The ball’s rolling again. After the coronavirus has kept players off the pitch for more than two months, the Bundesliga’s reopening a few matchdays ago sparked controversy and emotionally charged discourse. Videos quickly spread showing players disregarding all rules for “social distancing” and minted once revered stars as negative role models.
Politicians rely on an efficient financial sector for their economic protection programmes. Under KfW’s leadership, the entire breadth of the development banking system and the financial centre’s infrastructure has been deployed.
“Waste not, want not.” This proverb characterised the budgetary policy of the federal and state governments. Internationally, the “black zero,” the surplus in the budgets of the federal and state governments, has long been a hot topic. Now, however, it is precisely this room for manoeuvring that allowed politicians to get the “Protective Shield against Coronavirus in Germany,” likely in excess of 500 billion euros, up-and-running in quick order without triggering negative capital market reactions.
The largest aid package since the Second World War includes short-time work benefits, the deferral of social security contributions, tax-privileged one-time payments to employees, and a large number of aid and credit programmes for the self-employed, as well as small, medium- and large companies. The interest rates vary slightly, depending mainly on the exemption from liability for the lender.
Germany as a pioneer
Governments at the federal and state level have acted quickly, correctly and courageously. In doing so, they have relied on the financial centre’s efficient infrastructure, which has been successfully proven for decades. The state, development banks and local banks are well coordinated to quickly and efficiently process and disburse loans.
Borrowers apply for a loan from their local bank, which checks eligibility and creditworthiness, while a development bank provides the funds. Depending on the programme, the local bank can be exempt from liability up to 100%, while the development bank can refinance itself on the market with favourable terms because it has a state guarantee either explicitly or implicitly through the legally established institutional liability and guarantor liability. Moreover, due to the urgency of the situation, new programmes are usually not developed, but rather expanded and easier access to existing ones has been facilitated.
With KfW Bankengruppe and Landwirtschaftliche Rentenbank, Germany has two federally owned development banks. In addition, the federal states also have their own investment and promotional banks. For many years, KfW carried its corporate objective in its name, as it was founded in 1948 as the Kreditanstalt für Wiederaufbau as part of the Marshall Plan. After the Second World War, comparable institutions existed only in France, Italy, the Netherlands and Poland. It was not until 1989, first in the countries of Central and Eastern Europe, then increasingly in other EU countries from 2008 onwards, that comparable concepts were implemented and corresponding banks were established. Today, KfW is one of the world’s leading development banks in the world, with a AAA rating from the three most important rating agencies.
Financial stability concerns
With the loan programmes, the government mandates the German banking system to provide corporate customers with financial “medicine” for “acute care” and later “rehabilitation” based on its in-depth knowledge and experience
The corona pandemic shows how valuable a healthy finance sector can be for the real economy during a crisis. However, even the financial industry is not immune to the risks of drastic measures. Therefore, prudent principles must continue to apply to banks as well.
Against this backdrop, it is understandable when politicians and supervisors urge banks to waive bonuses and dividend payments due from 2019, at least if the banks do not receive the distributions as a capital gain. Although the banks have significantly increased their equity capital, the further course of the crisis is by no means clear enough to allow a sufficiently robust risk assessment to be made today.
BaFin and the Bundesbank have already taken far-reaching preventative measures together at the European level with the European Central Bank and the financial supervisory authorities. As BaFin President Felix Hufeld summarized, “The existing regulatory framework grants us a high degree of supervisory flexibility, of which we will fully utilise. We will relieve the burden on banks where this is possible without compromising financial stability.”
When visiting BaFin’s website on Corona, one gains an impression of the range of measures being taken. These relate to banking, insurance and securities markets, and range from waiving the planned countercyclical capital buffer, the treatment of problem loans, the postponement of Basel III standards by one year to the shortfall in pension funds and reporting obligations under the Market Abuse Regulation.
Drawing lessons from the pandemic
Just like the financial crisis in 2008, the corona pandemic in 2020 should be a point for reorientation. It should be clear that Germany, as the world’s fourth-largest economy, must have an efficient financial sector to overcome crises.
