007. However, a further downturn is expected in the current quarter.

Financial institutions show neutral sentiment on employee numbers

After the brief period of job cuts at the financial institutions in the second quarter, the employee numbers sub-index rises by 3.6 points and now signals a neutral sentiment at 100.1 points. As expected, the growth in employee numbers at the service providers has slowed. However, even after falling by 8.4 points, the corresponding sub-index remains at a good level of 117.9 points. As for the current quarter, the service providers expect employee growth to decline further, while the financial institutions are forecasting job cuts.

 

The results are based on a quarterly management survey in the German financial sector.

The Center for Financial Studies (CFS) conducts independent and internationally-oriented research in important areas of Financial and Monetary Economics, ranging from Monetary Policy and Financial Stability, Household Finance and Retail Banking to Corporate Finance and Financial Markets. CFS is also a contributor to policy debates and policy analyses, building upon relevant findings in its research areas. In providing a platform for research and policy advice, CFS relies on its international network among academics, the financial industry and central banks in Europe and beyond.

CFS survey: German financial industry takes a critical view of ICOs, calls for stronger regulation

ICOs (initial coin offerings) are especially popular with start-up companies as a means of corporate financing by issuing cryptocurrencies, also known as tokens. These may be acquired in exchange for fiat currencies or virtual currencies such as Bitcoin and Ether. In contrast to IPOs, tokens issued in ICOs are not subject to strict capital market regulations, even though they serve the purpose of corporate financing. The German financial regulator BaFin is currently biding its time before taking a clear stance on cryptocurrencies and ICOs, although it does rate ICOs as highly speculative financial assets.

In light of the enormous risks, the German financial industry is clearly in favour of stricter ICO regulation (70%) and would like BaFin to play a more active role in this sector (60%). This was revealed in a recent study by the Center for Financial Studies.

“We are seeing a veritable flood of ICOs on the market at the moment. This development is only in its initial stages in Germany, but soon we will also be hit with a wave of new tokens. The survey makes it clear that action is urgently required in the ICO sector. It is time for a clear regulatory framework with an appropriate mandate for the financial regulator,” Professor Volker Brühl, Managing Director of the Center for Financial Studies, interprets the survey results.

Mindful of the risks of fraud when ICOs are conducted on unregulated online exchanges, 50% of the survey respondents believe established exchanges should develop their own cryptocurrency trading platforms as a secure alternative.

“ICO platforms on reputable exchanges could help build trust among investors by establishing transparent and standardised processes, which could in turn benefit the issuing companies,” Brühl explains.

Just 12% of the respondents see opportunities for the Financial Centre Germany in this as yet largely unregulated sector.

As Hubertus Väth, Managing Director of Frankfurt Main Finance e.V., emphasises: “ICOs undoubtedly are an innovation baring remarkable potential for the financial industry. The industry’s request for stronger regulation is an understandable and welcomed approach to making use of the potential while managing the risks.”

 

The results are based on a quarterly management survey in the German financial sector.

The Center for Financial Studies (CFS) conducts independent and internationally-oriented research in important areas of Financial and Monetary Economics, ranging from Monetary Policy and Financial Stability, Household Finance and Retail Banking to Corporate Finance and Financial Markets. CFS is also a contributor to policy debates and policy analyses, building upon relevant findings in its research areas. In providing a platform for research and policy advice, CFS relies on its international network among academics, the financial industry and central banks in Europe and beyond.

CFS Index rises significantly

CFS Index: Revenues and earnings of services providers increase substantially / Investments by financial institutions reach a historic high since the survey began in 2007

The CFS Index, which measures the business climate of the German financial sector on a quarterly basis, rises significantly in the final quarter of 2016. It climbs 3.7 points to 114.3 points, reaching its highest level for almost two years. The rise can primarily be attributed to a very positive trend in the revenues and earnings of the service providers in the Financial Centre Germany. The only time these levels have been surpassed is when the surveys were first conducted in 2007. The financial institutions are also reporting a solid rise in revenues alongside steady earnings. Investments by the financial industry are noticeably higher too, reaching exceptionally high levels rarely seen in past surveys. Despite this positive development, the financial institutions are sticking to their plans to cut jobs, though these have been moderated slightly. The service providers, on the other hand, continue to increase their employee numbers, again at a slightly slower rate.

