German Financial Institutions Research Articles

The impact of regulatory requirements on German financial institutions’ outsourcing arrangements

PurposeThe purpose of this paper is to analyse and investigate how intensified regulatory requirements related to outsourcing have influenced and changed the outsourcing activities of German financial institutions.Design/methodology/approachThe study involved interviewing 11 outsourcing experts in the German financial sector, including four of the five largest banks in Germany. In coding and analysing the collected data, this study adopted the approach of a qualitative content analysis framework.FindingsThe study found that the revised legal requirements have had a significant and potentially negative impact on the efficiency of outsourcing, leading to a necessity for German financial institutions to internally realign their outsourcing managements. The study further revealed practical realigned methods German financial institutions executed to meet the legal requirements.Originality/valueThe impact, meaning and relevance of legal requirements in the outsourcing environment of German financial institutions has been relatively under-researched from a qualitative perspective and focused on other primary fields of investigation like outsourcing decisions and outcomes. This study has, by adopting a qualitative approach, addressed the identified gap by providing first-hand insights and new knowledge.

The development of an insolvency privilegle for derivatives in German law

The article outlines the development of insolvency privilege with respect to derivatives under German law in its historical perspective. It traces the evolution of special privilege from the moment when it was first announced in the German insolvency statute (Insolvenzordnung) and came into force on August 1, 1994, up to the moment when legislative provisions securing the functioning of derivatives in insolvency context were amended in response to the 2016 Federal Court of Justice Verdict. This court ruling ended the long-standing consensus on “friendliness” of the German insolvency law to derivatives and other financial transactions. German highest court concluded that contractual clauses on the termination of obligations under derivative contracts in the event of bankruptcy are invalid unless their legal result is identical to the one prescribed by law. This court decision created significant legal uncertainty for recognition of claims under derivative transactions and directly influenced the use of standard master agreement for over-the-counter derivatives. Drafted under the auspices of the German Banking Union (GBU), an organization representing the interests of German financial institutions, German Master Agreement for Financial Derivatives Transactions ( Deutscher Rahmenvertrag fur Finanztermingeschäfte ) provided a contractual framework for the relevant market, and it came under significant pressure. Overall, German insolvency rules were significantly enforced to achieve the enforceability of close-out netting thus expanding the insolvency privilege for derivative transactions.

Lighting Up the Dark: Liquidity in the German Corporate Bond Market

We study market liquidity in the markets for German and US corporate bonds, providing a comparative analysis of liquidity in two over-the-counter (OTC) bond markets with different characteristics. We employ a unique regulatory dataset of transactions by German financial institutions from 2008 to 2014 to find, first, that overall trading activity is much lower in the German market than in the US. Second, much like in the US, the determinants of German corporate bond liquidity are in line with OTC-market search theories. Third—and surprisingly—frequently traded German bonds have transaction costs that are 39–61 basis points lower than a matched sample of bonds in the US. We relate our results to a number of structural market differences that may explain our findings, including differences in market structure, transparency, and the tax and legal environment.

Lighting Up the Dark: Liquidity in the German Corporate Bond Market

We study the impact of transparency on liquidity in OTC markets. We do so by providing an analysis of liquidity in a corporate bond market without trade transparency (Germany), and comparing our findings to a market with full post-trade disclosure (the U.S.). We employ a unique regulatory dataset of transactions of German financial institutions from 2008 until 2014 to find that: First, overall trading activity is much lower in the German market than in the U.S. Second, similar to the U.S., the determinants of German corporate bond liquidity are in line with search theories of OTC markets. Third, surprisingly, frequently traded German bonds have transaction costs that are 39-61 bp lower than a matched sample of bonds in the U.S. Our results support the notion that, while market liquidity is generally higher in transparent markets, a sub-set of bonds could be more liquid in more opaque markets because of investors crowding their demand into a small number of more actively traded securities.

Lighting up the Dark: Liquidity in the German Corporate Bond Market

We study the impact of transparency on liquidity in OTC markets. We do so by providing an analysis of liquidity in a corporate bond market without trade transparency (Germany), and comparing our findings to a market with full post-trade disclosure (the U.S.). We employ a unique regulatory dataset of transactions of German financial institutions from 2008 until 2014 to find that: First, overall trading activity is much lower in the German market than in the U.S. Second, similar to the U.S., the determinants of German corporate bond liquidity are in line with search theories of OTC markets. Third, surprisingly, frequently traded German bonds have transaction costs that are 39-61 bp lower than a matched sample of bonds in the U.S. Our results support the notion that, while market liquidity is generally higher in transparent markets, a sub-set of bonds could be more liquid in more opaque markets because of investors crowding their demand into a small number of more actively traded securities.