In addition to the development banks and local banks, capital markets also play an important role, as this is where the programmes are financed. In this respect, the Financial Centre Frankfurt is outstandingly positioned in Europe. Gradually, institutional investors should also be included in financing the new start, because they can leverage and thus strengthen existing programmes. The role of international financial institutions should not be underestimated either. Here, Frankfurt has scored points in recent years by bringing more than 30 international financial institutions to the Main with their new EU headquarters. These institutions can now see that their choice of location was the right one because here, challenges were solved pragmatically.
Regulation is now being put to the test as well. There is no doubt that many components will demonstrably contribute to stability. Other rules will require review in the light of the crisis, especially where complexity is unfavourable in relation to the desired outcome.
It is certainly clear that digitalisation will receive an enormous boost. It will be irreversible. Simplification and de-bureaucratization of existing regulations will ease digitalisation efforts. The criteria should be adjusted by all parties involved. Our perfectionism, which is so valued worldwide, should be pragmatically adjusted in the light of the crisis. After all, we now are experiencing how, with a little flexibility, the challenges of the lock-down can be mastered in a way that was not imaginable just a few weeks ago.
What efforts the corona pandemic will still demand of politicians, the populace and the economy cannot yet be seriously predicted. At this point, whether it is a “black swan” event or, as the author of the book of the same name, Nassim Taleb, claims – simply an expected shock, is more of an academic question. We can only hope that the medical and pharmaceutical sector will quickly find a vaccine and/or an effective therapeutic treatment for the coronavirus and that those responsible can agree on economic and public health measures to better guard against future pandemics. Hopefully, we will not waste the lessons of our current emergency and be forced to relearn them in the next.
Financial institutions limit job cuts and increase earnings growth – Service providers report slower growth in revenues, earnings and investments
The CFS Index, which measures the business climate of the German financial sector on a quarterly basis, falls by just 0.7 points to 113.6 points. The resulting persistently high level is based on contrasting tendencies. The financial institutions report unexpectedly high earnings growth and make fewer job cuts. The service providers, on the other hand, report a significant decline in revenue and earnings growth, though these levels still remain high. The investment volume of both groups remains positive, though it is not able to maintain previous peak levels.
“The stabilized economic development of the financial institutions is particularly expressed by a gradual rise in earnings expectations, coupled with a strong increase in their earnings generated in the first quarter. This is good news, as it can create the right conditions for urgently needed capital growth among the banks and thus improve financial stability,” Professor Jan Pieter Krahnen, Director of the Center for Financial Studies, interprets the results.
Rating of the future international importance of the Financial Centre Germany reaches second-highest level of all time
Having already been rated extremely positively since the Brexit vote, in the second quarter of 2017 the future international importance of the Financial Centre Germany almost reaches its historic high of 136.8 points from last year. The corresponding value rises by 4.0 points to 135 points.
Dr. Lutz Raettig, President of Frankfurt Main Finance e.V. emphasizes: “The survey clearly shows that the growing trend is intact: the financial sector sees an increasing importance of the Financial Centre Frankfurt. This is a satisfying result and the outcome of increased cooperation between all relevant actors in the financial centre.”
Service providers record significant decline in revenue growth, yet maintain a solid, high level
Growth in revenues/business volume in the financial industry declines slightly, but remains at a solid, high level. Among the financial institutions this sub-index rises by just 0.9 points to 113.9 points. The service providers record a significant decline of 4.0 points, yet remain at a very good level of 126.6 points. Both groups anticipate a further decline in growth in the current quarter.
Unexpectedly positive earnings performance among financial institutions – By contrast, service providers report a considerable decline
The surveyed financial institutions are able to significantly boost their earnings following the weak performance in the previous quarters. The corresponding sub-index rises unexpectedly by 8.0 points to 112.5 points. A year ago the sub-index was as low as 97.9 points. The service providers, on the other hand, report a decline in earnings growth of 5.5 points, though the sub-index remains at a high level of 117.9 points. Both groups, particularly the financial institutions, anticipate a decline in the current quarter.
