1. finance

Yearbook 2015
GROWTH
FOR ALL
W h y w e n e e d g ro w t h a n d
how the financial sector can help achieve it
2
Frankfurt Main Finance
WE REPRESENT THE FINANCIAL CENTRE FRANKFURT
Regular Members
Sustaining Members
I N S E L N D E R AU F M E R K S A M K E I T
Kompetenznetzwerk
Versicherungswirtschaft
Version: February 2015
Frankfurt Main Finance
3
FRANKFURT MAIN FINANCE
WITH ONE VOICE FOR GERMANY’S LEADING FINANCIAL CENTRE
Frankfurt Main Finance is the voice of the Frankfurt financial cen-
zone. Today, the Frankfurt Finance Summit has become an indis-
tre. In addition to the State of Hesse and the cities of Frankfurt am
pensable platform for dialogue and an important voice in shaping
Main and Eschborn, its more than 40 members include many well-
the terms of the current debate on regulation.
known financial market players and their service providers, as well
as private and public universities. With their membership, they each
In addition, Frankfurt Main Finance pools and coordinates the con-
express their close ties to the financial centre and their desire to po-
tributions of the state, city and financial sector when international lo-
sition Frankfurt am Main effectively as a leading national and inter-
cation decisions are being made. In 2014, for example, this financial
national financial centre.
centre was chosen as the location of the renminbi clearing house.
And when financial service providers or international institutions are
Founded in August 2008, Frankfurt Main Finance has achieved much
planning to open offices in Europe, we work together with Hessen
in recent years. It supports local service providers in establishing in-
Trade & Invest GmbH, FrankfurtRheinMain GmbH and the Frankfurt
ternational business relationships and helps shape outside percep-
and Eschborn economic development initiatives to draw the atten-
tions of the financial centre, for example among delegations from
tion of decision-makers to the city.
our partner cities of Busan, Istanbul, Moscow and Beijing. In addition, it was on the initiative of Frankfurt Main Finance that the foun-
Another important role that Frankfurt Main Finance sees for itself is
dation of the Frankfurt Institute for Risk Management and Regula-
that of an observer of events affecting the financial sector, creating
tion (FIRM) was advanced, a company that has quickly established
platforms for dialogue such as the renminbi conference, the financial
itself in its field as a respected authority for research and education.
centre breakfast, panel discussions, or this yearbook on the topic of
growth and long-term financing.
One essential marketing tool for Frankfurt as a financial centre is the
Frankfurt Finance Summit, a conference jointly hosted since March
International competition between financial centres will continue to
2011 by Frankfurt Main Finance and FIRM which, since its inception,
grow, and new competitors will gain strength. This will make it all the
has established itself as a meeting place for the global risk and reg-
more important in the future to speak with one voice for this finan-
ulatory community. Here, central bank governors, regulators, repre-
cial centre – and that voice is Frankfurt Main Finance.
sentatives of the supervisory bodies, financial policymakers, academics and practitioners come together once a year to discuss current
issues in financial market stability. With this event in particular, both
partners have managed to emphasise Frankfurt’s importance as a
centre for financial market stability and bank regulation in the euro-
For more on the financial centre initiative,
visit www.frankfurt-main-finance.com.
Growth for all
The sequoia tree in the plant world, the blue whale in the animal world, the giant crystals in the
­Naica Mine in Mexico: three potent symbols of the power of growth. The picture on page 20 inspired the designers to choose the crystal, or more generally the crystalline structure, as the leitmotif for this yearbook. Crystals form structures that, while seemingly sturdy, can sometimes be
extremely fragile. The German economy is no different: it looks robust, but it can only continue to
grow if we make its environment conducive to growth.
4
Co n t e n t s
GREETINGS
Volker Bouffier
Peter Feldmann
5
6
1 | GROWTH IS FEASIBLE
A Bridge to the future
By Lutz Raettig
8
The ten dimensions of growth
10
Gas & Brake: New rules with side effects
By Jens Tolckmitt
12
A kaleidoscope of possibilities
By Rainer Neske
15
A culture of long-term financing –
The bedrock of a sound financial system
By Hans-Dieter Brenner
18
How growth can be achieved
By Ulrich Kater, Gertrud Traud, Carsten Brzeski
20
2 | GROWTH IS FUNDABLE
Green Finance – Sustainable investment
in the energy transition requires
sustainable financing options
By Tarek Al-Wazir
24
Drivers of the global energy transition
By Silvia Kreibiehl und Ulf Moslener
26
Municipalities are taking advantage
of new financing sources
By Uwe Becker
28
Industry 4.0 – A competitive edge
By Volker Brühl
30
Complex structures
By Mark Milders
40
Infrastructure – An attractive investment
Interview with Viola Scholzen
42
Exchanges: a compass for the use of capital
By Gregor Pottmeyer
44
En vogue – Shares as a source of capital
By René Parmantier
46
Transparency creates trust
By Sascha Rinno
48
SME bonds: worth a second look
By Ralf Kauther
50
Investing in the future
By Doris Brelowski and Andreas Küppers
52
Turning receivables into liquidity
By Moritz von der Linden
54
Industry banks foster independence
By Max Weber and Christopher Ley
56
The Pfandbrief: a classic with potential
By Wolf Schumacher
58
4 | GROWTH IS EVERYWHERE
3 | GROWTH IS VARIED
Financing: Many and varied instruments –
known, alternative, new
By Stefan Bielmeier
32
Europe is encouraging ­project partnerships
By Florian Degenhardt
36
Financing in collaboration
with the private sector
By Stefan Zeidler
38
Bank accounts for progress
By Arundhati Bhattacharya
60
Firmly on track
By Luis M. Linde
62
Turkish banks foster growth
By Cevdet Yilmaz
64
Cornerstones of trade
By Bernd Meist and
Maximilian Habsburg-Lothringen
66
Imprint
68
The opinions of the individual authors
published in this yearbook do not necessarily
reflect the views of all authors.
carbon neutral
natureOffice.com | DE-140-665833
print production
G r e e t i n gs
5
Ladies and Gentlemen,
A successful economy is the foundation for prosperity, for jobs and for working together successfully in the
future. One of the factors that plays an essential role in determining the success of the economy is the world
of finance. That is why the answers to the question of how it is possible to organise finance or the financial
sector in an orderly fashion, as a circulatory system serving the real economy, are crucial to the future prosperity of Hesse, Germany and Europe. We want to expand prosperity, both nationally and internationally, by
strengthening growth while at the same time dealing with distortions in the international financial markets.
In doing so, we have come a long way since the onset of the financial crisis in 2008, with Germany and Europe making tremendous efforts in recent years and successfully avoiding the consequences threatened by
the crisis. These efforts also include financial market regulation. A weakness of growth can be overcome if the
right framework conditions are established to ensure that companies again have access to reliable financing.
Financial market regulation can play a role in encouraging this.
Frankfurt came out of the financial crisis in much better shape than many other locations. The financial centre of the Rhine-Main region is doing well. The goal of the Hessian state government is to keep it that way in
the future. What we can do to keep the location attractive, we will do. Because the centre of european monetary policy is of vital importance to our state. In Frankfurt Main Finance, the location has a recognised voice.
I am confident that this yearbook will again offer many important and forward-looking contributions – for the
circle of professionals and beyond.
Volker Bouffier
Minister-President of Hessen
6
G r e e t i n gs
Ladies and Gentlemen,
The yearbook of the Frankfurt financial centre published by Frankfurt Main Finance has evolved in recent years
into a universally well-regarded platform that each year addresses important policy issues concerning the financial industry.
In 2015, the focus of the publication is on growth and long-term financing. According to Eurostat forecasts,
growth rates in Germany and the EU are on the rise: for 2014, it calculates the real GDP of Germany at +1.8 percent, with the EU at +1.5 percent, and both at +2.0 percent in 2015. Investment in 2014 is also showing growth
with a 4.1 percent increase, or 3.0 percent on average in the EU.
Nevertheless, we do also again need to see more substantial investment secured by long-term financing, which
establishes sustainable structures to cope with any potential crises. Long-term financing instruments such
as bonds offer a good basis for investment projects, provided that the bonds can be used in a manner that
achieves the confidence of investors. The imbalances between public and private sector issuers have required
intensified bond buying by the European Central Bank. It is therefore essential for further growth to ensure that
strong and effective regulation can assess these risks and reduce them preventively. Here, the Single Supervisory Mechanism of the European Central Bank could provide a stable framework that not only regulates the
120 systemically important banks, but could also serve as a model for more consistent financial supervision.
Peter Feldmann
Mayor of Frankfurt am Main
1 GROW T H IS F E A SIBLE
What are the influences that
hinder or promote growth.
G
ermany’s infrastructure thrives on substance, and public investments over
the longer term have risen significantly
less than GDP. While its share of GDP
in 1970 was 4.7 percent, it was only
1.5 percent in 2012. At the end of 2012,
the Daehre Commission appointed by the Conference of Minis-
will simply not be there for the very good reason that plain econom-
ters of Transport estimated that for the maintenance of roads, rail-
ics tells us that you can only invest what has previously been saved.
ways and waterways alone, Germany needs to invest at least another 7.2 billion euros each year if the business location is not to
It is the responsibility of policymakers to ensure a growth-friendly
suffer serious damage. On top of this, there is also the urgently re-
climate. But recent policy decisions, such as minimum wage or re-
quired expansion in regions with weakly developed infrastructure.
tirement at 63, do not make things easier for businesses and even
inhibit growth. In many other fields, policymakers have considera-
These figures make it clear that it is high time to address this sub-
ble influence: in education, technology, the tax system, and in other
ject. In addition to the pressing need for renewal of existing public
areas. The most important of these factors are outlined in the ar-
capital stock, there are also major challenges associated with the
ticle “The ten dimensions of growth”.
expansion of digital infrastructure and the energy transition. Even
more alarming is a glance at the financial position of the munici-
One of these dimensions is demography. Germany is ageing and
palities, with cities and towns absorbing more than half the cost of
therefore needs qualified immigration along with meaningful immi-
public works in 2012: the findings of the KfW Municipal Panel 2014
gration reform. The federal government has already implemented a
show a municipal investment backlog in the amount of 118 billion
number of initiatives. Metzler Bank is working in this area within the
euros. To meet these challenges, municipalities are thinking about
framework of the Metzler Foundation’s “d.eu.tsch” initiative for the
new ways of financing.
future, which awards scholarships for German language courses
and supports well-educated EU citizens who are entering the Ger-
In this, its seventh yearbook, Frankfurt Main Finance would like to
man labour market.
stimulate debate about the contribution the financial sector can
make towards financing the enormous efforts that await our state
Among the other factors with substantial influence on growth are
in the coming years and decades. It is equally important to us to
the conditions for long-term financing. Infrastructure investments
raise people’s awareness of the need for true economic growth for
with their high volumes committed over a very long period are
the common good – because without growth, the financial scope
subject to special risks. Increasing regulatory requirements make
9
G r owt h is feasib l e
A BRIDGE
TO THE FUTURE
By Lutz Raettig A well-developed infrastructure is one of Germany's major locational advantages
– and a substantial share of our prosperity is based on it. But the deterioration of roads,
bridges, railways, utility services and public facilities that is increasingly apparent in the former West German states is becoming a threat to the competitiveness of the business location.
Only with adequate growth can we cope with the work to be done in this area.
“
Only growth
creates
the ­fi nancial
scope for
­investment in
infrastructure.
”
it d
­ ifficult to award long-term loans of this kind. Is that intentional?
their banks, companies should also prepare themselves to place
The success of the energy transition is also based on solid long-
their financing on a broader basis in the future.
term financing, which must enable innovative technologies. Is there
a plan for this?
The Frankfurt financial centre makes its contribution to growth by
providing numerous financial instruments whose importance will
The challenges of the future must be met by the public and the pri-
continue to grow in the future. Frankfurt is continuously adapt-
vate sectors in equal measure. While the underfunding of public in-
ing to changing needs and providing stimulus in this area, the
vestment and the lack of private domestic investment inhibit growth,
most recent example being the launch in Frankfurt of the first
companies in this country are – after all – by and large well supplied
renminbi clearing centre in the eurozone. With the renminbi cen-
with capital. Not least on the insistence of the banks, German com-
tre, the Frankfurt financial centre is living up to its traditional con-
panies have done their homework by steadily increasing their equity
ception of itself as a service provider to the real economy bring-
ratio. Still at 18.6 percent on average across companies of all sizes
ing capital supply and demand together – for the benefit of the
in 2000, it rose to 27.4 percent in 2012. The fact that the equity ra-
economy and the strengthening of the growth of our state. ■
tios of the banks could be increased significantly as a result of the
extensive regulatory measures is shown clearly by the convincing
Dr Lutz Raettig is Spokesman of the Executive Committee of
performance of German banks in the ECB’s stress test. Despite
Frankfurt Main Finance e.V. and Chairman of the Supervisory Board
this trend, and in view of the increasing regulatory ­requirements of
at Morgan Stanley Bank AG in Frankfurt am Main.
10
Growth is feasible
The ten dimensions
of grow th
Many factors influence the growth of an economy. Assessed individually, it quickly becomes
clear that growth is no accident. And the low growth rates of advanced ­industrial ­countries
such as Germany are by no means inevitable. The important thing is to adjust the right
­parameters – and adjust them right.
Demography
Mentality
Education
Regulatory rigidity
Tax system Technology Distribution
Competitiveness
Budgetary
Long-term
consolidationfinancing
Growth is feasible
Demography Germany’s population is shrinking at a
11
Education Fifty one percent of students achieve a
rate of 0.2 percent every year – by 2050, the number of
higher education entrance qualification, and this figure is
people living in Germany will have dwindled from 80.9 million to-
growing by one percentage point each year. This sounds good,
day to 76.2 million. This reduces the number of consumers, work-
because innovation requires education, and education facilitates
ers and – especially important – creative young minds willing to
the introduction of new technologies. Education, you might say, is
take risks. This does not bode well for long-term stable growth.
a prerequisite for increasing productivity. But the voices of w
­ arning
One possible answer: qualified immigration of people in academic
are getting louder: in the past, every second young person
and non-academic professions.
­completed an education – today it is only one in four, and the
­economy is running out of skilled workers. A prime example of the
Mentality In 2013, full-time start-ups fell to a historic
complexity of educational policy decisions.
low of 306,000. At about seven percent, the number of
shareholders is extremely low by comparison with other countries.