Disclosure Enforcement Consequences Evidence from Germany

In 2006 Germany passed a disclosure enforcement law (EHUG) that strengthened the enforcement of financial statement disclosure in particular for non-listed firms whose compliance before the law was just about 16%. After introducing recurring fines of €2,500 to €25,000 disclosure rates surged to above 90%. We examine the impact of the law on transparency using proprietary data from the Deutsche Bundesbank (German Central Bank). The data covers financial statements of compliers, non-compliers and non-disclosers (firms exempt from disclosure) that received loans from German financial institutions. We find that firms not complying prior to the law were smaller, more profitable, had a lower effective tax rate, were less likely to have a foreigner as owner, were more likely to have a consolidated report, were more likely to be taxed at the individual owners’ level and were less likely to have a limited liability legal form. Then, using difference-in-difference models, we document that financial reporting quality of non-compliers, measured as absolute abnormal accruals, declines after the reform, both compared to compliers and compared to non-disclosers. In preliminary analyses, we additionally show that the probability to switch the legal form in order to avoid disclosure increases after the law. Overall, we document that while the law increased disclosure quantity, disclosure quality declined on average.

A connectedness analysis of German financial institutions during the financial crisis in 2008

For core financial market activities like risk management and asset pricing, it appears to be crucial to investigate the “connectedness” among financial institutions. In times of economic crises, a suitable measure of connectedness can provide valuable insights of financial markets and helps to understand how institutions influence each other. In particular, depending on contractual obligations between financial institutions, the financial distress at a bank with large systemic impact is likely to cause also distress at other institutions. In the literature, the latter phenomenon is generally tagged by ’contagion’ and can eventually result in severe economic crises. The purpose of this paper is to investigate the connectedness among German financial institutions during the global financial crisis 2007-2009, where the authors focus particularly on 2008 and its height in September 2008 with the bankruptcy of Lehman Brothers. They make use of the definition of connectedness, as it was recently proposed by Diebold and Yilmaz (2014). Their approach relies on analyzing multiple time series of volatilities by a vector autoregressive (VAR) model and a generalized forecast error variance decompositions. It provides several meaningful measures of connectedness and allows for static (average), as well as dynamic (daily time-varying) analyses. The authors show that the connectedness in Germany can be described well by the model. Keywords: сonnectedness, contagion, generalized variance decomposition, networks, spillover effects. JEL Classification: C32, C58, G32, G33

The new German Ringfencing Act establishing criminal liability of banking and insurance executives for failures in risk management

The German parliament recently approved a new law regarding individual criminal liability of banking and insurance executives, which will take effect as of January 2014. Under the new so-called Ringfencing Act (Trennbankengesetz), specific duties and responsibilities for risk management will be imposed on these executives. Failure to comply with these duties will be punishable by a maximum of five years’ imprisonment if it causes a threat to the viability as a going concern of a bank, or insolvency or over-indebtedness of an insurance company. This paper provides a description of the risk management duties and the corresponding criminal penalties. It also discusses the regulatory background and provides an initial assessment of the likely implications for risk management at German financial institutions.

How to Evaluate the Share Price Performance During CEO Tenure: The Case of Josef Ackermann’s Stewardship at Deutsche Bank

This clinical paper gives guidance on how to correctly compute and evaluate the share price performance of a corporation during a specific CEO tenure. Although the emphasis is on Deutsche Bank’s share price performance between 2002 and 2012, a lot of general questions relevant for this kind of assessment are tackled as well. For instance it is shown that currency adjustments are essential when comparing global companies if their shares are listed in different currency areas. In addition, the differences of dollar-weighted versus time-weighted returns for peer groups during consecutive observation periods are discussed.At Deutsche Bank’s AGM at the end of May 2012, the CEO tenure of Josef Ackermann officially ended after ten years in office. During his stewardship, Deutsche Bank established itself in the bulge bracket of investment banking and was one of the few global banks which survived the financial crisis without any direct government support. Whether his regime was successful for shareholders is controversial. It is shown that in spite of the fact that Deutsche Bank’s original share price performance during Ackermann’s stewardship has been negative by −50 %; it significantly outperformed other German financial institutions, international sector indices or hand-selected investment banking peer groups. However, it is not clear if this relative outperformance is solely attributable to Ackermann’s and his board members’ management capabilities or perhaps a result of implicit guarantees by the German government.Moreover, share price performance figures published by Deutsche Bank are reviewed. It turns out that some figures overstate the real performance. The same is true for e.g. Morgan Stanley’s performance graph in its latest 10-K report. This finally raises the question, how reliable share price performance figures presented by companies are. This is important for the ongoing pay-for-performance discussion because already the underlying data of share price performance could be biased.