Financial institutions clearly curtail job cuts
The trend since the start of the year among financial institutions to limit job cuts remains intact. The corresponding employee numbers sub-index shows a significant rise of 7.2 points to 97.6 points, though it still remains under the neutral threshold of 100 points. As for the current quarter, the financial institutions expect job cuts to rise slightly again. The service providers, on the other hand, continue to hire employees at almost the same rate. The corresponding sub-index falls by just 0.1 points to 113.6 points. The service providers are more optimistic regarding the current quarter.
Investment volume remains very positive, but cannot maintain previous highs
Despite a decline in growth, the investment volume in product and process innovations among both groups remains at a strong level. The corresponding sub-index for the financial institutions falls by 2.6 points to 113.5 points. The service providers report a more significant decline of 6.1 points to 111.8 points. Both groups anticipate further declines in the current quarter.
About the Center for Financial Studies
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.
About the CFS Index
The CFS Index is compiled from a comprehensive quarterly survey among 400 decision makers in the German financial sector (return about 50% on average). The survey contains four questions about the participant’s view on different business parameters (business volume, earnings, employment level and investment volume in product and process innovations). The answers to the questions may be given as “positive”, “neutral”, or “negative” and a response is requested for the previous and the current quarter. Due to construction, the maximum index value is 150, the minimum index value is 50; a value of 100 signalizes a neutral business sentiment. The survey-panel consists of enterprises and institutions of the financial industry and selected companies that profit from the financial sector.
The financial industry is in broad overall agreement (62%) that the three-pillar model of the German credit industry (commercial banks, savings banks, cooperative banks) has proven effective. This was revealed in a recent study by the Center for Financial Studies of financial institutions and service providers from the Financial Centre Germany. On the other hand, 29% are undecided and regard the three-pillar system as questionable; 8% take the view that the model has not proven effective.
Savings banks and cooperative banks are key to the financing of German SMEs
Onthe question of the respective importance of each of the pillars, over 40% of the survey respondents from the financial industry agree that savings banks and cooperative banks equally make the crucial contribution or at least an important one. Only 20% of the respondents regard the commercial banks as crucial, but 57% believe they are important to the system. On the other hand, 17% believe they are not so important.
“The savings banks and cooperative banks are essential for the financing of German SMEs,” Professor Volker Brühl, Managing Director of the Center for Financial Studies, interprets the results.
Assessments of the German banking sector’s international competitiveness vary – Further consolidation processes expected
The financial industry is sceptical in its assessment of the German banking sector’s international competitiveness. Fewer than 25% of respondents regard the German banking sector as well positioned in an international comparison. “The banking sector is under high pressure to consolidate due to sustained low interest rates, increased regulatory requirements and digitalization. The German banks need to raise the tempo of their restructuring efforts to avoid losing further ground on their international competitors,” Professor Brühl believes. In light of this, the financial industry is in agreement (95%) that further consolidation processes are to come in the banking sector.
An additional factor is that foreign banks are increasingly edging into the German market. There is broad agreement among the respondents (60%) that these actors will continue to gain in importance.
“The survey makes clear how attractive the financial center of Germany is to foreign banks. This is above all a motivation for us in the long term” comments Hubertus Väth, Managing Director of Frankfurt Main Finance e.V.
A recent study from Deutsche Bank Research has just been released which outlines the potential effects of Brexit on Frankfurt’s property market. The study examines the Financial Centre Frankfurt’s office and residential markets, current and future pricing trends, as well as trends in demand and availability. Furthermore, the analysis from Deutsche Bank compares several European financial centres, showing that Frankfurt is in several ways an obvious and affordable choice for financial services relocated from the United Kingdom.
“In view of the high level of political uncertainty surrounding the United Kingdom’s decision to leave the European Union, it will be some years until the size of the Brexit pie, i.e. the relocation of companies and employees, can be determined fully. Regardless of the final outcome of the negotiations between the UK and the EU, the city of Frankfurt is likely to benefit.