Regulatory rigidity Twenty two percent of the
And the main ambition of many students is to get into the civil
­financial service providers surveyed by the Deutsches Ak-
­service – for the pension. But growth only works with people who
tieninstitut (DAI) in 2014 no longer offer advice on shares because
are willing to take risks, which is perhaps the biggest hurdle f­acing
of the growing density of regulations – the transition from saver to
Germany.
investor has become a hurdle race for the German people. And
the share is the capital market instrument that represents “growth”
Tax system The book “Current Tax Laws 2015” from
per se. This example illustrates how meaning well is not always the
the publisher C.H. Beck runs to about 1,500 pages, cover-
same as doing well – particularly in the area of regulation.
ing the 24 most important tax laws and ordinances. German tax
law is extensive and constantly changing. Business people invest
in expensive tax compliance systems to protect themselves against
Technology German companies registered more than
32,000 patents in Europe in 2013, third place behind the
prosecution in the face of increasingly complex laws. Imagine the
United States and Japan, and still comfortably ahead of fourth-
forces for growth that would be unleashed if they could devote
placed China. But the tendencies are worrying: China up 16.2 per-
more energy to their core business ...
cent on the previous year, Germany down 5.4 percent – the only
country among the leaders with a downturn. But only those who
Distribution The Gini coefficient for Germany is 0.78.
remain innovative remain globally competitive. Innovation is
The lower the value between 0 and 1, the more equitable
­indispensable for growth.
the distribution of assets in an economy. 0.78 is the highest value
in the eurozone. In France it is 0.68, it is 0.61 in Italy, and in
Budgetary consolidation Keeping out of the red
­Slovakia it is only 0.45. What is better for growth is a matter of
is the major theme of German budgetary policy – and a point
academic dispute. What is not in dispute, however, is that the
of contention with many of its neighbours in Europe calling for fiscal
current m
­ ethods of redistribution, for example by means of tax-
impetus for growth from Germany. But if budget deficits were an
ation, tend to inhibit growth.
­engine of growth, countries like France and Italy would be among the
frontrunners in terms of growth. And they are not. Spain, on the other
Competitiveness Germany is ranked in fifth place in
hand, shows how consolidation becomes the basis for a new upturn.
the Global Competitiveness Index of the World Economic
Soundness pays off after all.
Forum – not a bad score, you would think. The twelve sub-indices
include areas such as infrastructure, financial markets and innova-
Long-term financing The share of long-term loans
tion – some of the key issues in this yearbook. With advances in
to total loans in Germany is about two-thirds. Seen in this
the area of labour market efficiency, Germany has gone from ­being
light, the economy without this instrument seems barely imagina-
the sick man of Europe to its locomotive. Whether the recent
ble. But long-term financing is becoming increasingly difficult in the
­decisions in labour market policy will damage this achievement
current regulatory environment, and this limits the scope of the
­remains to be seen in the coming years.
­financial sector to adequately fulfil its role in the financing of growth.
Can asset managers and insurance companies step into the breach?
12
G r o w t h i s f ea s i b l e
D
iscussion of the evident conflict between increasing regulation on the
one hand and the promotion of longterm financing on the other has so
far taken place mainly among experts. But a wide-ranging debate
about the interactions between financial market and banking regulation, and about the long-term provision of funds and growth,
would be particularly welcome..
After the onset of the financial crisis, the goal of sustainable stabilisation of the financial system dominated the political agenda
in Europe, particularly in the area of fiscal policy. After the regulatory reforms had been by and large adopted, the attention of
policy makers has in the past two years turned to the question
G r o w t h i s f ea s i b l e
13
Gas&
Brake
New rules with side effects
By Jens Tolckmitt The wish of the European Commission – to strengthen long-term financing in Europe
and to make it a pillar of the financial industry – is in some ways a striking contradiction to the
system of banking regulation that has been established in recent years.
of how the funds required for much-needed growth in Europe
promise the traditional hinge function of the banking industry be-
can be provided and secured. This is to be welcomed, because
tween the capital market and the real economy. No one seriously
long-term financing contributes to the enhancement of produc-
disputes that the right lessons had to be learned from the financial
tion potential, and therefore to growth in Europe. This is the aim
crisis – above all the realisation that it makes good sense to bet-
of many policy initiatives at both the European and national lev-
ter regulate banks to reflect their importance to the economy as
els designed to encourage investment programs for the mainte-
a whole in order to ensure that the taxpayer is never again sad-
nance of transport infrastructure, the development of green en-
dled with the costs of any future financial crisis. It is particularly
ergy or the promotion of small and medium-sized businesses.
important not to lose sight of the potential interactions between
various regulatory activities, running the risk of high costs in the
As the traditional broker for the provision of long-term capital, the
real economy in the medium and long term. The financial sector
banking industry has been faced since the onset of the financial
has drawn attention to this danger frequently and emphatically
crisis in 2008 with drafts of new regulations published with hith-
– but unfortunately with limited success. An in-depth analysis of
erto unprecedented frequency and, to a large extent, already in
these interactions has yet to be undertaken, and there are there-
force. Different institutions have to some extent pursued different
fore no reliable findings as to the consequences the new regula-
goals and adopted proposals that in some cases threaten to com-
tory measures will have in their entirety.
14
G r o w t h i s f ea s i b l e
Furthermore, the cumulative interaction of various regulatory measures threatens to weaken the
refinancing base of the banking industry. In particular, the
Bank Recovery and Resolution Directive (BRRD) and Solvency II
– the capital adequacy rules for insurers – cause traditional longterm investors in banks to withdraw further from these commitments. At the same time, insurers are increasingly engaging in traThe contribution of these regulatory initiatives to stabilising the
ditional banking business without comparable regulation. Finally,
banking sector is undisputed. But new rules and refined safe-
the ­frequency of new regulatory initiatives also makes business
guard mechanisms alone will not make the European banking in-
more difficult for long-term financiers, because the constantly
dustry, still weakened to some extent, more efficient in terms of
changing requirements cannot be factored into credit terms in
its core role as the financier of growth and innovation. Given the
an appropriate and necessary manner.
“The main concern is to identify the right parameters, otherwise banks could withdraw from long-term financing in favour
of shorter maturities.”
policy objectives of the European Union in the area of long-term
The bottom line must be to work towards less restrictive regulatory
financing, it is therefore all the more important to take another crit-
treatment of the long-term financing business of credit institutions.
ical look at those issues that are still negotiable, such as the de-
This is the only way to develop the stimuli of long-term financing
sign of the leverage ratio and the net stable funding ratio, in or-
that are wanted by policymakers and that promote growth. Oth-
der to keep the foreseeable risks and side effects for long-term
erwise, the new banking regulation regime threatens to shrink
financing as low as possible. But that cannot be the end of the
the market for long-term financing. As typical long-term finan-
matter. The main concern is to identify the parameters that can
ciers, Pfandbrief banks are therefore committed to the careful
be used to take the pressure off long-term business and for in-
differ­entiation of these regulations – with the goal of strengthen-
stance to melt off term supplements in internal models. Because
ing bank lending in this area in order to meet their primary eco-
in terms of risk capital adequacy, they create opposing incentives,
nomic responsibility of term transformation. ■
causing banks to withdraw from long-term financing in favour of
shorter maturities and a reduction of loan terms on balance. But
Jens Tolckmitt is General Manager of the Association of G
­ erman
this cannot be the intention of the policy.
Pfandbrief Banks, vdp.
Growth is feasible
15
A kaleidoscope
of possibilities
By Rainer Neske For some years now, the question of how our economy can finance major long-term
projects has been raised with increasing urgency, with the primary focus on the preservation
and expansion of our infrastructure.
A
functioning modern transport n
­ etwork
made up of roads, railways, airports
and waterways is – next to education
and training – the key factor in ­ensuring
the future global competitiveness of
Germany and Europe. And in the past
15 years, a new component has been added to the traditional transport networks: our digital infrastructure, which is as important now
in safeguarding our economic strength as the expansion of the rail-
way network was in the 19th century.
16
Growth is feasible
“Financing the renewal
of our infrastructure
requires determination,
a little courage, and
a trusting relationship
on all sides.”
Back then, Europe pulled well ahead of other economic regions
in the development of its infrastructure. Today, however, the rest
of the world is very much aware of the importance of physical and
digital networks. Countries such as China, Japan, and the United
States in particular, are investing heavily in the development of
broadband networks. Their governments know that the only regions that will be attractive to companies in the future are those
that, in addition to excellent transport connections, also offer modern high-speed networks for data transfer, networked production
and cloud computing.
But the level of investment required for this is enormous. According to estimates by the European Commission, we in Europe need
to invest around 2 trillion euros in the infrastructure sector as a
whole by 2020. This poses a problem for the individual nations,
because given the levels of national debt in most countries, they
cannot manage it alone. This means that without the participation
of private investors, many infrastructure projects are either delayed
or not implemented at all.
We must therefore mobilise private capital. In principle, the prospects for this are good. Given the historically low interest rates,
insurance companies, pension funds and asset managers are
looking for long-term investment opportunities for their customers’ money. What they need are moderate returns at an acceptable level of risk, and these are things that infrastructure projects
can offer. Banks, for their part, can play an important role here.
While regulation is making traditional lending for infrastructure projects increasingly unattractive, our industry, as an intermediary between investors and companies seeking capital, can offer product
solutions and financial advice. This turns us into financial service
­providers in the best sense of the term, performing an important
function in the real economy.
Deutsche Bank has done just that in recent years, providing
­advice and support for several large-scale infrastructure projects.
In ­Slovakia, we placed a structured bond with a volume of 1.24 billion euros and a yield of around 4.7 percent. The capital raised was
used by a project company to finance the operation and maintenance of a motorway. The 28 investors were mainly insurance
companies, pension funds and asset managers. And I should not
Growth is feasible
17
­neglect to mention that the transaction allowed the government to
chalk up substantial refinancing gains.
Of course, everybody concerned must make their calculations
­soberly. The fact is that the risks involved in investment in infrastructure projects are not to be underestimated, if only because of their
scale and long-term nature. Between that and a regulatory envir­
on­­ment that is not always conducive, many private investors often
shy away from getting involved in long-term financing of this kind.
Regrettably, public-private partnerships (PPP) are also often viewed
critically by government and policy makers. PPPs are clearly suit­
able for any kind of infrastructure financing. But greater i­nvolvement
on the part of private investors is also no sign of political weakness.
Both sides can benefit: the state through faster and often more
cost-effective implementation of projects, and private in­vestors
through attractive returns at an acceptable level of risk.
In our experience, there are three crucial factors in mobilising private capital for long-term financing:
❙❙ First, companies require planning and legal certainty, especially with a view to the predictability of future returns.
❙❙ Second, the government should establish regulatory incentives. One example would be the easing of capital adequacy
requirements for infrastructure projects by means of insurance.
❙❙ Third, the project and financing risks must be distributed fairly
among all partners involved, whether publicly or privately owned
And essential to long-term financing on all sides are determination,
a little courage, and a trusting relationship of collaboration between
the public and private sectors. If we can pull together on this ­basis,
we can shoulder urgently needed investments in our infrastructure
and release forces for growth in Germany and in Europe – and
permanently improve our global competitiveness by doing so. ■
Rainer Neske is a Member of the Management Board of Deutsche
Bank AG.
“The fact is that the
risks involved in invest­
ment in infrastructure
projects are not to be
underestimated, if only
because of their scale
and long-term nature.”
18
Growth is feasible
A culture of long-term financing –
The bedrock of a sound financial system
Germany
75%
Long-term loans
of
five years
and longer
to companies
T
he benefits of financing long-term investments with matching maturities and,
where possible, fixed interest rates are
obvious: for businesses and households,
they offer predictability with respect to
the term and cost of financing. On the
other side, the demand for long-term financing on the part of
customers also allows banks to plan for the long term and to
organise their liquidity management accordingly, which means
that they can significantly reduce their vulnerability to shortterm changes in the capital market and level out fluctuations
in interest rates. The German culture of long-term investment
can therefore make an important contribution towards making
banks and the financial system more crisis-proof.
And there is another feature of the German system of financing that should be pointed out: it is traditionally bank-based.
Spain
This means that the importance of German banks as the main
lenders for long-term financing far exceeds their role as pure
financial intermediaries. Long-term financing forms the basis
for stable customer relationships, often extending over generations. Rather than being occasional, contact with the customer
is extensive and ongoing. Banks contribute their overall knowledge – in areas such as the use of funding, financing struc-
90%
Short-term or
floating rate
financing
of real estate
ture, cash management or investment and asset management
– supporting their customers in achieving sustainable development, and also backing them in times of crisis.
Helaba‘s business model has been traditionally geared towards
long-term relationships between the bank and its customers.
Its „relationship banking“ is embedded in a conservative risk
profile, coupled with effective risk management and sound
equity and liquidity. As a result, the bank can boast very stable business and earnings performance, making it a reliable
long-term partner for its customers.
Growth is feasible
19
By Hans-Dieter Brenner Germany has a pronounced culture of long-term financing. This is particularly
apparent in the area of housing finance. But German companies also prefer long-term financing: about three-quarters of loans to companies and self-employed professionals have terms
of more than five years. In some neighbouring European countries, the picture is different: in
Spain, for example, more than 90 percent of properties are financed in the short term or at
­variable interest rates. In the United States, the situation is similar.
It can be said without exaggeration that the culture of long-term
With a green paper on long-term financing, the EU Commission
financing and credit relationships established in Germany is a
has already kicked off the debate as to whether more long-term
key element of a financial system that is geared towards susta-
financing can and should be offered in the future by other finan-
inable development of the real economy. And beyond that, it is
cial intermediaries such as insurance companies, pension funds
a regulatory element of the social market economy. It makes an
or loan funds. What it fails to take into account, however, is that
essential contribution towards stabilising the markets and the
lending by such institutions is not without its difficulties. Alter-
economy. It helps to protect both borrowers and banks against
native financiers for the most part lack the know-how that has
external shocks and the volatility of the capital market. The con-
been acquired by the banks over many decades. And they lack
sequences of short-term and opportunistic financing practices
the long-term customer relationships and the range of servi-
have been shown by both the subprime crisis in the United Sta-
ces that banks also offer their customers in addition to lending.
tes and the mortgage crisis in Spain.
As welcome as it is to reduce the risks in the banking sector
But long-term financing can also involve risks – which arise if
and to increase financial stability, it would be equally counter-
banks attempt to generate additional interest income by me-
productive to limit the economic function of banks. Negative
ans of excessive term transformation. A bank based on a solid
repercussions for the real economy, as can occur when long-
foundation will try to refinance its loans with matching maturities
term financing is restricted or made more difficult, must be avo-
where possible or adequately hedge interest rate risks where
ided. Outsourcing lending to another – less regulated – sec-
maturities are not matching. The financial crisis has shown that
tor is not a real alternative. While banks would become more
this maxim is not followed by every institution.
robust, the risks to the financial system and the real economy
would increase.
Bank regulators have learned the right lessons from this: the new
liquidity requirements are designed to prevent banks from get-
The regulators are now faced with the task of increasing the sta-
ting into difficulties with liquidity as a result of term transforma-
bility of the banks on the one hand without compromising their
tion not adjusted for risk. There is no question that refinancing
ability to function on the other. It is to be hoped that they re-
with matching maturities contributes significantly to the stability
solve this problem. The preservation of the German long-term
of the financial system. At the same time, however, the recent
culture is well worth the effort. ■
and anticipated regulatory measures pose new challenges to
long-term credit financing. The primary and stated goal of the
net stable funding ratio (NSFR) in particular is to eliminate extreme cases of volatile, rapidly revolving and leveraged shortterm refinancing. As things currently stand, however, there is a
danger that the ratio creates incentives to increasingly provide
Hans-Dieter Brenner is CEO of Helaba Landesbank
loans with short maturities.
Hessen-Thüringen.
20
Growth is feasible
The Naica Mine gained worldwide fame when natural mountain
caverns containing giant crystals of selenite, a form of gypsum,
were discovered during mining operations.