“Numerous banks currently find themselves in a phase of transformation, which is leading to considerable investment requirements, especially in the area of IT. The service providers, in particular, are benefitting from this development,” Professor Jan Pieter Krahnen, Director of the Center for Financial Studies, interprets the results.

Financial industry rates the future international importance of the Financial Centre Germany extremely positively

Following the Brexit vote last year, the rating of the future international importance of the Financial Centre Germany reached a historic high of 136.8 points, then declined slightly in the third quarter, and now rises again by 2.7 points to 131.0 points.

Dr. Lutz Raettig, President of Frankfurt Main Finance e.V. emphasized, “The efforts for the Frankfurt financial center are bearing fruit. Especially the positive results with regard to the international importance of the financial center show that Frankfurt is well positioned and has all the opportunities to gain further importance in this field as well.”

Financial industry revenues, earnings and investments are on the rise

The surveyed financial institutions and service providers rapidly increase their revenues/business volume in the final quarter of 2016. The corresponding sub-index for the financial institutions rises by 3.4 points to 113.0 points. However, the service providers record the sharpest increase of 11.3 points to 130.6 points. The only time this level has been exceeded was when the CFS Index surveys were first conducted in 2007. Expectations for the current quarter are positive among both groups, though slightly more modest than the current levels.

Earnings among the service providers develop particularly positively in the fourth quarter of 2016 and clearly surpass expectations from the previous quarter. The corresponding sub-index for the service providers climbs 8.1 points to reach 123.4 points. By contrast, the financial institutions record a small increase of 0.5 points to remain at the low level of 104.5 points, with no change anticipated in the current quarter. The service providers expect their hugely positive earnings trend from the end of 2016 to level off slightly in the current quarter.

The sub-index for investment volume in product and process innovations rises considerably for both groups, contrary to their expectations in the previous quarter. For the financial institutions this sub-index rises by 6.0 points to 116.1 points, thus reaching a historic high since the surveys began in 2007. For the service providers this value climbs 5.8 points to 117.9 points. Similarly, this level has only been exceeded in the years 2007 and 2014. Both groups are expecting the growth rate to level off just slightly in the current quarter.

Fewer job cuts at financial institutions – Slightly slower job growth among service providers

The huge job cuts recorded by the financial institutions in the third quarter have levelled off somewhat, though employee numbers continue to fall in the fourth quarter. The corresponding sub-index for the financial institutions rises by 4.4 points to 90.4 points. The financial institutions are expecting to make further job cuts in the current quarter. By contrast, the jobs situation among the service providers remains positive, though the rate of job creation is slightly lower. The corresponding sub-index edges down 3.3 points to 113.6 points. The service providers are even more optimistic for the current quarter.

 

CFS Index

CFS Index rates future international importance of the Financial Centre Frankfurt very positively

Significant job cuts at financial institutions – Significant job growth at service providers

The CFS Index, which measures the business climate of the German financial sector on a quarterly basis, rises by 0.3 points to 110.6 points in the third quarter of 2016. Though the value remains almost unchanged, it comes as a result of sharply contrasting developments of employee numbers at the financial institutions and the service providers. While the measure of employee numbers at the financial institutions is at a historic low since the Index surveys began in 2007, the service providers are stepping up hiring. Aside from this, the financial industry as a whole is recording growth in revenues and earnings. The financial institutions in particular, after considerable declines in earnings in the first half of the year, now report a clear increase that surpasses expectations. The growth in investment volume declines slightly, but remains at a solid level.

“The figures reflect structural changes in the banking industry’s mode of production, particularly with regard to rising capital intensity and falling employee numbers. Conversely, employee numbers at the external service providers are on the rise, partly due to the trend toward digitalization,” Professor Jan Pieter Krahnen, Director of the Center for Financial Studies, interprets the results.

Financial industry rates the future international importance of the Financial Centre Germany very positively

Following the Brexit vote, the rating of the future international importance of the Financial Centre Germany had reached a historic high of 136.8 points in the second quarter. This value remains at an above-average level of 128.3 points in the third quarter, despite falling by 8.5 points. Dr. Lutz Raettig, President of Frankfurt Main Finance e.V. emphasized, “The results of the study show that there is still great trust in Frankfurt’s capabilities as a leading Financial Centre. Our function as a bridge between London and the EU and our constructive handling of Brexit will strengthen Frankfurt as the most important Financial Centre in the Eurozone.”