Frankfurt is already continental Europe’s main financial hub, and compared to other European cities, it can boast a range of additional advantages such as low rents and residential property prices, good infrastructure and a highly dynamic economy. However, considering the strengths of its European and also non-European competitors, Frankfurt will end up with only a piece of the Brexit pie.
Frankfurt’s property market would gain considerable momentum even if only a relatively small number of British companies and employees moved here. Growth in employment in the wake of Brexit should stimulate demand for office space, thus contributing to a reduction in vacancies and rising rents in the office market close to the city centre. Following the referendum on Brexit, we have raised our average rent increase expectations in the top segment to over 2% per year by 2020 (double what had previously been anticipated for the 2018-2020 period).
Bottlenecks have existed in the housing market for some years. A large demand overhang – the shortage of housing runs to several tens of thousands of homes – and a lack of undeveloped land are the main reasons why prices have risen by around 25% since 2009. An additional Brexit effect could drive prices up significantly. The rule of thumb in this context is the price per square metre increases by EUR 25 for every 1,000 missing homes. Assuming additional demand for 5,000 homes, residential property prices will increase by EUR 125 or around 4% compared to current levels.”
The complete study from Deutsche Bank Research can be downloaded here.
Promoting the Frankfurt FinTech ecosystem would not be complete without recognizing some of the top FinTech start-ups for their accomplishments. On November 17, 2016, Frankfurt Main Finance, Business Angels FrankfurtRheinMain and WM Gruppe held the annual FinTechGermany Awards ceremony to present FinTech companies with a Golden Garage. Companies competed in four categories: Early/Seed Stage, Late Stage, Growth Stage and New entrant into Germany. The jury’s three most important judgement criteria were financial viability, scalability and exit-potential.
Guests filled the ground floor of the Pollux building which would host the inauguration of the Frankfurt FinTech Hub, Tech Quartier, later that evening. Certainly a symbolic location for the conferral of these awards, as the opening of Tech Quartier marks the culmination of months of work by Frankfurt Main Finance and other actors in the Financial Centre to promote Frankfurt’s FinTech ecosystem. Before the room would be consumed by the pomp and circumstance of state ministers and foreign delegates, it was transformed into a Golden Garage. This new concept should harken back to famous founders, like Jobs, Gates and Page, who worked tirelessly in their garages developing technologies that would later change the world. Rounding out the effect were golden tools across the tables and stage, where the awards – called Golden Garages- rested upon a pulpit of golden tires. Only the founders with the most promising and innovative business models would take home a Golden Garage, a symbol that should act as a signal to investors of the value and potential of these start-ups.
The top sponsor of this year’s FinTechGermany Awards was Deutsche Börse. Executive Board Member, Hauke Stars, explained, “We want to contribute to Frankfurt becoming the leading location for FinTech in Germany. To this end, it is critical that all involved work together to build up a community that is attractive to FinTechs and allows all actors to profit from one another.” Frankfurt has indeed developed a significant FinTech ecosystem and is now home to more than 50 FinTechs and several FinTech hubs, incubators and accelerators as well as a mass of regular events. Stars continued on the importance of these efforts and the Golden Garage, “The FinTechGermany Award helps to spotlight these efforts.” Other sponsors of the awards included EY, Baker McKenzie and the IHK Frankfurt.
The event began with opening words from Frankfurt Main Finance’s President, Dr. Lutz Raettig, who explained the importance of digitalization for the financial sector and economy. Commenting on the Financial Centre Frankfurt as a destination for FinTech Start-ups, Dr. Raetting stated that, “Simply put, we have a start-up ecosystem in Frankfurt and a great infrastructure which is practically second to none. Furthermore, we have what many cities do not, which is especially important for the FinTech sector, and that is the ability to test and experiment with new applications, because the end-users are in Frankfurt.”