HOW GROWTH CAN
BE ACHIEVED
Growth is feasible
21
More education
Dr Ulrich Kater, Chief Economist,
DekaBank
Growth is a triathlon event involving the disciplines of
labour force, capital accumulation and technological
call for a longer working life and the demands of globalisation re-
progress. If the process of growth is to be sustainable, the condi-
quire high levels of education and training. These are areas in which
tions for all three disciplines must be adequate. For Germany, the
the state either sets the framework, as with retirement planning, or
greatest challenge is the human capital factor. Demographic trends
may even invest directly, as with education. It is in areas of reform
like these that Germany still has some catching up to do. ■
22
Growth is feasible
More risk
Dr Gertrud Traud,
Chief Economist, Helaba
As prosperity increases, the willingness to take risks declines in society. In Germany, the tendency to see risks
rather than opportunities is particularly pronounced. It is with good
reason that we find ourselves discussing, time and again, a widespread “fully comprehensive” mentality or “over-insurance” among
our citizens. Demographic change exacerbates this problem fur-
have their place, but many have relied too much on debt. Rather
ther – because risk aversion increases with age. Reinforcing will-
than branding investors as “locusts”, we might instead want to con-
ingness to take risks, and strengthening the “equity culture” in par-
sider how we can make it more attractive for investors to act not as
ticular, should therefore be a central political concern in Germany.
creditors but as equity shareholders in companies. The incentives
This is not simply with reference to the old debate about “share-
to take entrepreneurial risks would also have to be increased – in
holder versus stakeholder”, which misses the crux of the problem.
terms of both the regulatory framework and fiscal legislation. Banks
But the financial crisis has shown that shareholders’ equity to bor-
should ensure that they do not retreat – whether voluntarily or in-
rowed capital has certain economic advantages. Both instruments
voluntarily – too far from the role of financing entrepreneurial activity. Otherwise, they run the risk of being increasingly displaced by
other institutional investors. ■
More Europe
Carsten Brzeski, Chief Economist,
ING Bank
The yawning investment gap in particular is an obstacle to future
growth, and the current initiatives for new investment are not a moment too late in coming. Infrastructure, high-tech, innovation and
energy are areas where investment can stimulate growth not only
in the short term, but also in the long term. These also happen to
be the areas in which Germany can maintain its strong position in
an increasingly competitive global marketplace.
The glory years of the German economic miracle are
gone for now. By 2014, the strong man of Europe had
To create new investment, the public and private sectors need to
been reduced to a one-eyed man in the land of the blind. This
work together. This is the only way to establish a persuasive struc-
­period of weakness was caused not only by external factors such
ture of incentives. And it’s not just a question of financial incentives:
as the crisis in Ukraine or the ongoing stagnation in many euro-
it’s also about developing a coherent strategy. A vision. This vision
zone countries. It also exposed structural weaknesses in the
must go beyond national borders. In sectors such as infrastructure,
­German economy. Germany is currently enjoying the final stages
high-tech, innovation and energy, a coordinated European strat-
of the latest round of structural reforms. If this is to continue and
egy would send a huge signal of optimism to domestic and for-
new impetus for growth is to be found, more structural reforms are
eign investors. If we’re looking for sustainable growth in Germany,
probably inevitable in the next few years.
in other words, there is only one solution: go with more Europe. ■
2 GROW T H IS F UNDA BLE
Why growth requires
long-term financing.
24
G r o wt h i s f u n d ab l e
Green Finance –
Sustainable investment in the energy transition
requires sustainable financing options
By Tarek Al-Wazir
G
reen Finance has become more
than just a buzzword. And much
more than a marketing tool for
banks and financial service providers looking to engage in a little
greenwashing. Of course companies advertise with the term, courting the favour of
the growing number of customers specifically ­looking
for this type of product. But they are also contributing to the fact that billions are flowing into a
sector in which there is an immense requirement for
­financing: the energy transition.
We are facing enormous challenges: to complete the phase-out
of nuclear power and reduce our dependence on fossil fuels
while working against climate change at the same time, we need
to change our energy supply, reduce our energy consumption
considerably and learn to be more economical with our resources. This green transformation needs financing – green finance.
Ultimately, the question is this: how can the financial sector make
its contribution to protecting the climate and the environment and
creating the infrastructure required to do so? And how can policy support and promote this?
In 2013 alone, over 16 billion euros was invested in Germany in the
construction of renewable energy plant and infrastructure. In 2014,
for the first time, renewable energies will probably be the most important energy source for electricity generation in Germany. But it
is not only the expansion of renewable energies that should continue – the necessary expansion of electricity grids and the investment required in energy efficiency and energy conservation will
also carry on. This gives a clear picture of the volumes of further
investment required to implement the energy transition. And the
sums involved make it plain for all to see: only a part of this investment can be raised from companies, individuals or new forms of
financing such as crowd investing.
G r o wt h i s f u n d ab l e
25
“As the most important German
financial centre, Frankfurt
plays a vital role in financing the energy transition – and also faces
major challenges.”
Therefore, we also need to get institutional investors such as in-
funds above a certain level from private investors cannot be coun-
surance companies or pension funds on board. With their long-
tered with the objection that this would involve higher regulatory
term investment horizons, investors like these are a very good fit
costs for the German Federal Financial Supervisory Authority. This
for the equally long-term investment required for the energy tran-
would not be a compelling reason for failing to improve the regula-
sition. There are also several good reasons for the increasing at-
tory framework. Investor protection must take priority.
tractiveness and profitability of green investments: comparatively
speaking, fossil fuels will become considerably more expensive, the
In addition to regulatory issues, policy initiatives can also actively
rapid technological progress in the field of renewables is continu-
contribute to bringing the supply and demand sides together. This
ally opening up new business segments and on the demand side,
is another area in which we will reinforce our existing commitment.
we can see a steady increase in environmental awareness. Add to
We provide companies and investors with platforms and events that
this the special situation at present, with extremely low interest ra-
bring together the stakeholders on both sides. Those who need
tes – investors, including institutional investors, are looking for sen-
money. And those looking for new forms of investment.
sible and sustainable investment opportunities.
As the most important German financial centre, Frankfurt plays a
But if we are to promote green investment, it must be accompa-
vital role in financing the energy transition – and also faces major
nied by improved investor protection, especially with regard to small
challenges. But at the same time, this new business area also re-
private investors. On the dreaded capital market in particular, there
presents a historic opportunity for the financial sector. The goal of
are still serious deficiencies and regulatory deficits. One possibility
the Hessian state government here is clear. We want to develop
would be to consider whether investments without rights to parti-
the Frankfurt financial centre into a pioneer in the field of green in-
cipation or control, such as profit participation rights or registered
vestment. And the good news is, that‘s what the financial centre
bonds, could be subject to a licensing requirement for providers
wants too. The extremely high demand for green bonds at present
and issuers from a certain issue volume. In the interest of investor
is only one of many good examples of this. So let‘s get to work! ■
protection, it is also imperative to put the necessary oversight capacities into place. The argument for establishing ongoing super-
Tarek Al-Wazir is Minister of Economics, Energy, Transport and
vision of providers of investments that seek to attract investment
Regional Development, State of Hessen.
26
G rowth is fun d ab l e
I
n most countries around the world, the structural trans-
Stable infrastructure projects also attract other equity investors.
formation of energy production is on the agenda in one
Taking the place of a market heavily dominated by just a few elec-
form or another. The driving force behind this is by no
tricity suppliers is a more fragmented market, with a wide range of
means just climate protection. Concerns about energy
independent power producers – the so-called IPPs. There is also
security and energy independence also often play a role,
much discussion in this context of the democratisation of the en-
and even cost considerations are increasingly common:
ergy sector – with the consequence that control of the energy mar-
in many countries, hydroelectric power is an important pillar of their
ket and its medium-term development is more in the hands of pol-
least-cost energy supply strategy. In many regions, wind energy can
icy makers, not individual large power companies as used to be the
already compete with the local options for conventional electricity
case. Nor is this always a matter of subsidies. But given the high
generation. The falling price of wind turbines and solar power plants
fixed costs of renewable energy projects and little potential for ad-
is only partly responsible for this. In some countries, the range of re-
justing the business model after installation of a plant, investors do
sources available in the form of wind and solar power compared to
need predictable revenues.
conventional power generation brings considerably more b
­ enefits
than in this country. The Global Trends Report 1 provides evidence
Access to borrowed capital reduces financing costs. Often, how-
that renewables are coming of age: in 2013, global investment in
ever, the market for long-term outside capital is itself not p
­ articularly
Drivers of the global energy
By Silvia Kreibiehl and Ulf Moslener The concept of “energy transition” stands for a massive structural
transformation away from fossil fuels and nuclear energy and towards a system essentially based on renewable energies. To attract investors for the required new energy
­infrastructure, the most important factor is a stable environment in the electricity market. This is a challenge for policy makers.
new generating capacity amounted to 192 billion US dollars – by
­liquid. In addition, the familiar trends in financial market regulation in
any measure no longer just a fraction of the investment in fossil-fired
the context of Basel III and Solvency II present challenges for long-
power plants (about 270 billion US dollars). In China, the past year
term financing as a whole – particularly through higher relative cap-
even saw higher investment in renewables than in coal-fired power
ital adequacy requirements and the higher refinancing costs asso-
generation for the first time. For many financial intermediaries, this
ciated with them. Two additional dimensions of risk ­associated with
is a market with considerable growth potential.
the long-term financing of renewable energies should be highlighted
here: First, an aspect of political risk that has grown in ­recent years,
This structural transformation changes the requirements for financ-
and second, the uncertainty surrounding the electricity m
­ arket of
ing: green energy infrastructure is capital-intensive. Although the
the future.
“fuels” are free, the plants used to generate electricity based on
renewables typically have high fixed costs and investment costs.
By international standards, the political and regulatory risk asso-
Wind and solar may not send invoices, but investors are interested
ciated with investment in Europe can be considered low. At the
in a return. Compared to conventional power generation, these
same time, when compared internationally, policy-based finan-
technologies therefore have a particular need for the capital mar-
cial support for investment in renewables in Europe is generous.
ket, with its term transformation function and access to affordable
However, any consistent regulation must link ambitious goals with
long-term financing.
­appropriate i­nvestment incentives or other instruments such as a
An annual report of the Frankfurt School – UNEP Collaborating Centre for Climate and Sustainable Energy Finance.
1
G rowth is fun d ab l e
27
“The future organisation of the electricity
market is a key factor in ensuring our ability
to make long-term investment decisions.”
Polycrystalline silicon solar cells in a solar panel.
carbon ­emissions trading system with corresponding shortages /
is then technically necessary, but it pays off only if the price is ex-
prices. Both incentives and a carbon market with a high price re-
tremely high in periods without wind and sun. From an economic
quire active political intervention. The absence of active political
perspective, the real shortages are much better represented by two
support r­ educes the profitability of investment in renewables. Since
prices, one for actual electricity, and the other for the ability to pro-
the promotion of renewables is now ideally derived from the cor-
duce electricity. The future organisation of the electricity market is
rection of market failures, projects for electricity generation from
therefore a key factor in ensuring our ability to make long-term in-
­renewables would, from an investor’s perspective, in many cases
vestment decisions.
not be attractive without assistance. The investor must not only
see that there is a policy of promotion in place, he must also be
If policy makers want to facilitate the long-term financing of the
convinced that the policy will be maintained at least over the p
­ eriod
­energy transition, they are therefore faced with two challenges:
first, they must moderate the reorganisation of the
electricity market. This involves a complex inter­action
transition
of m
­ icroeconomic, macroeconomic and technical
­criteria. But conceptually, the second challenge may
seem even greater: policy makers must reduce the
risk that they themselves unintentionally help to ­create,
of the project. The risk is therefore not primarily one of unexpected
­frequently through no fault of their own.
political intervention, but rather the risk that a particular intervention
will not be continued. This risk increases systematically with the level
From the financial sector, policy makers will need any honest help
of ambition, which is to say the amount of funding. And it is not only
they can get on the issue of how these risks can be reduced and
political signals that are decisive, but rather factual credibility. Mod-
absorbed. The growing share of renewable energy, to which there
est funding, as long as it is credible, can mobilise significantly more
is no political alternative, must be attractive to investors across
investment than an unrealistic promise. However, as is so often the
the board and outside the world of corporate social ­responsibility.
case, it is also evident here that trust can be lost a lot faster than it
­Policy makers must therefore develop reasonable expectations with
can be rebuilt: In the Czech Republic, for example, or in Spain, sub-
­respect to the risk-return expectations of the private financial s­ ector.
sidy policies were at least partially suspended in retrospect – after
And the private financial sector for its part must be expected to
investments based on trust in the current p
­ olicy had been made.
clearly communicate its own expectations and what it sees as the
The result: the investments collapsed almost completely.
limiting factors. ■
There is another uncertainty that touches on all long-term invest-
Silvia Kreibiehl is Head of the FS-UNEP Collaborating Centre for
ments in power generation: a fundamental change in the function-
­Climate & Sustainable Energy Finance and Prof Dr Ulf Moslener
ing of the electricity market. In countries like Germany in particular,
holds the chair of Environmental Economics & Sustainable Energy
where renewables – chiefly wind and solar – already represent a sig-
Finance at the Frankfurt School for Finance and Management.
nificant component of the electricity mix, the current market structure does increasingly less and less justice to the actual ­situation.
In a market in which there is essentially only one price per quantity of electricity, the option of being able to produce or consume
electricity whenever required also has a value. A prerequisite is that
while large parts of the electricity from wind and solar are generated
at a marginal cost of about zero, the schedule for generation cannot be controlled. For a stable power grid, conventional production
28
G r o w th is f u n d a b l e
Municipalities are taking advantage
of new financing sources
By Uwe Becker The local authority loan continues to be an important instrument for the ­financing
of cities and municipalities. This is especially true for fast-growing cities like Frankfurt am
Main. Alongside them, alternative forms of financing such as promissory notes, municipal bonds
or crowd-funded models are also establishing themselves, enabling municipalities to fulfil
their task of providing public services for their citizens.
F
rankfurt am Main is growing, the mark of
amount of around 89 million euros and debt restructuring in the
700,000 people has been reached, and in
amount of around 24 million euros.
the coming years, the population will again
increase significantly. In light of this growth in
Comparatively speaking, municipalities can still obtain very favour­
particular, the issue of the provision of public
able financing terms, although the generally low level of interest rates
services, and with it the question of ­financing,
is becoming more significant.
The provision of public services requires predictability and depend­
at the moment is concealing rising margins. However, the past few
years have seen something of a narrowing of availability and an in­
crease in the cost of credit, particularly for terms of more than ten
years, mainly due to the requirements and measures for banking
ability and, as a consequence, the need for long-term financing. The
regulation implemented as a result of the international financial and
established and proven instrument for the investment financing of
sovereign debt crisis. A number of state banks have scaled back to
municipalities was and is the local authority loan, and it should con­
their regional responsibilities, some banks are introducing set limits
tinue to be available in the future as one of the chief methods used for
for municipalities, while others are withdrawing completely from the
the financing of municipal responsibilities. This is an opinion shared
low-margin local authority loan sector.
by the Association of German Cities.
