It was only in August of 2012 that the Association of Foreign Banks in Germany celebrated its 30-year anniversary and took a look back at its history, while also offering a glimpse at what lies ahead for the financial location of the future. The break that occurred amidst the financial crisis and its aftermath, which has been ongoing since 2007, cannot be ignored. International financial institutes that operate at a cross-border level are increasingly faced with the strategic question of which existing locations remain attractive and where they might settle in the future. The motivations behind these considerations are diverse. In contrast to the past, these are not made primarily for economic reasons and according to the respective business prospects. Much rather, regulatory aspects have a substantial impact, in which case these of course need to be taken into account indirectly during economic assessments in light of costly implementations. In addition, there are structural policy discussions in many states regarding the splitting or restructuring of banks that go beyond the previously known regulations and therefore have serious implications in terms of financial market policy.
So where do we stand today? What can we expect? And: What will the financial location look like a few years from now? These are the central questions that need answering.
Only a few months after the collapse of the US investment bank Lehman Brothers and the impact on the international financial markets that fallowed as a result, there was a wave of national and international regulations. And it has not yet reached its peak. To prove this, one must only take a quick look at the first reform of deposit insurances, the more strict capital requirements in accordance with Basel III (CRD IV and CRR), the regulation of alternative investments (AIFM), the transfer of numerous bilateral OTC business activities to regulated trading and transaction platforms (EMIR), the regulations of short sales, the development of new European supervisory structures as well as the introduction of national bank levies. In addition, there is a much stricter supervisory practice, which can be seen in Germany, for example, when you consider the minimum requirements for risk management. Further specifications for the redevelopment and restructuring of banks, the concluding reform of deposit insurances, the expansion of the liability of depot banks or the specifications for high-frequency trading are currently still being discussed, or have already been implemented with considerable effort. Moreover, there is the potential introduction of a financial transaction tax and the deliberations on the separation of various business areas within banks, as was recently outlined by the Liikanen Group and partially implemented by German lawmakers on the basis thereof. The list goes on and on. It does, however, clearly show how determined supervisory and policy authorities are in their goals to change the current structures in a sustained manner.
The motivation for this is not only obvious but very much understandable in many cases. No doubt: there have been considerable abuses in the financial sector and many states around the globe are still dealing with the repercussions. This holds even more true when you take into account that the financial crisis has brought to light many basic deficits of individual countries, which will take quite some time to deal with. On top of this, the financial crisis has not only exposed the international network of financial markets but has also highlighted the significance of the financial sector for the individual national economies. This becomes clear when considering the data published in the Liikanen Report in early October of 2012. The balances of the banks in Luxembourg, for example, add up to 2430 per cent of the country’s gross domestic product. In Great Britain you are looking at 570 per cent, in France at 423 per cent and even in Germany at around 331 per cent. Moreover, if one takes the significance of the financial location for individual national economies into account, it becomes clear just how important and great the concern for the stability of the sector should be. The numbers of the Swiss Federal Department of Finance show that the companies of the financial location in Luxembourg hold a percentage of 28.3 per cent of the gross domestic product. In Switzerland, the percentage is 10, in Great Britain 9.4 and in Germany 5.2. This however does not include the important service and credit supply functions the financial institutes assume for the rest of the economy. In the context of these dependencies, national and international discussions are being held on whether or not a restriction of the size and business activity of banks, or even their splitting, is sensible. In this regard, there is also the question concerning the procedure in case of restructuring. For this purpose, central positions were created, among others, by the representatives Dodd and Frank in the USA, the Vickers commission in Great Britain as well as within the context of the Liikanen Report on a European level.
The impact and consequences of these plans remain uncertain at this point. The further development will also have an influence within the euro zone and in Europe in general. Independent from this, the ongoing implementation of the stricter capital requirements on an international level is already leading to significant adjustments within the financial industry. Without a doubt, they will also affect the international alignment of banks and with it the financial location Germany. The financial location Germany, however, keeps providing good starting conditions, primarily due to its strong and export-oriented national economy, and will therefore continue to play a vital role in the outlined strategic deliberations. The fact that the number of foreign banks in Germany remained stable in recent years in spite of the financial crisis and its ramifications can surely be considered an optimistic indication in this respect.
However, lulling oneself in a wrong sense of security and becoming complacent would be the wrong approach. A lot of trust in the financial industry was lost in the past few years – this applies to both the customers and to the public in general. For this reason alone, the general consensus is that reforms are unavoidable. The financial industry has to develop them itself as well as in cooperation with supervisory and policy authorities. A new and stable financial architecture can only be created through mutual understanding. Customers, supervisory authorities, companies and all other market participants alike and, in effect, the financial location and the national economy as a whole will benefit from maximum stability. Numerous reforms have already been initiated which can be employed to reduce balances and risk-weighted assets. “Compliance” and “Corporate Governance” are the keywords that lead to new structures to further reduce risks and introduce new remuneration structures. Many achievements have already been made in this respect, although this tends to be neglected in light of various individual incidents. All of this will not be enough, however, to revive the lost confidence in a sustainable way. In this regard, the industry as a whole, but also each and every one of us, has the obligation to report and overcome shortcomings. All of this must be carried out without blaming one another. An open and honest dialogue must be our main focus at all times.
Also, it is absolutely necessary to continue to strengthen and expand the European domestic markets. Let there be no doubt that the German national economy in particular was able to profit from these concerns. Germany as a financial location will only remain competitive on the international market with broadly harmonised framework conditions, as cross-border activities will be even more connected to efficient company structures than ever before. For this reason, it must be clear that Germany will continue to be a pioneer of European integration. Independent from the positive outlook in terms of national economy, this will be a central focus for the future attractiveness of the financial location and thus for its foreign institutes.
The author is a board member of the UBS Deutschland AG and CEO of Investment Bank. He started his career at the Citibank in Frankfurt and at Bankers Trust in London. Since he moved to UBS, S. Winter has been responsible for the entire security business in Germany and in charge of the Investment Bank as the country head in Germany. He is CEO of the Association of Foreign Banks in Germany.