Dr. Jens Zinke, Managing Director of Börsen-Zeitung, took the stage as master of ceremonies to introduce presenters as well as the Golden Garage winners. In his opening remarks, he discussed the growing importance of FinTech. According to Zinke, the first mention of FinTech in the Börsen-Zeitung was in 2014. He continued to state that FinTech is now a reality of everyday life and that, “in the past twelve months, there have been over 300 articles published about FinTech in the Börsen-Zeitung, or more than one per day.” This increasing relevance of FinTech underscores the importance of the FinTechGermany Awards and the support of the Financial Centre for the FinTech ecosystem.
The Golden Garage winnners for each category are:
- Seed/Early Stage: Scalable Capital
- Late Stage: CRX Markets
- Growth Stage: WebID Solutions
- Foreign new entrant to Germany: Quantoz N.V.
Being honored with a Golden Garage is surely a milestone for these young companies, as is the opening of the Tech Quartier for the Frankfurt FinTech ecosystem. In his remarks, Andreas Lukic, Chairman of Business Angels FrankfurtRheinMain, discussed the importance of his work with Business Angels in supporting these young companies. “There is a large financing gap from several million to a few hundred thousand. We wanted to close this gap through our work with the dialogue forum. This prize is one of our best marketing instruments for this.” The FinTechGermany Awards play a critical role in attracting investors’ attention and helping to increase the flow of funding to the region and Germany. Without the necessary funding and support, start-ups would stagnate, not be able to scale, and the brilliant ideas of these innovative entrepreneurs could never be realized.
At today’s FT Banking Summit, Hubertus Väth, Managing Director of Frankfurt Main Finance, explained, “For London’s banks, the time for decisions has come. We believe that London should maintain its position as Europe’s leading financial centre; however, some operations will still need to relocate into the Eurozone. In this regard, Frankfurt is in the pole position. Most banks are not able to wait and see how the Brexit negotiations turn out because they need to start lengthy talks with regulators before they can move their operations. The risks associated with waiting are much too high. It is decision time and moves are being made.”
FrankfurtRheinMain GmbH and Frankfurt Economic Development GmbH joined Frankfurt Main Finance at the FT Banking Summit to promote the Financial Centre Frankfurt as the top destination for those who must leave London. The three organizations have worked in close cooperation for months, developing a constructive and solution-oriented approach to positioning Frankfurt as a bridge between London and the Eurozone.
The Financial Centre Frankfurt is particularly well positioned to attract banks and other financial services that must leave London for the Eurozone. Already one of Europe’s most important financial centres, Frankfurt is a regulatory hub, home to the ECB, EIOPA, ESRB and already a part of EBA. Boasting the world’s largest data exchange point, DE-CIX, and more than 1 million square meters of available office space at costs around thirty percent lower than Paris, Frankfurt’s infrastructure uniquely equips it to absorb a displacement from London like no other financial centre. Current estimates expect around ten thousand jobs to relocate to Frankfurt over the next five years.
On August 31, 2016, the Association of Foreign Banks in Germany and Frankfurt Main Finance hosted the seventh edition of their successful Finanzplatz Frühstück (Financial Centre Breakfast) event series. More than eighty entrepreneurs and representatives of the financial sector, were in attendance to hear François Villeroy de Galhau, Gouverneur of the Banque de France, speak on the topic “European Growth – Challenges in uncertain Times.” Welcoming the audience, Dr. Oliver Wagner, Managing Director of the Association of Foreign Banks in Germany, stressed the importance of foreign banks as a critical economic factor for Frankfurt. “Foreign banks assume responsibility for the local economy and recognize the German Financial Centre as the core market in Europe.”
Villeroy de Galhau wasted no time delving into the current state of monetary policy within the EU and how to ensure sustainable growth. Stressing the importance of investment for growth, especially amongst SMEs, he expressed the need for the Capital Markets Union and the movement of risk and capital across borders. He also weighed in on the ECB’s current strategy of negative interest rates, which has been openly criticized by several German bankers. He described the strategy as a crucial instrument in fighting deflation, which he explained would be more damaging than the negative rates. Villeroy de Galhau continued, stating “Negative interest rates are useful but they are just one among many instruments and have their limits. This is why we have to stick to the current monetary policy. And yes, we’re doing so sustainably.” He did, however, reject the notion of the ECB providing helicopter money directly to consumers.