Because the banks are increasingly withdrawing from longThe city of Frankfurt am Main also uses this method of investment
term l­ ocal authority lending, municipalities are attempting to
financing. In 2012 and 2013, the administrative area of the city of
broaden their fi
­ nancial structure. One alternative that suggests
Frankfurt am Main saw new borrowing in the amount of around
itself is the o
­ pening up of additional groups of creditors through the
595.6 million euros and debt restructuring in the amount of around
issue of promissory notes and bonds. In recent years, municipali­
131 million euros, made up almost entirely of local authority loans.
ties have increasingly financed themselves by means of promissory
Local authority loans were also taken out in 2012 and 2013 for the
notes. Some of the larger cities have also placed more bonds, which
operation of the city’s drainage system, with new borrowing in the
G r o w th is f u n d a b l e
29
­require a ­certain minimum volume. This facilitated an approach to in­
level, however, this is viewed more cautiously. On the one hand,
stitutional in­vestors and smaller regional financial institutions as new
the federal government does consider itself primarily responsible
groups of creditors. In addition to the cost of appropriate placements
for the financing of municipalities. On the other, it is feared that des­
and the management of the market that is then required, the terms
pite credit ratings that are effectively identical, the terms could de­
for munici­pal bonds do not necessarily reach the level of municipal
teriorate through the involvement of municipalities.
loans. The municipal bonds placed to date were all issued without
any ­external rating that the Association of German Cities emphat­
From today’s perspective, local authority loans – and this includes
ically rejects for municipalities for reasons of cost.
Frankfurt am Main – will continue to play an important role in the
­financing of municipalities, albeit under more difficult conditions. The
Among municipal companies, promissory notes – which generally
partnership between municipalities and banks remains close. A large
have lower additional and follow-up costs than bonds – are now
number of banks have established themselves in Frankfurt am Main.
established practice. In 2013, for example, the procurement of new
They are not only shaping the history of our city and today’s cityscape,
rolling stock by Frankfurt’s transport company VGF was financed in
they are also bound to it by close business relationships.
part by means of guaranteed promissory notes or registered bonds
with a volume of 200 million euros.
Another alternative that has been looked at by the city of Frankfurt
am Main is crowd-funding by means of citizen bonds and ­citizen
loans, which is heavily focused on the strong sense of identifica­
“The partnership ­between
municipalities and banks
remains close.”
tion that citizens have with their community. The design is open
and limited only by the amount citizens wants to invest. Here too,
new investors can be won. In most cases, the citizen loan is pro­
A purely monetary consideration might lead to the conclusion that
moted for a m
­ unicipal investment measure of general public inter­
short-term financing is more favourable as a rule. But this would fall
est. It is however more likely to achieve smaller amounts of funding,
short, because the provision of municipal services is essential to the
and its uptake is more likely if maturities are short. Given the rela­
interests of citizens, and must be based on solid foundations. On
tively low spread at the moment between interest on investments
the other hand, short-term financing is not to be classified as “bad”
and interest on borrowings, other transaction costs are crucial here
per se. Instead, each municipality must assess its own risk-bear­
for ­municipalities. This market sector is therefore currently less at­
ing capacity individually and decide on that basis which financing
tractive for core ­municipal budgets.
­structure it wishes to choose. ■
Another option for financing is investment by municipalities in fed­
Uwe Becker is the Treasurer of the City of Frankfurt am Main.
eral or state bonds. In June 2013, the first joint federal-state bond
was issued. In this bond, there is no joint liability of the parties – in­
stead, each issuer is liable for predefined shares. The Association
of German Cities welcomes municipal involvement in bonds of this
type, in particular to allow this form of access to the capital market
for smaller cities with lower borrowing requirements. At the f­ederal
30
G r owth is fund a b l e
Indu s t ry 4. 0 –
A compe t i t i ve e d ge
T
By Volker Brühl
he smart factory will
­lower labour costs. Clothing, toys, but
revolutionise manu-
also consumer electronics or techni-
facturing, creating
cal standard products, are manu-
new opportunities
factured predominantly in low-wage
for German industry.
countries. This trend could be broken in the coming ­years if it proves
Smart Factory
One of the consequences of the
possible to exploit the opportunities
­digitisation of the economy is that
of Industry 4.0.
machines and equipment as well as
everyday objects such as cars and
In fact Germany, with its outstanding
household appliances are intercon-
expertise in the areas of mechanical
nected via the Internet. The World
engineering, process automatisation,
Wide Web is evolving into an “Inter-
robotics and information technology,
net of Things” and into an “Internet
is well positioned to play a pioneering
of Services”. New markets and busi-
role in the future markets of Industry 4.0.
ness models are also emerging, and with them add­itional growth
These include areas such as “smart health”, “smart home”
potential for countries and companies that actively shape these
and “smart grids”.
new opportunities. On the other hand, it cannot be denied that
­disruptive changes entail risks for providers who are slow to ­engage
The German government has recognised the economic
with the new technologies.
potential of Industry 4.0 at an early stage, funded ­basic research and facilitated the development of initial application
Many experts believe that we are on the cusp of the fourth industrial revolution – termed Industry 4.0 – because digitisation is finding its way into production. In the intelligent factory of the future the Smart Factory – the physical and virtual worlds will merge into
so-called “cyber-physical systems”. Highly flexible manufacturing
“The factory of the future will r
­ educe
the cost of individual p
­ roduction to
the level of mass production.”
systems will be able to manufacture customised products at the
manufacturing cost of mass production. The labour cost differen-
scenarios. Now it is important that Industry 4.0 also receives a high
tial, a traditional problem in high-wage countries, is becoming less
priority in the European investment program, which was ­announced
important for the location of production sites.
by the President of the European Commission Jean-Claude Juncker
(volume of about 315 billion euros) in November 2014. ■
For years, the number of people employed in production in Germany has been declining. Entire industries have moved their pro-
Dr Volker Brühl is Managing Director at the Center for Financial
duction abroad in recent decades, mainly to take advantage of
Studies at Goethe University Frankfurt.
3 GROW T H IS VARIED
What tools does the world of
­finance hold for growth.
32
G row t h is va ried
ver
ea
h
T
“
age
u
iss
ol
ev
u
for
me
pr
is
om
so
ry
in
tes
no
20
Financing
Many and varied instruments –
known, alternative, new
Blaze of colour:
Citric acid crystals under the
polarising microscope.
13
G row t h is va ried
33
By Stefan Bielmeier Since the financial crisis, banks
have been subject to more stringent regulation. While they are withdrawing from certain
financing segments, alternative financiers are
entering the market, established financial instruments are being revitalised or completely
new products are being developed. At the same
time, the trend towards direct capital market
financing is picking up pace.
w
a ro
as
u
0
12
nd
l
mil
e ur
ion
os
.”
7.5 percent, the running costs for the issuer are comparatively high.
Despite interest rates that appear high, there has been no excess
return due to a large number of bankruptcies since 2010 with significant nominal losses for creditors. The investor base has been made
up to date of both retail and institutional investors. We assume that
in the medium term, the proportion of institutional i­nvestors will
predominate. In our judgement, however, the fragmentation of the
The precursor to the capital market
market with the various trading segments is an obstacle to a sus-
The instrument of the promissory note is established in Germany.
tainable breakthrough in the institutional environment, which also
It is characterised by minor formal requirements and requires lit-
limits the long-term potential.
tle publicity. Maturities are for the most part between three and
seven years, but ten to fifteen years is also possible. Because it is
placed chiefly with institutional investors, the promissory note can
New approaches of the European Commission:
ELTIFs and EU project bonds
be ­considered a precursor to capital market viability. According to
At the end of June 2013, the European Commission published
DVFA figures, promissory notes with a total volume of around 7 bil-
a proposal for the establishment of a new European investment
lion euros were issued by the end of September 2014, roughly at
fund under the name “European Long-Term Investment Fund”
the level of the corresponding period in the previous year. Maturities
­(ELTIF). ELTIFs are designed to increase the level of non-bank
of ten or more years account for only about one fifth of all transac-
­financing of companies investing in the real economy in the EU. In
tions. In relation to the market volume – with a range of 5 to nearly
the first half of 2014, the European Parliament and the Council of
18 billion euros in recent years – this suggests only a ­limit­ed poten-
the European Union outlined their positions on the proposal of the
tial for long-term financing. With a minimum amount of 10 million
European Commission with respect to ELTIFs, and on 10th De-
euros and an average transaction volume of 120 million euros, it
cember the Council announced the agreement of a compromise
is clear that the instrument is also only suitable for larger SMEs or
reached with the Parliament, under which the term ­ELTIF can be
major companies. According to our estimates, this will not change
applied exclusively to AIFs and the investment universe is limited
in the medium term.
to a minimum of 70 percent in qualified ­assets and a maximum of
30 percent in other non-long-term ­investments. Given that ELTIFs
Direct accession to the capital market
are still in the early stages, their potential for long-term financing
Spread across five stock exchanges, the SME bond segment is
remains difficult to assess.
highly fragmented in Germany. DVFA research indicates that the
average issue volume last year was around 55 million euros, with
Another financial innovation was the issue in July 2013 of the first
a range from 8 to 250 million euros. Still young, the market seg-
EU project bond, which was followed by further issues in 2014. An EU
ment has so far seen the issue of about 150 bonds with a total vol-
project bond is a bond issued by a company whose credit standing is
ume of around 4.8 billion euros. With an average coupon of about
improved by the support of the EIB. The focus of these bonds is on
“W
h
as
ith
are
of
abo
ut
70
c
per
ent
,b
fin
ank
anc
con
ing
tin
to
ues
y
pl a
the
do
min
rol
ant
e in
p
cor
or
ate
an
fin
cin
g,
­Revitalisation in this area is to be driven by a new premium segment known as high quality securitisation. In 2014, the European
primary market saw the floating of securitisations with a volume
of around 177 billion euros (of which 19.2 billion were in Germany),
bringing the decline in volume of the previous years to a provisional
halt. We anticipate a significant upturn in the market beginning in
infrastructure projects. In this scheme, the EIB makes available a subor-
2015 and for the years that follow.
dinated financing instrument that raises the credit standing of the bond
to a higher level. With their specific design, EU project bonds are suited
Loan funds as an alternative investor
only to the financing of major projects. To date, only five projects with
A loan fund is a special form of AIF set out in the AIFMD in which
a total volume of around 2.9 billion euros have been supported. Given
funds are invested exclusively in loan assets. The focus of investment
the huge requirement for infrastructure financing, we see considerable
is on SMEs, infrastructure and commercial property. Loans are not
market potential in this new instrument.
awarded from the original loan funds themselves, but acquired via
syndication in the respective secondary market. Loan funds are currently receiving increased attention, with a rising supply of loan as-
Securitisations as indirect
capital market financing
sets on the bank side accompanied by increased demand for loan
Securitisations represent a link between the credit and cap­
assets on the investor side. There is however no indication that loan
ital markets. As a “pooling vehicle”, securitisations provide a way
funds are now taking the place of banks. According to our market
of a
­ ggregating a large number of loans into a single investment
survey on European loan funds, SME loan funds represent about a
and pooling them in a portfolio. Their division into shares means
third of all loan funds as measured by number and by volume. The
that small and medium-sized investors can also become indirectly
focus of investment is primarily on mezzanine financial instruments,
­involved in the financing of the real economy. The derecognition of
and is accompanied by correspondingly high yield expectations. This
loan assets takes them off bank balance sheets, creating the op-
means that SME loan funds represent only a limited alternative to
portunity for new lending. Recent academic studies confirm the
trad­itional bank lending and tend rather to compete with private
economic benefits of this financial instrument in terms of both the
­equity. According to our research, the aggregated loan fund target
volume of credit supply and the financing terms. However, this in-
volume across all segments appears to amount to around 50 billion
strument has fallen into disrepute in the wake of the US subprime
­euros. We estimate the level of investment to be only about one fifth
crisis – unjustly, in view of the performance of European securiti-
of this target volume, which means that loan funds will have an ap-
sations, which is why the calls for a revival of the market are grow-
preciable presence in the market in the coming years. They should
ing louder. Against the backdrop of more restrictive lending by
therefore rather be seen as supplements to and not substitutes for
the banking sector, which will continue into the future, it seems
banks: for subordinated financing segments, long maturities or more
only lo­gic­al to use securitisations to avail of the capital market.
difficult asset classes and business situations.
G row t h is va ried
b
in
oth
Ge
rm
any
and
in
the
eur
o
wh
sa
a
a
are
ole
35
.”
particular, this means working on their capital market viability. Ultimately, this effort will be rewarded by a diversified investor base, a
high level of stability of long-term financing, an individualised financ-
Conclusion
ing fit, and cost benefits. But banks also benefit from the diversity
With a share of about 70 percent, bank financing continues to play
of new financial instruments, either because they help them to pre-
the dominant role in corporate financing, both in Germany and in
serve specific business segments, or because they can at least use
the euro area as a whole. The implementation of the key param­eters
these instruments to generate commission revenues as a broker.
of Basel III does not come into force until 2018 and the following
Alternative financiers such as insurance companies or loan funds
years. Before that happens, companies would be well advised to
should be seen by banks as partners rather than competitors. ■
give some thought to how they plan to cover their long-term capital requirements and to determine the financial instruments and
Stefan Bielmeier is Chairman of the Executive Board of DVFA
investor groups that are appropriate for them. For larger SMEs in
and Chief Economist at DZ BANK AG.
Comparison of financial instruments
CRITERIA
Promissory note
SME bond
ELTIF
EU project bond
ABS
Loan fund
CONSTRUCT / LEGAL NATURE
Loan agreement
(promissory note)
Debenture bond
Fund (AIF)
Bond
Bond
Special AIF
MARKET / PRODUCT STATUS
Established,
at a stable level
Active,
but fragmented
In planning
In pilot phase until end of Active, but declining /
2014 or 2016
before reactivation
Active, but still
in the early stages
LEGAL BASIS
National
bond law (e.g. German
§ 488 BGB/§ 344 HGB)
National
bond law (§ 793 BGB)
ELTIF Regulation
National
bond law
National
securitisation law
AIFMD
VEHICLE
n/a
n/a
EU-wide special fund
SPV
SPV
AIF / national fund vehicle
PERMITTED
INVESTMENTS
Business loans
Business loans
Financing of:
Infrastructure / CRE / SME / ships / aircraft
Infrastructure loans only
Loans and other assets
Designated loan assets
INVESTMENT
SPECTRUM
n/a
n/a
Limited
Very limited
Largest
Large
PERMITTED FINANCIAL
INSTRUMENTS
Debt
Debt
EK, mezzanine, debt
Debt
All assets with CF flow
Debt
AVERAGE ISSUE
VOLUME
Average of about
120 million euros
Average
55 million euros
n/a
Average
580 million euros
100 million to
3 billion euros
Approx. 300 million euros
(SME loan funds)
(GROSS) RETURN
0.25% – 0.5% above
interest rate for bonds
already outstanding
Average
approx. 7.5%
Approx. 5%
Average 4%
Euribor + 26 bp to
215 bp spread
Approx. 6% – 14%
(senior / mezzanine) /
approx. 20% (distressed)
CREDIT
COLLATERALISATION
Predominantly no
Predominantly no
No
Yes
Yes
No
RISK EXPOSURE
(INVESTOR)
Total amount less any
proceeds from sales
Total amount less any
proceeds from sales
Total portfolio with full
risk
Individual credit risk
after EIB support
In accordance with
s­ tructural positioning
after deducting credit
collateralisation
Total portfolio with full risk
INVESTORS
Institutional
Retail and institutional
Retail and institutional
Institutional
(retail possible)
Institutional (retail
possible but uncommon)
Qualified institutional
(QIAIF) and private equity
INVESTMENT HORIZON
3 to 10 years
3 to 6 years
Long-term
(approx. 10 years)
Long-term
Medium to long-term
Medium to long-term
36
G row t h is va ried
Europe is encouraging
p
­ roject partnerships
By Florian Degenhardt In its growth strategy “Europe 2020”, the European Union sees a need for
substantial investment in infrastructure in order to achieve its targets for economic
growth. According to estimates by the European Commission, an investment of up to
2 t rillion euros is required, and obtaining financing for infrastructure projects from
the private sector is essential.