Target Balances and the German Financial Account in Light of the European Balance-of-Payments Crisis

As shown in Sinn and Wollmershauser (2012a), during the European balance-of-payments crisis, inter-governmental credit and Target credit granted by core-country central banks have replaced private international capital flows in financing the crisis countries’ current account deficits, and even compensated for outright capital flight. This article offers a closer look at the components of this reversal of capital flows for the case of Germany. Its main finding is that most of the reversal materialized in the decline in foreign claims of German commercial banks. The inflow of foreign flight capital into Germany is small by comparison, with purchases of German government bonds increasing substantially, in particular by Spanish and Irish investors. Some foreign capital even left Germany. In net terms, over the years 2008, 2009 and 2011 foreigners withdrew credit they had previously provided to German financial institutions. However, in 2012, foreign credit flows to German financial institutions surged, while the flow of credit redemptions paid to German financial institutions came to a halt.

German Socially Responsible Investment: Barriers and Opportunities

In socially responsible investment terms, Germany is a contradiction. The country is considered by many as one of the pioneers of post-war environmentalism and social reform. Yet, German financial institutions are amongst the European laggards in adopting environmentally and socially informed approaches to investment. This article identifies a variety of legal, institutional and attitudinal factors which hinder the growth of the German SRI market. Its paltry size does not reflect evidence of any specific disinterest among German investors in social and environmental issues. Rather, it arises from a combination of structural impediments, particularly the institutional arrangements for German pension schemes that hinder their participation in financial markets, regulations which encourage conservative investments, and investors' preference for low-risk assets and avoidance of shareholder activism. Legal and institutional reforms over the past decade have in theory created better opportunities for SRI in Germany, although they have yet to engender significant changes in the market.

Interest Rate Risk Rewards in Stock Returns of Financial Corporations: Evidence from Germany

Abstract The interest rate sensitivity of stock returns of financial and non‐financial corporations is a well‐known phenomenon. However, only little is known about the part of total stock returns that is attributable to the compensation an investor receives for being exposed to interest rate risk when investing in equity securities. We pursue here a benchmark portfolio approach, constructing benchmark portfolios having the same interest rate risk exposure as a particular stock. By studying the time series of returns of these asset‐specific benchmarks, we find: i) Regardless of the industry considered, the interest rate risk benchmarks of German corporations have mostly earned a significantly positive reward. ii) Returns of interest rate risk benchmarks of financial institutions exceeded significantly those of non‐financial corporations. iii) An investor willing to bear nothing but the average interest rate risk of German financial institutions would have earned a mean return of about or even exceeding 70% of the corresponding total stock returns. iv) Returns of the interest rate risk benchmarks of the German insurance sector were significantly higher than those of German banks, which seems to contradict conventional market wisdom that insurances hedge interest rate risks.

Interest rate risk of German financial institutions: the impact of level, slope, and curvature of the term structure

We investigate here the sensitivity of the equity values of a large sample of German financial institutions to movements in the term structure of interest rates. While similar approaches rely on a single interest rate factor only, we quantify the exposure to changes in level, slope, and curvature, which are the driving factors of term structure changes. Our main findings are: (i) banks and insurances are exposed to level and curvature changes but only marginally to slope movements; (ii) the interest rate risk exposure depends on the banking sector investigated; (iii) level and curvature changes are priced in the cross-section of stock returns.

Ownership and control in Germany: do cross-shareholdings reflect bank control on large companies?