France and Germany are the major drivers of growth in the Union and, according to the Villeroy de Galhau, still have untapped opportunities to ensure sustainable growth for the future. One proposal highlighted in his address would be a so-to-say Erasmus Pro programme which would offer young people the opportunity to gain vocational training outside of their home country as well as provide them the European experience. Such a programme could be particularly useful for France and Germany. France has a demographic advantage in that they have many more young people than Germany, who boasts one of the best training and educational infrastructures in the world. Alleviating this deficit in skilled labour in both countries, and across the EU, would help to ensure sustainable growth for years to come.
Cooperation between France and Germany in the EU is critical for future growth and the success of the European Project. How does this look, however, in a Europe without the United Kingdom? Speculation is still the name of the game when it comes to Brexit, but Villeroy de Galhau did make it clear that they still want London to be at the centre of European Finance, but as Villeroy de Galhau stated, there will be “no free ride, and no cherry picking.” In other words, the UK must accept and abide by EU rules and regulations in order to gain access to European markets post-Brexit.
Frankfurt Main Finance’s Managing Director, Hubertus Väth, summarized the event, “Mr. Villeroy de Galhau encouraged German entrepreneurs to prepare to invest and take on risk. Only France and Germany can set European growth on an adequate track for growth.” Väth continued, stating, “Monetary policy can only be successful if the economy embraces monetary stimulus by accepting and making investments. In this case, trust plays a central role. Mr. Villeroy de Galhau’s contribution today in further developing this trust is not to be underestimated.”
Schwarz-weiß wie Scheeee! Das ist die SGE! On Sunday, August 14, the Commerzbank-Arena will again be filled with the joyous sounds of Eintracht Frankfurt fans cheering on their home team as the official opening game of the new season. Gates will open at 10 a.m. for the traditional season-opening party which will include plenty of activities, fun and games will throughout the day. The highlight will be the Frankfurt Main Finance Cup, a friendly match pitting Eintracht Frankfurt against Europa League contenders, Real Club Celta de Vigo, kicking off at 15:00. The game and the events around the stadium are included in the cost of the tickets.
Frankfurt Main Finance is proud to be a sponsor of the Cup for the third year in a row. In the previous two years, Eintracht has faced off against Inter Milan and F.C. Tokyo in front of more than 50,000 spectators. Hubertus Väth, Managing Director of Frankfurt Main Finance, weighed in on the importance of football for Frankfurt. “In London, every Monday begins with an analysis of the weekend’s games. With this in mind, Eintracht Frankfurt plays a big role when it comes to showing the bankers in the City and on Canary Wharf that Frankfurt is a world class Financial Centre. Once you’ve experienced an Eintracht game, you’re sure to become a fan. We hope to see more coming soon!”
The match against Celta de Vigo will be a great occasion, they finished 6th in La Liga last season and participate in the UEFA Europa League campaign coming up. One of their star players John Guidetti featured at EURO 2016 for Sweden. Eintracht and Celta have met before, pretty much 10 years ago the Eagles managed a 1-1 draw away to Celta in the UEFA Cup group stage.
The votes have been counted and the UK has decided to leave the EU. But how will this decision affect the Financial Centre Frankfurt? Frankfurt Main Finance’s Hubertus Väth sat down with FINANCE-TV to discuss how Brexit will affect European financial centres and what Frankfurt has been doing capitalize on this opportunity. With some experts predicting that 100,000 jobs could leave London’s financial district, there is a lot at stake and Frankfurt Main Finance had all hands on deck in the hours rigth after the announcement. In cooperation with their partners, Frankfurt Economic Development and FrankfurtRheinMain GmbH, Frankfurt Main Finance launched a website, welcometofrm.com, an information hotline and a social media campaign on LinkedIn and Twitter targeted at decision makers in London’s financial sector. Watch Hubertus Väth’s full interview in the video below (German).