G row t h is va ried
T
37
o restore the attractiveness of this private
Without the PBCE or the structuring of other credit enhancements,
form of financing, the European Commis-
project bonds not funded regularly receive only a B rating. The PBCE
sion and the European Investment Bank
therefore attracts capital from many institutional investors whose in-
(EIB) have established the Europe 2020
vestment guidelines require an A rating before they can even invest
Project Bond Initiative (PBI) as an innova-
in infrastructure projects or other assets. The investment opportuni-
tive financing alternative.
ties for these investor groups are increasingly regulated – in the case
of insurance companies in Germany, for example, by the Insurance
What are the objectives of the PBI? The primary goal of this inst-
Supervision Act and the Investment Ordinance. Once these barriers
rument is to attract institutional investors such as insurance com-
are overcome, suitable infrastructure projects satisfy the great de-
panies and pension funds to long-term investment in infrastruc-
mand among institutional investors currently looking for long-term
ture projects eligible for funding and to acquire additional funds
investments in high-quality projects with attractive risk-return profi-
for their financing through the capital market with project bonds.
les. In times of low and sometimes negative interest rates, this type
The focus of this sponsorship is on selected projects of European
of investment is all the more attractive.
interest in the trans-European sectors of transport, energy and IT
infrastructure.
The PBI is putting Europe on track
Since the launch of the pilot phase of the Project Bond Initiative in
Lending more difficult with
conventional financing
2012, several infrastructure projects have been financed success-
The increased capital requirements for banks (Basel II and III) make
expansion of the A7 autobahn. And given the enormous financing
loans with long maturities more difficult, with the result that project
requirements for infrastructure projects, a continuation of the PBI
fully with project bonds with PBCE – most recently for example the
financing for long-term infrastructure projects is no longer availa-
seems probable as part of the Connecting Europe Facility for the
ble on the market to the same extent that it once was. In addition,
EU budget until 2020, which provides for project bonds as an alter-
the monolines, which used to issue risk mitigation guarantees for bonds, have practically disappeared from the picture since the financial crisis. The PBI is therefore desig-
native form of financing. With public funding from the budgets of the
EU or the Member States alone, the backlog of investment in infrastructure in Europe cannot be eliminated.
ned to establish an alternative or complementary form
of financing to supplement traditional bank loans, in order to close funding gaps or improve financing conditions.
The EIB has already approved additional projects eligible for funding in accordance with the EU guidelines for project bonds with
To achieve this, the EIB is making an instrument for credit enhan-
PBCE. Particularly eligible are motorways in several Member Sta-
cement of project bonds available: the so-called Project Bond Cre-
tes, power supply lines from German offshore wind farms and na-
dit Enhancement, or PBCE.
tural gas storage facilities in southern Europe. Demand from the
capital markets is high. There has also been refinancing of Euro-
Investment grade thanks to the PBCE
pean infrastructure projects with project bonds without PBCE,
With the PBCE, the lead partner in a project can improve the qua-
and new projects can be structured for the capital market. With
lity of the bond to be issued and its assessment by rating agencies
the support of the EIB within the framework of the PBI, the emer-
such as Moody‘s or Standard & Poor‘s. The improvement is achie-
ging new asset class of the project bond for infrastructure pro-
ved by means of subordinated direct loans or precautionary loan in-
jects can be an important engine of growth for Europe in the in-
stalments by the EIB. The lead partner can draw on these if current
frastructure sector. At the same time, this asset class meets the
project revenues are not sufficient to meet liabilities to priority bond-
great demand among institutional investors for long-term assets
holders or if funding is not available when planned costs such as con-
in suitable projects for the renewal envisaged in Europe 2020. ■
struction costs are exceeded. With this safety mechanism, the PBCE
reduces project risks and the probability of default for the bondholders, which in turn is reflected in an improved rating of the project
bond, allowing a single-A rating (investment grade).
Florian Degenhardt is a Partner at White & Case in Hamburg.
38
G r owt h is v a r i e d
Financing in collaboration
with the private sector
By Stefan Zeidler The backlog of repair and redevelopment work in municipal infrastructure is cur-
rently a much-discussed topic. Transport infrastructure in particular is now considered
a risk factor for the German economy. The need for investment is high, while the fi
­ nancial
position of municipal budgets is strained, which is particularly evident every time a railway or motorway bridge in need of redevelopment becomes a bottleneck for passenger
T
and freight transport. One option for financing may be public-private partnerships (PPP).
he German government is considering
edu­cation, health, administrative and cultural bodies, as well as cor-
incentives for private investment in infra-
rectional facilities and other public safety institutions. A
­ ccording to
structure. This investment is a necessary
the consulting firm ÖPP Germany AG, there were a total of 195 pro-
prerequisite for sound economic devel-
jects in building and road construction in Germany in the ­period
opment in Germany. But working alone,
from 2002 to June 2014. The investment volume amounts to a
neither the federal, state nor local author-
­total of 7.6 billion euros. Schools, day-care centres and education
ities are in a position to implement the badly needed infrastructure
(building construction) account for most projects, at 39 percent,
measures. One of the options available for infrastructure projects
while only eight percent are in road construction. In terms of invest-
are what is known as public-private partnerships (PPP), which are
ment volume, however, it’s a different story, where road construc-
a form of long-term, contractual collaboration between the pub-
tion alone accounts for 32 percent, because of project size, with
lic and private sectors over the entire life cycle of an infrastructure
24 percent for schools, day-care centres, and education.
project. PPP is not a form of financing – as it is widely understood
to be – but rather a procurement model for the planning, construc-
In 2013, a total of eight projects were completed, with a total in-
tion, operation and financing of infrastructure projects. In projects
vestment volume of 189 million euros, of which road construction
structured as public-private partnerships, public sector work is
­accounted for 15 million euros and building construction for 174 mil-
assigned to one or more private companies for a period of up to
lion euros. Compared with the heyday of public-private partner-
30 years. While financing is one aspect, it is only part of the whole.
ships in the period between 2007 and 2011, with a peak investment
volume of 1.5 billion euros, the market is now at a very low level.
In PPP projects, it is not the responsibility, the construction project or
the ownership that are privatised, but rather the infrastructure meas-
From a financing perspective, the essential characteristics of PPP
ures themselves are devolved to private companies. The involvement
projects are stable and predictable cash flows and the high capital
of the private sector is designed to realise efficiency gains over the
intensity of the projects on the basis of long-term contracts or con-
entire life cycle of infrastructure projects. The public authorities typi-
cessions. Given these characteristics, PPP projects are p
­ articularly
cally define the scope of the work to be carried out and the standard
attractive for long-term investors such as insurance companies,
of quality, for which the private companies are generally paid a fee.
banks and pension funds.
In return, the public authorities benefit from increased cost certainty.
In the area of direct funding of infrastructure projects, banks ­account
In addition to economic infrastructure – such as transport, energy,
for 60 percent of all financing worldwide. In Germany, this figure is
telecommunications, utilities and water – potential investments in
estimated by DZ BANK to be even higher, at well over 90 percent.
PPP projects also include social infrastructure, in areas such as
The recent past has also seen increased interest in i­nfrastructure
G r owt h is v a r i e d
39
financing among insurance companies, pension funds and other
viding project financing, structuring services, advice and support
institutional investors, who are looking for a long-term substitute for
during the construction phase and interim financing of forfaiting
the government bonds and fixed-interest securities that used to be
models. The spectrum of financing available ranges from interim
favoured but that now no longer provide yield sufficient r­ eturns to
construction financing and project financing for roads, schools,
meet existing guaranteed interest rate pledges. This is an area in
sports facilities and correctional facilities to the construction of the
which conservative, long-term infrastructure loans ­offer an attrac-
new Federal Ministry of Education and Research building. Rooted
tive a
­ lternative. Notwithstanding regulatory uncertainty (including
as they are in their regions, the banks in the cooperative financial
network are the natural first point of contact for local municipali-
“In the area of direct funding
of infrastructure projects,
banks account for 60 percent
of all fi
­ nancing worldwide.”
ties. For infrastructure projects in particular, this combination of a
deep understanding of local conditions on the one hand and crossexpertise on the other is crucial.
The need for PPP projects in Germany is high. A sound nationwide
infrastructure is crucial for the economic development of the coun-
Solvency II), it can be assumed that we will be seeing more of these
try. Both businesses and policymakers have recognised the need
companies acting as financing partners for infrastructure projects
for action and that a joint effort is required to manage the large
in the future. But despite stricter requirements under Basel III, as
volume of investment. As a reliable financing and project partner,
well as other regulatory challenges, banks will continue to be the
the Volksbanken Raiffeisenbanken cooperative financial network
main source of financing for PPP projects. This applies in particu-
stands ready to play its part in this collaboration. ■
lar to the German market, where the number of projects financed
is reasonably limited and a wide range of banks are willing to lend.
Within the Volksbanken Raiffeisenbanken cooperative financial net-
Stefan Zeidler is a Member of the Board of Managing Directors
work, DZ BANK AG is the competence centre for PPP projects, pro-
at DZ BANK AG.
40
G row t h is va ried
By Mark Milders In the field of renewable energies, the capital requirement for investments is
in most cases considerable. With project-specific financing, banks are helping to make
­renewable energies more attractive.
Complex
structures
G row t h is va ried
E
41
nergy is a global business: the United
and ­connection capacities, as well as the lack of long-term ex­
States is making itself independent of
perience and the difficulty in assessing the exact investment and
e nergy imports with fracking, Asia is
­
operating costs – all of these provide only a rough outline of the
­c overing its requirements with liquefied
additional elements that need to be taken into account. Seen
natural gas from the Middle East, and
from this perspective, the reform of the Renewable Energies Act
cheap coal is finding its way to Europe.
leads to improved control of the expansion by creating a stable
And by 2022, all nine nuclear reactors still operating in Germany
framework while at the same time contributing to greater secu­
are to be decommissioned. For some years now, the promotion
rity of investment for investors.
of renewable energy has been a policy objective in this rapidly
changing environment.
Favourable winds off the island of Sylt
One of ING Bank’s showcase projects is its central role as man­
Financing in the field of renewable energy sources is structured
dated lead arranger, lender and hedging bank in the financing of
and designed specifically to each project. Generally speaking,
the Butendiek offshore wind farm, with a total investment of over
the structure of financing in this area involves a legally independ­
one billion euros. The offshore wind farm is already under construc­
ent special purpose entity, whose objectives are the specific
tion, and is situated 32 kilometres west of Sylt. On ­completion in
investment project,
operation of the
completed project
and optimum an­
“The reform of the German Renewable Energies Act is contributing to greater investment security for investors.”
ticipation of global
changes in the en­
ergy sector. Important parameters in any financing structure in­
2015, the wind farm will be capable of generating a base load of
clude the expected returns and their robustness, the drafting of
288 megawatts of power. The electricity it will produce each year
contracts to ensure optimum distribution of project risks among
is forecasted at approximately 1,300 ­gigawatt hours, which means
the stakeholders, and the hedging mechanisms. Since the en­
that this wind park alone will contribute over four percent to the Fed­
ergy sector is characterised by very distinct national differences,
eral Government’s goal of installed offshore wind energy ­capacities
the regulatory environment also plays an important role. The
totalling 6,500 mega­watts by 2020.
structure of a financing mechanism of this kind is therefore of­
ten very complex, requiring rigorous scrutiny and adequate pre­
The global knowledge of ING Bank with respect to the world­
paration time.
wide trends in the energy sector enables project structures with
which the risks for investors and operators in Germany can be
Green energy is gaining momentum
minimised from the outset. Our projects also benefit from the fact
The volume of credit provided by ING for renewable energy
that the promotion of sustainability projects is part of the corpo­
sources grew from 1.1 to 1.3 billion euros in 2013. Which means
rate strategy of ING Bank, which is why ING Bank was included
that green energy now accounts for 39 percent of global project
in 2013 in the Dow Jones Sustainability Indices, which in addi­
financing by ING Bank in the energy sector. These figures give
tion to economic factors also take account of environmental and
clear expression to the strategic objective of the bank to further
­social criteria. Against this backdrop, ING Bank offers its cus­
develop this sector – including in Germany.
tomers in the field of renewable energies transparent and efficient
­financing structures, as well as long-term project s­ upport. ING
In the field of renewable energies, the financing requirement
Bank is therefore contributing towards making the energy tran­
for investments is in most cases considerable. With offshore
sition as attractive as possible for investors and consumers. ■
wind energy in particular, the complex risk profile defines the
agenda: water depth, technology, planning reliability, depend­
Mark Milders is Head of ING Commercial Banking Germany
ence on the weather during construction and maintenance, line
and Austria.
42
G r o w th is v a r ied
Infrastructure –
M
s Scholzen, infrastructure is
well on its way to becoming a
separate asset class. What is
driving this trend?
Viola Scholzen: The most import­
ant driver is the enormous amount
of investment needed in the areas of transport, energy and educa­
tion infrastructure. The OECD estimates the financing requirements
for Europe alone at 10 trillion dollars over the next 15 years. How­
ever, given the current high levels of national debt, many countries
have little or no financial scope for expanding and maintaining the
necessary infrastructure. And infrastructure is an essential location
factor in global competition – it represents the backbone of an econ­
omy whose stagnation or even decline no government can afford.
But in Germany, the interest of policy makers in private infrastructure investment tends to be somewhat non-committal ...
Scholzen: In this country, the discussion got under way spe­cifically
in association with the energy transition, for example in connec­
tion with ­financing
for the construction of costly off­
shore wind power plants and
new power lines. In many cases,
German policy makers do indeed
have a sceptical view of the idea
of greater use of private sources of
financing. One reason for this may
lie in the widespread critical atti­
tude towards financial investors. In
­Europe too, the market for private in­
vestment in infrastructure is still at an
early stage. But given the backlog in
investment and the budgetary con­
straints, the dialogue between pol­
“Anyone looking to
­a ctively position
­t hemselves in this
segment …
icy makers and institutional investors
should be intensified. Infrastructure in­
vestment should receive an additional
boost from the Euro­
pean ­
Solvency
II d
­ irective, which aims to i­mprove
G r o w th is v a r ied
43
a n attractive investment
Interview with Viola Scholzen Only a few years ago, investment in infrastructure projects was an e
­ xotic
­niche. Now, institutional investors are breaking new ground. An conversation with Viola S
­ cholzen,
Head of Loan Distribution at DekaBank, about a new trend in institutional investment.