This paper aims to analyse the relationships (equity and non-equity) between German banks and German firms, which are the peculiarities of the German institutional system of corporate governance. Scholars agree on the fact that cross shareholdings among banks, insurance companies and institutional firms (Charkham 1994, Baums 1993), combined with long term shareholdings (Gerschenkron 1989), and close relationships and interlocking between board members of different companies (Tilly 1969, Hopt and Prigge 1998), are the main features of bank-firms relationships in Germany. Specifically the main purpose of the paper is to demonstrate, for the panel of German companies investigated, that bank-firm relationship relies not only on patrimonial linkages but also on personal relationships. In the light of the sweeping changes that this model has undergone since the late 1990s, an empirical study has been carried out regarding relationships (patrimonial and personal) among the first 100 German companies with the highest turnover and the 6 main German financial institutions, showing the evolving trend along a period of 8 years and comparing the collected data with previous research. Therefore, in order to try to measure the extent of the banks role in Corporate Governance and to evaluate in a deeper sense the effective influence they have on the industry management, we carried out two different analyses. The first, takes into consideration the equity relationships between banks/insurances and the German industrial firms, the second analyses the number of seats held by the same banks in the correspondent supervisory board. In particular, in our opinion, the analysis of the composition of the supervisory boards can help to outline the personal relationships above mentioned. Therefore is understood, that we consider the presence of bank’s representatives in others than banks’ supervisory boards as signal of banks’ opportunity to exert power and influence

Restructuring “Germany Inc.”: The Politics of Company and Takeover Law Reform in Germany and the European Union

The reform of German company law by the Control and Transparency Law (KonTraG) of 1998 reveals the politics of corporate governance liberalization. The reforms strengthened the supervisory board, shareholder rights, and shareholder equality, but left intra‐corporate power relations largely intact. Major German financial institutions supported the reform's contribution to the modernization of German finance, but blocked mandatory divestment of equity stakes and cross‐shareholding. Conversely, organized labor prevented any erosion of supervisory board codetermination. Paradoxically, by eliminating traditional takeover defenses, the KonTraG's liberalization of company law mobilized German political opposition to the European Union's (EU) draft Takeover Directive and limited further legal liberalization.

Regulation, Taxation, and the Development of the German Universal Banking System, 1884-1913

The historical literature has traditionally paid much attention to the role of universal banking in the industrialization of Germany and has presumed, in line with Gerschenkron (1962), that the system gained preeminence in the late nineteenth century due to the general 'backwardness' of the economy. Some researchers have stressed legal and political factors in the evolution of German financial institutions, placing particular emphasis on the Stock Exchange Law of 1896. The 1896 law, because it restricted the allowable activities of the securities exchanges, is seen as promoting the growth and concentration and possibly also monopoly power in the universal banking sector. Two important tax levies on securities market business, arriving shortly before and after the 1896 law, are also considered as an catalyst for change in the financial system. Despite the many claims made about the impact of regulation and taxation, though, a convincing quantitative analysis of the multiple influences is still lacking. The current paper begins to fill this gap by examining company law and stock exchange regulations from the 1870s until the onset of World War I and by investigating the measurable effects of this legal framework on the development of the universal banking sector from 1884 to 1913. The analysis covers three hypothesized areas of impact: concentration, overall growth, and volume of business relative to the stock markets. The findings indicate that the size and volume of the German universal banks developed in a strong, but sustained, manner throughout the period considered, and concentration of the sector increased less than the conventional wisdom supposes. None of the three considered indicators reacted significantly to the 1896 stock exchange law, but all three appear to have increased weakly in response to taxes. Comparison with the British deposit banking sector indicates that the two countries followed nearly identical paths towards increasing concentration between 1884 and 1920, and that indeed the greatest push towards concentration came between 1913 and 1920 - long after the regulation and taxation episodes in Germany. Moreover, in spite of the growth of the German universal banking sector during the period, the British deposit banking sector was still markedly larger in 1913 (normalized by GNP). Thus, the evidence suggests that the effects of individual pieces of legislation were small compared to other changes in the economy.

DEGUSSA-HÜLS: A NEW GERMAN GIANT

It has taken nearly a year to dot every i and cross every t , but in early February, Degussa-Huls Group, a new German chemical giant based in Frankfurt, will emerge from two smaller entities. The merger will allow this new vigorous player to realize the global ambitions of its progenitors—among them a goal to double current sales in North America from $2 billion to $4 billion by 2004. Bringing Frankfurt-based Degussa together with the Marl-based Huls subsidiary of German oil, electricity, and telecommunications giant Veba was not quite the result of a shotgun wedding, but it did seem that way at first. In summer 1997, Veba bought 36% of Degussa from a holding company controlled by two German financial institutions and German chemical and detergent producer Henkel. Industry observers say Veba saw a way to hurtle its Huls subsidiary into the ranks of the largest global specialty chemicals players and forced through the merger with ...