Job cuts hit financial institutions more strongly than expected, and further cutbacks in personnel are anticipated

The extent of job cuts at the surveyed financial institutions turned out to be even larger than expected in the last quarter. Previously the number of employees had remained stable at a neutral level. Now the employee numbers sub-index for the financial institutions falls by -13.7 points to a historic low – since the start of the survey in 2007 – of 86.0 points, and the financial institutions are expecting the situation to degrade further still in the current quarter. By contrast, employee numbers at the service providers are developing even more positively than expected. The corresponding sub-index improves significantly on the previous quarter, rising 11.8 points to 116.9 points. The service providers are even more optimistic regarding the fourth quarter.

Revenue growth for the financial institutions

The growth in revenues/business volume among the surveyed financial institutions turns out to be slightly higher in the third quarter of 2016 than was expected in the previous quarter. The corresponding sub-index rises by 2.5 points to 109.6 points. As expected, the service providers also maintain their high level of revenues, slipping just -1.0 points to 119.7 points, and they are anticipating increased revenue growth in the current quarter.

Financial institutions stop decline in earnings – Financial industry takes a positive view of the current quarter

In terms of earnings, both groups report growth in the third quarter. The financial institutions in particular, after considerable declines in earnings in the first half of the year, now report a clear increase that surpasses expectations. The corresponding sub-index for the financial institutions rises by 7.0 points to 103.9 points; the service providers’ sub-index climbs 2.2 points to 115.3 points. Both groups have a positive outlook for the current quarter.

The growth in investment volume in product and process innovations declines slightly, but remains at a solid level. For the financial institutions, this sub-index falls by -2.2 points to 110.1 points, contrary to expectations. The service providers’ sub-index remains stable, slipping just -0.4 points to 112.2 points. As a result, the two groups are still at an almost equal level, with neither anticipating any major change in the current quarter.

finance industry

CFS Index shows upward trend – Finance industry revenues developing positively

The CFS Index, which measures the condition of the German financial sector on a quarterly basis, rises by 1.6 points to 110.3 points in the second quarter of 2016. The increase is based on the strong development on revenues in the finance industry. Contrary to expectations, however, the earnings performance of the financial institutions remains on a downward trend, while the service providers remain on a steadily positive trend. The investment volume of the finance industry is stable and almost unchanged. The financial institutions are anticipating job cuts in the current quarter; up to now the number of employees has remained stable at a neutral level.

“The survey results prove that a number of financial service providers are in a period of reorganisation, because the pressure on earnings in the industry continues to rise,” Professor Jan Pieter Krahnen, Director of the Center for Financial Studies, comments the results.

Finance industry sees the future international importance of the Financial Centre Germany at a historic high

The future international importance of the Financial Centre Germany reaches a historic high of 136.8 points. Owing to Britain’s potential exit from the EU, the corresponding value rises by 20.7 points.

Dr. Lutz Raettig, Executive Chairman of Frankfurt Main Finance e.V., emphasized, “We all deeply regret the results of the referendum, but naturally, we also respect the outcome. As a consequence, financial centres within the EU will now compete with one another to lure individual product areas and activities out of London. Frankfurt Rhine-Main will certainly be at the centre of this competition, but in a constructive and cooperative manner.

Business volume of the finance industry develops positively – contrast between earnings performance of financial institutions and service providers

The surveyed financial institutions and service providers manage to considerably increase their revenues/business volume again following the poor performance in the first quarter. The corresponding sub-index for the financial institutions rises by 2.7 points to 107.2 points in the second quarter. The service providers raise their revenues by 3.8 points to 120.3 points, which is only slightly below the prior-year level. The finance industry expects to maintain these levels in the current quarter.

In terms of earnings, the financial institutions record a further decline, contrary to their expectations. The corresponding sub-index falls to 96.9 points. However, the service providers reveal steady earnings growth, in spite of negative prior expectations. The earnings sub-index for this group rises by 0.3 points to 113.1 points. The financial institutions expect the low level to persist; the service providers are more optimistic for the current quarter.

The investment volume in product and process innovations of both groups remains at a solid level. The sub-index of the financial institutions falls by 0.2 points to 112.3 points. The service providers’ sub-index falls by 0.1 points to 112.6 points. As such, both groups are at the same level and neither is expecting changes in the current quarter.

Financial institutions anticipating job cuts in third quarter

As for employee numbers, which the financial institutions have so far kept stable at a neutral level of 99.7 points (+0.7 points), a significant decline is expected in the current quarter. The surveyed service providers are maintaining a higher level, with a value of 105.1 points, though they have hired significantly fewer new employees than in the previous quarter. The corresponding sub-index falls by 5.9 points. The service providers are optimistic that this value will improve in the third quarter.