­diversification and lower the volatility of revenues at insur­
ance companies.
complexity of design also raises measurement
issues, which make equity investments in in­
frastructure more challenging for institu­
Market potential and regulation
foster the demand for infrastructure investment.
What are the benefits of
these investments for institu-
tional investors. All in all, debt capi­
… should not
tal investments are currently the
underestimate
most attractive form of in­
the complexity
vestment in infrastructure
of infrastructure
investments.”
for institutional investors,
because the risk they entail
tional investors?
Scholzen: Institutional investors ap­
is clearly limited. As against other
preciate the fact that they provide pre­
dictable and regular cash flows. In addition,
long maturities underpin the sustainability of this
form of investment. They also see the advantage
debt capital investments with com­
parable returns, they offer lower default
probabilities combined with high recovery
rates in the event of insolvency.
of the small correlation to other asset classes and the
contribution this makes to diversification in their invest­
ment portfolio. Another factor in favour of infrastructure is
that, where there is good reason, price increases for users are
possible. This means that the cash flows contain the potential for
What are the considerations with respect to
implementation?
Scholzen: Anyone looking to actively position themselves
in this segment should not underestimate the complexity of in­
inflationary adjustment, making infrastructure even more attractive
frastructure investments. Attractive offers on the market tend to be
from the perspective of asset-liability management. And finally, in­
quite clear, the identification of suitable projects is challenging, and
frastructure investments offer a high net asset value, which is not
the form of investment must be matched to the needs of each inves­
the case with pure financing receivables.
tor. Few asset managers and investors have the expertise required
in this area, which makes it all the more important to have a strong
What are the options for investing in infrastructure?
partner with extensive market experience and the expertise needed
Scholzen: The design options are many and varied. The key
to design the investment. Other success factors include multiple lan­
­question is whether an investor wants to act as an outside creditor
guages and a profound knowledge of the regional specifics of the
or equity shareholder. By their nature, infrastructure investments are
investment locations, as well as established relationships with com­
generally characterised by low liquidity and limited marketability. This
panies, government agencies and other key institutions. ■
is especially true for equity investments, and to a lesser extent also
for investments based on borrowing, i.e. infrastructure loans. The
Viola Scholzen is Head of Loan Distribution at DekaBank.
44
G row t h is va ried
By Gregor Pottmeyer Growth occurs when companies use capital efficiently and proactively. The best
guides to the efficient and proactive use of capital are the prices that emerge from the free
interplay of supply and demand. To ensure that prices are determined freely, ­regulated
marketplaces such as exchanges are necessary, because only these adequately combine the information and liquidity required to allow undistorted pricing.
G row t h is va ried
45
Exchanges
a compass for the
use of capital
T
he determination of prices through the bal-
market, where investors invest in newly issued shares – whether in
ancing of supply and demand leads to a
the context of a commercial launch, an IPO or a capital increase. In
valuation of companies whose shares are
this manner, the exchange brings institutional and private investors
traded on the exchange. It is expressed in
together with companies that need capital for their growth invest-
terms of market capitalisation – the prod-
ments. The exchange ­basically acts as an institutional investor. This
uct of the market price of a share and the
is usually done through banks and specialists who are accredited
total of shares issued. Companies with the highest growth poten-
for their respective regulated markets. Exchanges are therefore one
tial usually achieve the highest valuation. While there may be cases
of the major channels providing companies with access to capital.
of irrational overstatements or understatements, the market does
sooner or later correct mispricing.
No market is perfect. But markets are still the best means of determining the growth prospects of companies, because the prices
set on the market reflect the assessments of a large number of in-
vestors. The prices amalgamate the information available about a
company centrally. Market prices thus provide a compass for the
use of capital that leads to the best possible economic growth.
Company valuation is accompanied by additional functions that
the exchange has in common with the financial market: maturity,
“Markets are the
best means of
­determining the
growth prospects
of companies.”
lot size and risk transformation. Exchanges make short-term capital available for long-term investments. Exchanges also combine
smaller amounts of capital into larger amounts which can then flow
into comprehensive capital expenditure programmes. At the same
Because capital tends to flow into the sectors with the best growth
time, with the ability to split investments into smaller units and to
prospects, the primary market also acts as a mechanism for the
cancel them where necessary, the risk associated with the invest-
effective and swift allocation of capital. Economies in which the
ment is limited for individual investors. This capacity for triple trans-
stock market plays a key role in the allocation of capital can react
formation also contributes significantly to economic growth, be-
more quickly than others to changes in the market environment.
cause it is a prerequisite for ensuring that the capital available in an
They are therefore in a position to initiate timely structural change
economy can flow to where the economy needs it in the first place.
and m
­ obilise the necessary investment funds, which means that
economies with functioning exchanges remain competitive interna-
But exchanges don’t only provide the basis for the valuation of com-
tionally, allowing them to maintain their growth in the long term. ■
panies and the transformation of capital. Capital also flows from the
financial sector into the economy through exchanges. This financ-
Gregor Pottmeyer is a Member of the Executive Board at Deutsche
ing function is the responsibility of what is known as the primary
Börse AG.
EN VOGUE
SHARES
AS A SOURCE OF CAPITAL
By René Parmantier Shares are the most promising
­investment opportunity – and not only in view of
today’s low interest rates. But when it comes to
investing in shares, Germans are still hesitant.
Nevertheless, shares can offer opportunities,
and not only for private investors: companies too
can use them successfully to raise capital and to
benefit substantially, particularly in the area of
refinancing.
A
glance at the development of the major stock indices in recent years can in
fact allow no other conclusion than, as
an investment, shares are very much
“en vogue”. Seen from the lows of the
market, which were reached in early
2009 in the wake of the financial crisis, the DAX has significantly
more than doubled. Almost more impressive than the extent of the
upturn is the recovery period. A bull market lasting more than five
years is definitely something of a rarity.
An altogether different picture is painted by the shareholder statistics in Germany, where the strong move towards recovery has not
resulted in scores of investors turning to shares as a form of investment. According to the Deutsches Aktieninstitut, the number
of direct shareholders increased by one third from the end of 2008
to the end of 2013, from 2.188 million to 2.811 million individuals.
But if one also considers the additional 1.749 million in­vestors that
hold shares and equity funds, as well as the 4.361 million o
­ wners
of ­equity funds, this figure appears decidedly low in relation to
the German population as a whole – especially when compared
to ­nations that clearly have a greater affinity for shares, such as
­Switzerland, the United States or Great Britain.
From the perspective
of the issuer, shares
are more than just
an alternative worth
considering.
G rowt h is v aried
47
Now the realisation that the Germans are a people who love sav-
❙❙ The current rise in the markets opens up the opportunity for
ings accounts and tend to give shares a wide berth is neither new
­capital increases that, seen historically, really are quite lavish, again
nor original. But nothing lasts forever, and there has rarely been
keeping the associated dilution effects at tolerable levels.
a moment as favourable to changing this attitude as the present.
­After all, the beloved savings account and other comparable short-
❙❙ With this form of refinancing, company decision-makers really
term investments are now offering exceedingly unattractive inter-
do have a level of planning reliability beyond that which is inher-
est rates. Anyone with money to invest will presumably be think-
ently possible with loans or bonds with set terms. Anyone who for
ing long and hard about finding better alternatives.
example had to reschedule on the basis of final maturities d
­ uring
the 2008 financial crisis will know the problem very well. Even
This is not just limited to short-term interest-bearing investments.
when interest rates are low, the refinancing risk associated with
Yields on government and corporate bonds have also reached a
bonds remains.
level that is definitely beyond the pain threshold of many investors.
And since interest-bearing investments commonly have a maturity,
❙❙ Compared to other equity investors, such as private equity funds,
there will always be new funds becoming available and looking to
money borrowed on the wider market carries fewer obligations on
find a use. Anyone who assumes that the base rates will continue
all sides. Dissatisfied shareholders can sell their shares to willing
to remain at a substantially low level will sooner or later inevitably
investors at any time, so that the shareholdings, in theory at least,
turn their attention to shares as an investment. And given for exam-
are always an accurate reflection of the investment.
ple the exorbitantly high levels of debt among almost all Western
­nations, any dramatic turnaround seems unlikely. This should cause
❙❙ The possibility of raising additional capital, and also repayment
governments to exercise their influence with the central banks to
to shareholders by means of various forms of capital increases,
hold the interest burden on public finances at moderate levels,
­dividends or share buyback programmes, opens up plenty of room
which is most likely to succeed with low interest rates.
for manoeuvre.
And it is precisely this perspective on persistently low interest rates
❙❙ A stock exchange listing also facilitates additional measures with
that could produce a situation in the coming years in which we
a great deal of strategic leeway: shares can be used as acquisition
­actually do see institutional and private investors increasingly turn
currency, while employee share option or investment plans will cer-
to shares – a comparatively profitable form of investment on the
tainly reinforce the loyalty of the workforce.
basis of dividend payouts alone. This will certainly not take place
overnight and will be more an evolutionary than a revolutionary
Using the equity markets for refinancing purposes does of course
process, but perhaps with a consistency that is not to be under-
also involve risks, such as the possibility of hostile takeovers with
estimated. This is just the way the new road to shares can look.
a high free float. But these are outweighed by the opportun­
ities, especially in the current environment and with the perspec-
Companies can and should take advantage of this development.
tives now in place. This view also appears to be prevailing in the
Because from the perspective of the issuer looking for money
market, as indicated by the number of recent IPOs and capital
on the capital market, shares are more than just an alternative
increases which, while starting from a low base, have been
worth considering. The shift in the relocation of investment funds
­gradually increasing. In my view, it is therefore very clear: there is
sketched out above could leave demand substantially at a high
no way around an increased recourse to shares. Not for issuers,
enough level to provide issuers with solid planning reliability. Given
and not for investors either. ■
the low i­­nterest phase sketched out above, borrowing can of
course also make sense, but for a number of reasons, shares as
a component of the refinancing mix are attractive from the corpor­
ate p
­ erspective at present.
René Parmantier is CEO of ODDO SEYDLER BANK AG.
48
G row t h is va ried
TRANSPARENCY
By Sascha Rinno When considering financing through the capital market, people running small and
medium-sized businesses often wonder whether the effort, the costs, the public perception,
the involvement of external institutions and the issue of potential loss of control are in
fact commensurate with the benefits of this kind of financing.
CREATES TRUST
M
any entrepreneurs wonder whether
tive of their basic expectations in terms of yield, investors also
the capital market isn’t just a little
expect companies to provide continuous, timely, accurate and
too much to handle. Answering this
complete information about their economic development. One of
question objectively is one of the
the ways in which this is done is by means of the compulsory in-
essential services provided by the
formation prescribed by law according to the chosen exchange
issuing bank, working with other
segment, such as ad-hoc or annual reports. But it also involves
transaction advisors such as lawyers, accountants and commu-
in­vestor events in the form of management roadshows, investor
nication consultants. The core concern is to analyse the costs
con­ferences, l­etters to investors and the media.
and benefits of entering the capital market, and to ensure that
it is in line with the development plans of the company and its
Gathering, preparing and distributing this information to those
shareholders.
who need it and maintaining a continuous dialogue with investors
requires significant corporate investment in developing a ­finance
One of the key aspects of this analysis involves the basic require-
and reporting system, including the necessary planning, manage-
ments of the capital market and investors with respect to the
ment and control systems. Departments for investor ­relations and
information policy of medium-sized issuers, because irrespec-
compliance must also be established.
Lorem Ipsum dolor
sin amet dolor sin
amet lorem
G row t h is va ried
49
In practice, it is clear that medium-sized issuers in less regulated
financial instrument and the public image of the company – asso-
exchange segments often neglect their obligation to supply in-
ciated with direct consequences for the company’s value.
formation after an issue has been floated.
Ultimately, the issued capital market instrument may develop as-
“Many ­companies
­neglect their
­information
obligations.”
sociations so negative that they might become an obstacle to any
further potential considerations with respect to financing on the
capital market. One of the original objectives of going to the capital market, namely to diversify the sources of company fi­ nancing,
is then at risk.
Rather than avoiding the effort associated with capital market
communications, it is better to see the information requirements
of investors as an opportunity. Pursuing an information policy
At the time of the issue and under the guidance of the issuing bank
­adequate to the capital market supports the company in its on­
and communications consultant, the current business situation
going professionalisation at all levels and in all functional areas
and the strategic perspectives of the company are reported ex-
facili­tates the use of the many financing options available on the
tensively – in the interests of optimal marketing of the stock, bond
capital market, thus supporting the growth plan of the com-
or other financial instrument. But immediately after the transaction,
pany. The founder and chief executive of a company launched
it is often only the prescribed minimum standards that are met.
successfully on the capital market with an IPO a few years ago
Not infrequently, this passive attitude to information is reflected in
accom­panied it, our company could never have implemented our
negative price performance of the financial instrument after ­issue,
planned growth strategy – no question about it.” ■
puts it like this: “Without the IPO and the professionalisation that
low trading liquidity and high volatility in the secondary market.
Also not to be underestimated is damage to the reputation of the
Sascha Rinno is Head of Capital Markets at ICF BANK AG.
50
G r owth is va r ied
SME bonds:
worth a second look
S
ME financing is an attractive busi-
have already been opened. These are huge losses,
ness segment for many banks yield-
especially in a bond segment.
ing fairly attractive interest surpluses.
Of SMEs with over 50 employees, only
But naturally – and this unfortunately is often neglected in the pub-
three percent failed to succeed in their
lic debate – spreads of this kind also open up attractive opportu-
loan negotiations with banks in 2013,
nities: 64 titles are still quoted at or above 100 percent, carrying
as the KfW SME Panel1 report shows. In the current environment,
very attractive coupons. The securities heavily affected by falling
investors cannot profit from the interest income from SME busi-
prices have consistent residual returns beyond ten percent per
ness with deposits and savings certificates. This is not surpris-
annum – also worth a second look. But every investment here
ing: there is a strong interest in investing directly in the segment.
requires a high level of risk affinity, as well as a thorough examination of the individual titles – something made very clear by the
A HETEROGENEOUS MARKET – SUBSTANTIAL
­relevant EDG risk classification.
LOSSES, BUT OPPORTUNITIES TOO
In markets like this, transparency is especially important in not
As has been widely reported of late, these investments do not al-
succumbing to a phenomenon that the US economist George A.
ways go well. The Micro Bond Index (MiBoX), for example, has
Akerlof described in 1970 in his paper “The Market for Lemons”:
seen a decline of almost five percent since its launch in March
In markets with a high level of information asymmetry, good quali-
2012. The Bank of America Merrill Lynch Euro Non-Financial High
ties are squeezed out. Buyers demand high discounts for the lack
Yield Constrained Index, on the other hand, rose 28 percent over
of transparency. But these are only accepted by sellers who are
the same period. The EDG has examined a universe of 104 SME
aware of the poor quality of their products. Those offering good
bonds listed at the various German stock exchanges which are
quality stay away from these markets. Buyers have to anticipate
published at Finanztreff.de.3 Of these bonds, 28 were quoted at less
this, demand even higher discounts, and this in turn keeps other
than 90 percent ot the issue price, including 11 under 50 percent. It
sellers out of the market. In extreme cases, such markets grind to
no longer includes 19 of 23 titles for which insolvency ­proceedings
a halt. This phenomenon of “adverse selection” cannot be dealt
2
1
Volume of tables for 2014 KfW SME Panel report, table 18
As at: 5 November 2014, MiBoX is the property of Anleihe Finder GmbH and is determined by Solactive AG
As at: 6 November 2014
2
3
G r owth is va r ied
51
By Ralf Kauther Both investors and borrowers can benefit from further development of the ex-
change-trading SME segment. But it should be remembered that the market requires a high
degree of transparency. Otherwise, the risk of trading with lemons is great.
