By and large, German companies have well survived the past years of recession and were able to take advantage of a quick subsequent recovery of demand. Contributing factors were the solid financing and liquidity structures of companies as well as financial institutes answering the requirements of the economy. The structure of the banking sector has changed in recent years, in parallel with the transformation of bank customers.
Traditional financing through bank loans has been complemented by loan securitisations, borrower’s notes and corporate bonds. Derivatives for the management of interest and currency risks are an added novelty. Indeed, not every new product of the past few years has stood the test, but the many different financing challenges of the economy can no longer be embodied by bank loans alone
The traditional practice of bank lending is called “buy and hold”. This means that, when a bank grants a loan, it keeps it on its balance sheet until it has been paid back in full. That practice causes a lending bank to take great interest in its creditor’s reliability to pay back the loan. It is, thus, to be expected that a bank will exercise great caution in the loan origination process. Over the past decade, that practice has increasingly been superseded by the “originate to distribute” business model. With that, a bank grants credit with the knowledge that it will soon no longer be in its own accounts. The loans are sold to investment banks, which bundle them into packets. This is called loan securitisation. It is obvious that such transfer of credit risks requires particular attention to making sure that credit worthiness is not compromised.
Loans and their subsequent securitisation have contributed considerably to our prosperity and the global economic growth. The new financial products have significantly reduced the cost of lending – also for German mid-sized companies. In a future without securitisation, the cost of borrowing would tend to increase
Germany has benefited from loan securitisation in a different way as well. For instance, the rising credit in developing and emerging countries – whose demand has decisively contributed to Germany’s status of export world champion – has significantly accelerated the growth.
For larger mid-sized companies, bond markets have gained increasing attention. Corporate bond issuing activity is not slowing down. According to Thomson Reuters, Europe has experienced a corporate bond volume of about 108 billion euros during the first five months of 2011 – eight times that of the same period in 2010. To some extent, companies can finance themselves more economically through the capital market and bonds than with loans. In addition to euro bonds, a rising number of companies are also utilising the possibility of funding their local activities outside of the euro and US dollar zone. Besides Chinese renminbi bonds, we are also witnessing an increased emission activity in the Brazilian real, for example. A different financing mix provides companies with added latitude and, thus, possible cost advantages.
In addition to financing in the narrow sense of the word, companies, faced with an ever-stronger internationalisation of the division of labour, expect their banks to give them access to the entire product palette of financial services available in various markets. The focus here is not on the products, but on opening the market for the customer. For instance, the internationalisation and foreign activities of German SMEs – the backbone of the German economy – put special demands on financing: the priority is on export financing and international payment transactions. Export risk hedging instruments are also gaining in significance. Letters of credit and foreign guarantees, for example, help manage global default risks.
Likewise, it is an essential success factor for customers outside of Germany who are looking to access the German market to work with a bank that is deeply rooted in Germany and understands the local German market.
n addition to funding companies through loans and securities as well as accompanying them on foreign markets, banks are required to provide their customers with support in risk management. For, many a company is in search of stability and reliability. Strong price variations on the commodity, interest rate and currency markets can quickly foil calculations.
For a majority of German small and medium-sized enterprises, fluctuating commodity prices are the number one risk, followed by supplier default risks as well as currency risks due to foreign exchange volatility and interest rate fluctuations. For that, banks now offer options and futures, which may be used to limit such risks. The condition for a successful application of such derivatives is, thus, to clearly identify the risks and to choose the appropriate instrument.
Goods, services, as well as labour and financial markets are closely intertwined. That is particularly evident in the international economic and financial relations, which, measured by their volume, have risen sharply in recent years. The banks’ role as “transmission belt” between those individual markets is gaining in importance to the extent that the international division of labour is increasing. Banks are integral to that creation of added value and assist their German as well as international customers in transforming risks. That is why stable and effective financial markets are indispensable for companies, for ensuring prosperity and for creating jobs.
The author has been CEO of Deutsche Bank since 2012. He started his career in the corporate client operations of Citibank. After switching over to Deutsche Bank in 1987, he was active in various executive positions in Thailand, Japan and Singapore. Since 2002, he has been a member of the Group Executive Committee of Deutsche Bank. In 2005, he was appointed CEO of Deutsche Bank Germany.