 

Financial Centre Frankfurt emerges as major winner of Brexit

Germany’s financial industry is in firm agreement that the Financial Centre Frankfurt will profit from a British exit from the EU, although the outcome of the British vote largely came as a surprise to the industry. The potential impacts on the German economy are also regarded as neutral to positive. These were among the results of a survey of financial institutions and service providers in the Financial Centre Germany. Securities trading and settlement in the Financial Centre Frankfurt will receive a particular boost, according to 78% of respondents. Just over half the survey participants believe the European Banking Authority (EBA) will move from London to Frankfurt. Regarding potential shortages in Frankfurt in case of an influx of business, 72% of the surveyed financial firms are concerned about adequate living space.

“The survey results confirm that many financial market participants had not expected the Brexit outcome at all. This surprise effect is reflected in the high level of stock market volatility we can expect to see in the coming months,” Professor Volker Brühl, Managing Director of the Center for Financial Studies, interprets the results.

For almost all companies surveyed (95%), the Financial Centre Frankfurt emerges as the major winner. In addition, just over two thirds see Paris as another beneficiary of a British exit. 15% expect Amsterdam to profit. Just 6% see a positive effect for London. Hardly any respondents expect to see Milan or Madrid benefit, but one third expect positive impacts on other financial centres.

For almost all companies surveyed (95%), the Financial Centre Frankfurt emerges as the major winner. In addition, just over two thirds see Paris as another beneficiary of a British exit. 15% expect Amsterdam to profit. Just 6% see a positive effect for London. Hardly any respondents expect to see Milan or Madrid benefit, but one third expect positive impacts on other financial centres.

“Frankfurt was well prepared for a Brexit. We will make every effort to take advantage of this once in a century chance. It is clear to us that London will maintain its position as the central financial centre. We hope that the Financial Centre Frankfurt will become the bridge between London and the Eurozone,” explained Hubertus Väth, Managing Director of Frankfurt Main Finance e.V..

When asked in which business areas the Financial Centre Frankfurt could benefit in particular, 78% of respondents pointed to securities trading and settlement. Half the participants see opportunities for the areas of asset management and corporate banking, followed closely by professional services (43%). By contrast, only 7% named retail banking in this regard.

“The results reveal the market participants’ high expectations about the future role of the Financial Centre Frankfurt. Yet other financial centres are also hoping to benefit. I therefore anticipate stiff competition between various locations, so it will be crucial to highlight Frankfurt’s specific strengths to top decision-makers,” adds Professor Brühl.

It is unlikely that the European Banking Authority (EBA) will be able to keep its headquarters in a country outside of the EU. However, it remains to be seen where the EBA will choose as its next location. The majority of the German financial industry (57%) believes the EBA will move to Frankfurt. However, 33% of respondents expect the EBA to relocate to another city.

The German financial industry is also anticipating certain bottle-necks in case business activities shift from London to Frankfurt. Almost three quarters of those surveyed (72%) point to a shortage of living space; half (53%) are concerned about having enough qualified personnel; 27% believe the transport infrastructure may not be sufficient; 22% point to the availability of office space. By contrast, only 11% see Frankfurt’s IT infrastructure as a potential bottle-neck.

Majority of the financial industry in favour of limiting Britain’s access to the EU interior market and expects a Brexit to have neutral to positive impacts on the German economy

In the opinion of most financial institutions and service providers surveyed (68%), the EU should not grant Britain unrestricted access to the EU interior market after a Brexit. By contrast, 22% advocate not introducing any restrictions in spite of a Brexit. Around half the respondents (48%) regard the potential impacts of a Brexit on the German economy as neutral, while 35% see them as positive. Just 15% are anticipating negative impacts.

The results are based on a quarterly management survey of around 400 companies in the German financial sector.
The Center for Financial Studies (CFS) conducts independent and internationally-oriented research in important areas of Financial and Monetary Economics, ranging from Monetary Policy and Financial Stability, Household Finance and Retail Banking to Corporate Finance and Financial Markets. CFS is also a contributor to policy debates and policy analyses, building upon relevant findings in its research areas. In providing a platform for research and policy advice, CFS relies on its international network among academics, the financial industry and central banks in Europe and beyond.