“Instead of writing
the segment off,
the structural
challenges should
be addressed.”
with effectively with pricing policies. Risks of this kind
must be rejected.
of both efficiency and the accuracy of the information
analysis, they are in competition with the banks. The latter can
count on in-depth expertise in the lending business and on ­having
Banks have the option of requesting confidential information from
experienced staff, special review processes and an extensive pool
borrowers – both when granting loans and on an ongoing basis.
of data, particularly for long-term customers. On the other hand,
If the situation deteriorates significantly, they often also have the
competition for individual borrowers among the banks is limited,
option of contractual intervention. The higher rates of interest that
not least because the collection of information is very costly for
banks generally receive from SMEs are not a premium for the lack
both sides. A competitive process among an adequate number
of transparency described above, but rather compensation for the
of banks is something that surely can only be shouldered by a
costs of gathering and providing information and the relatively low
small number of SMEs. In a market so imperfect, there is gener-
tradability of the loan. According to Akerlof’s hypothesis, borrow-
ally dormant efficiency potential to be found. For other products
ers who are either paying very high interest rates to banks or are
at least, the information requirements are well under control, as
not getting bank loans at all want to take advantage of the SME
shown for example by the large private car market on the Internet.
segment. Those who attempt to counter this structural trend with
further interest rate premiums are trading with lemons.
Both investors and borrowers benefit if the SME segment continues to develop. Instead of writing the segment off, the initial diffi-
GREATER TRANSPARENCY CAN DEVELOP
culties and structural challenges should be addressed. ■
THE MARKET
Where information asymmetry is encountered, the market becomes more attractive to a broader stratum of investors. Private
investors cannot gather and evaluate information of this kind at a
reasonable cost. This is a job for specialised service providers, and
Dr Ralf Kauther is Managing Director of vwd Vereinigte
active institutional investors also play an important role. In terms
Wirtschaftsdienste GmbH.
52
G r o wth is v a r ied
INVESTING
“The Frankfurt Startup Fund aims to
By Doris Brelowski and Andreas Küppers A classic problem for
startups: the idea is there, the business plan is
written up, but the capital for implementation is
hard to find. For people lacking their own resources, there are business angels or venture capitalist funding and also the option of bank loans.
But for many young entrepreneurs, this ­approach
is difficult if they cannot provide ­sufficient collateral, especially since banks are often hesitant
about financing small projects. Fortunately for
local startups, Frankfurt municipal policy has
recognised this problem.
A
t the end of 2008, Frankfurt Economic
Development GmbH received a crossparty mandate from the city council
assembly to develop an approach
to facilitating the financing of small
and micro startups. As the Frankfurt
School and its International Advisory Services had already gathered
many years of experience in international microfinance, it was commissioned to conduct a study. The supply side for small business
loans was analysed in interviews with a dozen banks, and the demand side with a survey of hundreds of startup companies. Based
on the findings of the September 2009 “Study of microfinance in
Frankfurt”, the concept of the Frankfurt Startup Fund was developed. In the spring of 2010, BaFin and the Hessian Ministry of the
Interior granted the approvals for the programme.
Endowed by the city of Frankfurt with 3 million euros, the Frankfurt Startup Fund was launched in June 2010 as a project run by
Frankfurt Economic Development GmbH. With advice and guarantees of up to 50,000 euros for their bank loans, the project supports startups and young companies from Frankfurt am Main that
have been on the market for less than five years. Depending on
their agreements with their banks, a grace period of up to two years
and a term of up to six years are possible.
Those interested submit their business plans and other documents
to Frankfurt Economic Development’s project partner, the office
of the Startup Fund at Frankfurt School Financial Services GmbH,
G r o wth is v a r ied
53
IN THE FUTURE
secure the long-term survival of startups on the market.”
which acts as a central coordination point, advises customers and
several years is to ensure the sustain-
recommends those assessed positively for a guarantee. The sec-
ability of startups – and with it also
ond project partner is Bürgschaftsbank Hessen, which for its part
the sustainable benefits of municipal
examines the plans and, on approval, extends a guarantee pledge
funding.
to customers within a few working days with which they can negotiate their bank loans individually. In the best case and where all
With the Frankfurt Startup Fund,
documents are available, the entire process takes only four weeks.
Frankfurt am Main is the only city in
Germany that provides a guarantee programme in conjunction
The funds are therefore used on the one hand for guarantees ex-
with consultation before negotiation with the bank and subsequent
tended by Bürgschaftsbank Hessen for 80 percent of the loan
coaching over the entire term of the loan free of charge for the start-
amount. For the remaining 20 percent, the risk is assumed by the
ups. Looking at the number of cases and loan amounts, this may
eight partner banks of the Frankfurt Startup Fund. The partner
not seem like very much. But the psychological effect in the startup
banks are Commerzbank AG, Frankfurter Sparkasse 1822, Frank-
scene should not be underestimated. The fund is often praised and
furter Volksbank eG, Is¸bank, Naspa Nassauische Sparkasse, Oyak
highlighted as part of a good environment for startups in Frankfurt.
Anker Bank, Taunus-Sparkasse, Volksbank Griesheim eG and
Information about the funding program is made continuously avail-
Volksbank Höchst eG.
able within the entire network of bodies providing consult­ation to
Secondly, the fund’s resources are designed to secure the long-
activities. For the partner banks, the Frankfurt Startup Fund repre-
term survival of the startups on the market. In addition to the con-
sents good image advertising and an investment in customer com-
sultation before the meeting with the bank, another major advan-
panies growing in the future.
startups in Frankfurt and through a range of different marketing
tage of the programme is the quarterly check of business figures
over the entire term of the loan. These services are free of charge
Behind the 361 subsequent coaching sessions is the most impor-
for the startups. The goal of this intensive follow-up support over
tant value of the Frankfurt Startup Fund for the companies sponsored and for the economy. In many cases, the regular quarterly
follow-up support has been able to identify and contain critical situations at an early stage. After consultation with the office of the
The Frankfurt Startup Fund in figures
Startup Fund at Frankfurt School, quite a number of companies
15 June 2010 to 30 November 2014
have remained on the market that otherwise would likely have failed.
486
­p reliminary inquiries and 170 applications. Of these, 68
The taxes used here by the city of Frankfurt are therefore already
companies have received a loan commitment from partner banks.
many municipalities in the Rhine-Main area also offering this sup-
To date, the office of the Startup Fund has received
105 applications were rejected or withdrawn by the ap68 guarantees were granted. The total ­volume
of guarantees extended amounts to 1,773,783 ­e uros,
with the average guarantee volume at 28,600 ­
e uros
per case. There have been 4 defaults to date. At almost
67,000 euros, this is equivalent to a default rate of 3.8
showing sustained and positive effects. It would be good to see
A total of
port program. The approach and the infrastructure are in place.
plicants. In the end
And it only takes around 1 million euros of funds to get started. ■
Doris Brelowski is Head of Startup Projects at Frankfurt ­Economic
Development GmbH.
percent of the volume of guarantees extended.
Andreas Küppers is Director of Startup Financing at Frankfurt
School Financial Services GmbH.
54
G r o w t h i s v a ri e d
By Moritz von der Linden Given their lower credit ratings, small and medium-sized enterprises are cur-
rently struggling with rising financing costs and difficulties in accessing loans. Supply chain
finance (SCF) solutions are based on an integrated entrepreneurial focus on the capital flow
within the supply chain. Securitisations of trade receivables are therefore an attractive investment for investors close to the money market.
Turning receivables
into liquidity
I
nvestors in the money market value reliable and long-term
forms of investment to avoid having to frequently redeploy
funds in accordance with the fund criteria – which leads
to higher costs. Until now, money market funds have met
a majority of their investments with, for example, government bonds. With interest rates falling, these investors
are looking for comparable assets that offer a certain minimum
interest rate at a comparably low risk in order to meet the yield
targets for each fund.
CRX Markets offers money market investors access to short-term
business risk in the form of securitised trade receivables. Pur­
chasers of goods and services validate their suppliers’ receivables, allowing investors to gear themselves to the good rating of
the customer. Issued as zero coupon bonds with maturities of between 30 and 90 days, these securities offer an attractive pick-up
over comparable investments in the money market.
Customers and suppliers share the objective of rolling financing
in order to ensure the maximum possible stability of the supply
chain and individual safeguarding of the financing of each of the
G r o w t h i s v a ri e d
55
­suppliers. For the investors, this is accompanied by the emer-
All financial instruments offered by CRX Markets are based on
gence of the longer-term investment they are looking for. Both
the approved payable finance (APF) approach. With APF, the cus-
sides benefit in the long term from this financing solution.
tomer must validate the supplier’s receivables in advance of the
financing, and by doing so makes a promise to pay. Validation
CRX Markets is a leading provider of supply chain finance (SCF)
of the invoice lets the supplier take advantage of the customer’s
solutions, offering alternative financing options that are independ-
credit enhancement in order to achieve more favourable financing
ent of banks, flexible, scalable and quick to implement. The de-
terms. The automatic CRX Markets validation process g
­ uarantees
mand for capital market-oriented financing of operating funds
“audit-proof” financing of trade receivables for the customer with
shows that many small and medium-sized enterprises are ­looking
for a supplement to existing bank financing and factoring solutions. Through greater diversification of funding sources, customers and suppliers can reduce dependencies and prevent potential financing gaps. CRX Markets offers customers and suppliers
the following supply chain finance solutions:
❙❙ Dynamic Discounting is an innovation of the well-known cash
discount model (10 days – 2 percent), creating a flexible discount
curve that allows suppliers to finance receivables validated by the
early liquidity for the supplier.
“small and mediumsized ­enterprises
are looking for
more flexible
and ­affordable
alternatives.”
customer in advance over the entire term by the customer himself.
❙❙ Bank APF is a single or multi-bank programme where invoices
Securities placed on the capital market on a rolling basis can
validated by the customer are financed directly by participating
be used by small and medium-sized enterprises as a long-term
banks at predetermined prices within the framework of estab­
source of financing for current assets, and by investors as a long-
lished lines of credit.
term alternative investment in the money market. ■
❙❙ Multi Investor APF offers supply chains the opportunity to sell
securitised receivables as securities on the capital market.
Moritz von der Linden is EVP of CRX Markets S.A.
56
G r o wt h i s v a r i e d
Industry banks foster independence
By Max Weber and Christopher Ley Industrial companies want to become more independent of banks, and a
growing number are starting to establish their own institutions. This allows them to do many
things themselves, from sales financing to their own project financing.
D
espite historically low interest rates, many
In addition to the well-known alternatives, such as asset-backed
medium-sized industrial enterprises find
transactions or the issue of tradable debt instruments, the recent
it increasingly difficult to obtain bank
past has seen a trend towards companies establishing their own
loans and sales financing at competi-
bank or acquiring the licence of an established bank. The reasons
tive financing terms. This can be largely
for this are not to be found exclusively in alternative options for re-
attributed to more stringent regulation
financing, but also in becoming less dependent on banks, exploit-
and the stricter capital requirements for banks that go with it, be-
ing additional customer potential, reinforcing customer loyalty and
cause from this perspective, many banks see their ability to grant
opening up new sources of revenue.
new loans as limited. In addition, general confidence in the bank-
ing system continues to fall as a result of the financial and banking
The automotive sector is a pioneer in the field of industry banks. In
­crisis. In this environment, companies are increasingly looking for
Germany today, more than half of all vehicles purchased are leased
­alternatives to traditional bank loans and seeking greater overall in-
or financed. Captive financial service providers hold a market share
dependence from banks – also because of the limited short-term
of over 60 percent in this sector and contribute on average about
investment opportunities for liquid funds.
20 percent of pre-tax profits to their parent groups. With a ­banking
G r o wt h i s v a r i e d
“
57
With a banking licence, companies have direct access
to the capital market and to the central bank.
”
­licence, these companies have direct access to the capital mar-
process model. With the “Bank in a Box Model”, Ernst & Young has
ket and the central bank and can also offer the group call money
developed an integrated and fully comprehensive process model
and fixed-term products, giving them new and diversified refinanc-
for the establishment of banks and the introduction of new banking
ing options.
products. With five modular phases, the model combines all of the
In addition to the further professionalisation of treasury functions,
and license application to the start of business operations.
relevant steps, from a strategic business case to conceptual design
establishing their own bank is therefore becoming a strategic option for many companies in other industries. In 2014, for example,
As a general rule, a preliminary study is used to develop the ­business
the German industrial manufacturer Trumpf announced the open-
strategy, the legal and regulatory framework, alternative business
ing of its own universal bank with a focus on sales financing for the
models as well as the appropriate organisational and operational
company’s customers. In addition to pure sales financing, a bank-
structures, and a strategic business case is prepared. In this process,
ing ­licence also opens up other possibilities, such as securing the
Ernst & Young uses simulation tools to simulate the relevant balance
supplier network or financing major projects. These considerations
sheet and income statement effects and the capital requirements.
may also explain the establishment of banks at Siemens or the bank
acquisition at Airbus.
With a range of services from Advisory, Law, Tax and Transaction Advisory Services, Ernst & Young is ideally positioned to pro-
Furthermore, companies can also develop alternative approaches to
vide industrial companies on this path of transformation with ad-
financing, in particular by accepting deposits or making use of ECB
vice and support across divisions, also covering transaction and
facilities. While a simple transfer of deposits raised on the market or
valuation issues, where necessary, as well as legal and tax as-
of other funds within the industrial group is not unproblematic due
pects. Advice is available for the establishment of banks, the de-
to the provisions governing large exposure, there is the indirect pos-
posit and lending business, the organisational and operational
sibility of using the bank as a financing vehicle for their own projects.
structure of banks and leasing institutions, and in the evaluation
of business models and the business plans based on them. ■
The establishment of a bank is more than just founding a new business. There are separate and complex regulatory requirements to be
observed – an area of expertise that is not ordinarily available in in-
Dr Max Weber is a Partner and Christopher Ley is Manager in the
dustrial companies. There is also a requirement for a stringent p
­ roject
area of Advisory EMEIA Financial Services at Ernst & Young GmbH.
58
G r o w th i s v a r ie d
The Pfandbrie f
a class i c wi t h p o t e n t i al
By Wolf Schumacher
­refinancing. Here, the Pfandbrief plays a decisive role, as was once
again demonstrated during the financial crisis, when the German
mortgage Pfandbrief successfully passed what was arguably its
biggest test to date. Even at the height of the crisis of confidence
in the financial markets, investors were buying Pfandbrief bonds.
For banks, the Pfandbrief has proved to be a reliable instrument for
refinancing, even in the current volatile market situation, making it
a core component of any sustainable bank strategy.
The legal framework for the issue of Pfandbrief bonds has been
in place in Germany for almost 250 years now. On this basis, the
Pfandbrief market for issuers and investors has evolved into a decisive competitive advantage for the German capital market and the
German economy. Prompted by this success, almost all European
E
countries have introduced national legislation governing covered
bonds since the early nineties of the last century. Although a num-
ven at the height of the financial c
­ risis,
ber of basic principles with respect to the various covered bonds
investors were buying Pfandbrief bonds.
are similar, the individual laws and their establishment in national
Their high standard must also be
legal norms sometimes differ significantly.
­p reserved for covered bonds within a
­European framework.
In early 2014, the European Commission set out its next steps
on the road to European harmonisation in this area, including
The aftermath of the financial crisis has led to a fundamentally
for ­example a proposed impact study on the benefits of an EU
changed environment, not only in the financial industry but in equal
framework for covered bonds. It remains unclear what form this
measure also in society, business and politics. For banks in particu-
should take and the extent to which an approximation of the dif-
lar, the regulatory environment has
ferent legislation makes sense.
become c
­ onsiderably more strin-
From the perspective of a Ger-
gent. The numerous legislative ini-
“The German Pfandbrief covered
bond is the benchmark for quality.”
man Pfandbrief bank, the intended harmonisation should
tiatives that the industry has to deal
with have become one of the key challenges for the banking sec-
preserve the national differences, in order to guarantee investors
tor as a whole, and for the business models of many individual
a minimum level of quality while at the same time retaining the sta-
institutions.
tus of the German Pfandbrief as a quality benchmark. And this
would ensure the continued supply of affordable financing by the
Achieving lasting success in this challenging environment requires
Pfandbrief banks. ■
a high level of flexibility and adaptability, but resting on a solid
foundation. For banks, it is not only essential to have a balanced
Dr Wolf Schumacher is Chairman of the Management Board of
loan portfolio, they also must have broadly diversified sources of
­Aareal Bank AG.
4 GROW T H IS E V ER Y W HERE
What is being done internationally for growth.
60
Growth is everywhere
TARGET
up to 75 million
new accounts
Accident
insurance
Life insurance
Bank Card
Growth is everywhere
61
Bank accounts
for progress
By Arundhati Bhattacharya Access to financial ser-
vices is an engine of economic and social
development. India has set itself ambitious
targets to spread the bank account to the
farthest corners of the country.
“Almost 40 percent of households
in India still do not make use of
banking services.”
F
or five decades now, India has been pur­
75 ­million new accounts by mid-January 2015 – for State Bank of
suing the goal of providing access to a
India, this means a share of 15 million new accounts. The num­
range of financial services to all house­
ber of new accounts opened at State Bank of India is currently
holds at a reasonable cost. The quality of
running at 150,000 to 200,000 a day. The challenge is to main­
financial services is currently being raised
tain this momentum. Another challenge is cost, because these
to a new level – made possible by the tech­
accounts can only be managed efficiently and profitably if trans­
nical capabilities of mobile banking and Aadhar cards for unique
actions are made regularly and if there is a demand for financ­
identification on the basis of biometric data.
ing. This calls for measures to improve education in the area of
Between 2001 and 2011, the number of Indian households that
finance. If s­ upport payments from the government are also paid
to these accounts, this can encourage better use.
are integrated into the formal banking system rose from 36 per­
cent to 59 percent. In the course of this process, the density of
Despite these challenges, the banks are willing to see the pro­
bank branches and ATMs has also increased. Furthermore, the
ject through to success under the direction of PMJDY, provid­
importance of bank lending in relation to gross domestic product
ing a growing but still socially disadvantaged section of the
has increased. Nevertheless, almost 40 per cent of households
popu­lation with access to banking services and eligibility for
in India still do not make use of banking services – a significant
microcredit loans. In doing so, they are making their contri­
proportion. The government has taken this as an opportunity for
bution to the equitable distribution of wealth and a stable so­
a new initiative.
ciety and economy. With this work, the financial services sec­
tor will contribute to increasing the country’s productivity and
PMJDY, the Department of Financial Services within the M
­ inistry
improving economic growth. In the long term, the positive
of Finance in India, now aims to make financial services avail­
contribution to national ­d evelopment will be enormous. ■
able to the poorer sections of the population. It is planning a
bank account associated with a bank card that includes acci­
dent and life insurance. The government had set itself a target of
Arundhati Bhattacharya is Chairperson of State Bank of India.
Firmly on track
By Luis M. Linde In the wake of the financial cri-
sis, Spain has made great efforts to offset the negative development of public finances and to revitalise poor economic
performance. Today’s positive trend signals a sustained recovery that will allow
debt reduction beginning in 2017.
“Sound public finances
are indeed a prerequisite
for sustainable growth.”
G r o w t h is e v e r y w h e r e
T
63
he Spanish economic performance has ex-
To offset these developments, a great effort has been made in pub-
perienced different stages in recent years,
lic finances. This has involved both the expenditure and the revenue
from hectic growth to mild growth, reces-
sides. As a result, the structural primary balance moved to positive
sion and ultimately recovery.
figures in 2012. From minus 2.7 percent of GDP in 2011, it achieved
a 2.2 percent surplus in 2013 and, according to Ministry of Finance
Developments in public finances have also
and Public Administration estimates as provided in the draft State
been quite notable. From 2005 to 2007,
Budget for 2015, it will reach 2.7 percent of GDP in 2014. Public debt
Spain’s public finances ran surpluses up to 2.2 percent of GDP, while
is forecast to stabilise and to initiate a correction from 2017 onwards.
public debt, following a marked downward trend, came to stand at
a level of 35.5 percent of GDP in 2007, within the lowest bound in
Markets – supported by a favourable monetary policy stance and
the European Union.
the disappearance of doubts on the future of the euro – have corro­
borated the importance of these efforts. Yields and sovereign risk
The global crisis that broke in 2007 – at a time Spain had reached
premiums have declined markedly.
a mature cyclical position – and the strong fiscal stimulus provided
by the authorities to counterbalance these developments were par-
All in all, fiscal consolidation has not prevented the econ-
ticularly harmful for Spanish fiscal accounts. The subsequent euro
omy from recovering in Spain. Despite the short-term contrac-
crisis contributed further to exacerbating the situation. As a conse-
tionary effects on domestic demand, fiscal consolidation lead-
quence, from 2009 to 2012 budget deficits hovered around dou-
ing to sound public finances and orderly debt ­
dynamics are
ble-digit figures and general government debt soared by 50 pp from
indeed a prerequisite for sustainable long-term growth.
its low in 2007. In this context, the economy performed poorly, with
significantly negative rates of growth from 2009, except for a shortlived rebound in 2010.
Luis M. Linde is the Governor of Banco de Espan˜a.
■
64
G r o w t h is e v e r y w h e r e
Turkish banks
foster growth
By Cevdet Yilmaz Despite the global crisis, Turkey
has been able to boost its economic growth
and internationalise its banking sector in
the past few years.
A
long with its dynamic population and
prime location, its sound and efficient
banking sector is a major asset of Turkey
to build Istanbul International Financial
Center. Despite moderate growth rates
in the recent years, the Turkish banking
sector has continued to grow and maintained its resilience against
macroeconomic shocks due to its sound capital structure and man-
ageable risks. The asset size of Turkish Banks reached USD 862.0 billion and 111 percent of GDP as of August 2014.
G r o w t h is e v e r y w h e r e
65
862
The asset size of Turkish Banks reached
billion USD
“The Turkish economy
developed comparatively
well after 2008.”
Turkey is among the countries which performed comparatively well
opened branches outside of Turkey and provided various kinds of fi-
after the 2008 global economic crisis. Having experienced economic
nancial services in international markets. At the same time, foreign
and political instability and severe macroeconomic fluctuations in
investors are eager to enter the banking sector. Between 2002 and
the 1990s, Turkey adopted a number of ambitious structural reforms,
September 2014, the total FDI to the banking sector reached USD
­including restructuring of the banking sector, securing central bank
35.2 billion, which accounts for 29.6 percent of total FDI in Turkey.
independence and introducing a multi-year budgeting system at the
beginning of 2000s. These structural reforms and successful imple-
High quality human capital, well-developed IT infrastructure and regu­
mentation of macroeconomic policy have propelled this economic
lation framework in compliance with international standards are the
performance, and the financial system has shown strong perfor-
main strengths of the Turkish banking sector. The growth capacity
mance during global economic turmoil. After the global economic
of the economy, dynamic demographic structure, potential of Istan-
crisis, in addition to the efficiency and the size of the banking sys-
bul as an international financial center, potential of interest-free bank-
tem, components and the quality of the balance sheets have be-
ing, increasing share of emerging markets in the world economy, in-
come more important issues in terms of financial stability. Therefore,
novations in technology and payments systems can be summarised
to provide macroeconomic sustainability, a series of macro-pruden-
as the opportunities for the sector in the near future. ■
tial measures, which aimed at restraining consumer loans, were taken
in recent years.
From the point of global integration, the Turkish banking sector has
gained experience and ability in recent years. Turkish banks have
Dr Cevdet Yilmaz is Turkey’s Minister of Development.
66
Growth is everywhere
Cornerstones
of trade
By Bernd Meist and Maximilian Habsburg-Lothringen
The role of the Chinese state banks within
the German economy has gained steadily in
importance since China‘s „reform and opening“. The establishment of the clearing centre and the policy of internationalisation of
the renminbi have paved the way for even more
dynamic development.
“Trade with China is greatly
expanding demand for
­foreign trade financing.”
Growth is everywhere
U
67
ntil the period of the so-called “re-
All four of these banks are currently represented in Germany. The
form and opening”, China had a highly
Bank of China (Zhongguo Yinhang), for example, which provides
­c entralised banking system in which
a range of economically important services with the newly es-
the Chinese central bank (Zhongguo
tablished renminbi clearing centre, has been working in Frank-
Renmin Yinhang) together with two
furt since 1989.
other state banks wholly covered the
­national market 1. Today, the banking market is dominated by
The main activities of the Chinese state banks are currently in
four ­major players who in the past year covered about two-thirds
­medium and long-term lending and trade financing.
of the commercial bank market as measured by lending and
­deposit ­volumes 2. Industry insiders will be familiar with the names
The booming foreign trade figures from Germany to China are
­“Agricultural Bank of China”, “China Construction Bank”, “Bank of
opening up great demand for foreign trade financing, which is
China” and “Industrial and Commercial Bank of China”.
­tailored by Chinese banks to the specific needs of their c
­ ustomers.
But for German companies already established in the Chinese
growth market, the State banks also play an important role. Chin­
ese banks now serve numerous DAX, MDAX and SDAX com­
panies, which together with the four commercial banks are
­attracting experts in the Chinese economy and the Chinese financial market, experts who can build bridges.
Finally, the opening of the renminbi clearing center will facilitate
trade for German SMEs in the future, as they can now make
­renminbi transfers locally through a single credit institution. This
allows companies to optimise their liquidity management and
­secure attractive access to the Chinese interbank market. The
ability to issue German corporate bonds in renminbi, which is already practised, is gradually opening what is still limited access
to the Chinese capital market to large German companies 3. ■
Bernd Meist is Managing Director and Maximilian HabsburgLothringen is Risk Analyst at Bank of China Ltd. Zweignieder­
lassung Frankfurt am Main Frankfurt Branch.
1 Popp, Stephan (1996): Multinationale Banken
im Zukunftsmarkt VR China – Erfolgsfaktoren
und Wettbewerbsstrategien, p. 17.
2 Mainland China Banking Survey 2013,
KPMG.
3 Cf. China Contact, 2014, Issue 18, article by
Lutz Raettig.
7 M.
… visitors spend the night
in the city every year.
3,450BN.
137,000
… euros is the sum of the total
assets of all banks in Frankfurt.
… people work in the financial sector in the
Frankfurt-Rhine-Main metropolitan area.
55M.
… people live in the Frankfurt-Rhine-Main
metropolitan area.
193
186
61,300
… people work in the F
­ rankfurt
financial sector.
… banks have their
­h eadquarters or
branch offices in
Frankfurt.
… banks in Frankfurt
are foreign banks.
1,000
41,000
… employees of financial
services companies com­
mute daily from the sub­
urbs to Frankfurt.
7,900
… companies in financial services are
based in the Frankfurt-Rhine-Main
­m etropolitan area.
… jobs were created through
the expansion of the ECB in
the financial centre.
FINANCIAL CENTRE
FRANKFURT
FAC TS AND
FIGURES
Published by
Frankfurt Main Finance e. V.
Zum Laurenburger Hof 76
60594 Frankfurt am Main
Telefon: + 49 69 · 94 41 80 31
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www.frankfurt-main-finance.com/en
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Editorial Staff/Layout
NewMark Finanzkommunikation GmbH, Frankfurt am Main
90% 67
. %
… of Germany‘s total stock
­ arket turnover is generated in
m
the Frankfurt financial centre.
Picture Credits
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­Peter (p. 20 – 22) unknown (p. 21); unknown (p. 22 top); unknown (S. 22 ­bottom);
Sergiy Serdyuk/Fotolia (p. 24); bennyartist/Fotolia (p. 25 top left); Petkov/­
Fotolia (p. 25 top right); unknown (p. 25 bottom left); danielschoenen/Fotolia
(p. 26 – 27); Claudia Müller (p. 28 – 29); Wilson Joseph, Julien Deveaux, Arthur
Shlain, Jon Trilliana: all from the Noun Project (p. 30); Pilens/Veer (p. 32 – 34);
iconeer/istockphoto (p. 36 – 37); djama/Fotolia (p. 39 top right); mseidelch/­
istockphoto (p. 39 bottom left); Thomas Leiss/Fotolia (p. 39 bottom right);
Anja B
­ äcker/plainpicture (p. 40); Fritz Philipp (p. 42 – 43); akf/Fotolia (p. 44);
Serg Zastavkin/Veer (p. 46); RTimages Saphire/F1online (p. 48 – 49); XXV/­
Fotolia ­(p. 50 left); alvarez/istockphoto (p. 50 mittig); ldprod/Fotolia (p. 50 right);
industrieblick/Fotolia (p. 51 mittig); lightpoet/Fotolia (p. 51 right); Stephen J.
Krasemann/All Canada Photos/Corbis (p. 52); SunChan/istockphoto (p. 53);
Photographee.eu/Fotolia (p. 54); EvrenKalinbacak/Fotolia (p. 54 – 55); LVDESIGN/Fotolia (p. 55); josemoraes/itstockphoto (p. 56 left); industrieblick/­Fotolia
(p. 56 mittig); MACIEJ NOSKOWSKI/itstockphoto (p. 56 bottom right);
Easy_Company/istockphoto (p. 56 top right); Ikonica/Masterfile/Corbis (p. 58);
Jzedlitz/wikimedia.org (p. 60 – 67)
Printed by
Druck- und Verlagshaus Zarbock GmbH & Co. KG, circulation: 2.000
Frankfurt, March 2015
148.5 BN.
… euros were traded on the stock
exchange spot m
­ arkets in January 2015.
... is the contribution of
the financial sector to
the ­e conomy of Hesse.
21.7 M.
… transactions were concluded­ ­
on Xetra in January 2015.