Mr. Gaddum discusses Germany as a financial centre and the strengths of the
German capital market of today Speech by the Vice-President of the Deutsche Bundesbank,
Mr. Johann Wilhelm Gaddum, at the Financial Centre Roadshow in New York on 14/10/97.
1. Strengths of the German capital market of today
Finanzplatz Deutschland -- the financial centre Germany, which is the "home port" of the
D-Mark -- is characterised by the long-standing stability culture of the Deutsche Bundesbank. And the
financial centre Germany has benefited considerably from the currency's stability. With the introduction
of the euro everything will change. The financial centre Germany will lose its D-Mark bonus. However,
it will gain the opportunity to display its competitiveness with the euro in a larger market. The banks, the
German parliament and the Bundesbank have been working for years to increase the attractiveness of
Germany as a financial centre. With a view to the introduction of the euro, it is important to further
strengthen the competitiveness reached so far through additional innovations. It is essential to prepare for
competition in the large European market. But we can say with some satisfaction that even today the
financial centre Germany, which is the biggest and most dynamic financial market in continental Europe,
is in a good position.
Germany is currently the third-largest industrial nation in the world and, since German
reunification, it has had the highest population of any country in the European Union; in the wake of
reunification, however, it has also changed from a capital-exporting country into a capital-importing one.
The large current account surpluses which had prevailed until 1990 have turned into sizeable deficits.
But the era of Germany's current account deficits could soon be a thing of the past. After
a seasonally adjusted positive balance was recorded in the second quarter of this year, I expect the
German current account will show an annual surplus again in 1998 at the latest.
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The deficit on current account was covered in part by sales of fixed-rate
bonds -- especially Federal securities -- abroad. In view of the D-Mark's role as a reserve currency and
the high creditworthiness of the Federal Republic of Germany as a borrower (triple A rating), it is
not -- and never has been -- a problem for Germany to raise funds abroad. German banks are among the
premier credit institutions worldwide in all sectors of traditional banking business. In only a short period
of time they have diversified into new areas of business (investment banking, derivatives, etc.); here, too,
they have meanwhile established professional and efficient lines of business.
This trend has been and is being accompanied by modernisations undertaken at the
German stock exchanges, which are acquiring new structures, opening up new markets and, in doing so,
consistently put their faith in the use of electronic systems. Concerning the speed, security and
cost-effectiveness of securities trading, the German stock exchange Deutsche Börse leads the field. It has
made rapid progress towards full computerisation and soon will offer a trading platform which will be
trend-setting in the European context. The tool needed for this -- XETRA (Exchange Electronic Trading)
is currently being implemented. The aim of XETRA is to facilitate full electronic handling of stock
exchange trading with up to 40,000 securities -- with a worldwide remote membership facility. This will
mean lower costs, more efficiency and a high degree of liquidity.
In this context the centralised securities settlement system of Deutsche Börse Clearing
AG, the leading German stock exchange clearing house, deserves a mention. Its functionality and speed,
together with its cost-effective settlement procedures, are unmatched internationally. In Germany,
settlement is generally completed within just two days (T+2) -- if necessary, even on the same day; that
is faster than anywhere else. And, for the sake of security, they are working on cutting the time even
further. The question of deregulation proved to be a less pressing problem in the traditionally liberal
German financial market than in other countries; however, in Germany, too, further steps in this direction
were necessary. Thus -- to cite just a few examples -- the securities transfer tax was abolished in 1990.
Since 1992, foreign non-banks have been able to issue commercial paper denominated in D-Mark.
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In 1994 investors' protection was reinforced by the establishment of the Federal
Supervisory Office for Securities Trading and the legal ban on insider dealing. In 1994, too, genuine
money market funds were admitted. In January 1997 minimum reserve requirements on repo transactions
were abolished. In March 1997 the new stock exchange segment "New Market" was introduced for small
and medium-sized fast-growing enterprises. Since May 1997, banks have been allowed to collateralise
and sell loans in the form of asset-backed securities. Measured by the volume of securities outstanding,
the German bond market is currently the third-largest debt securities market in the world. Within Europe
it leads the field.
Approximately 40 per cent of the German government bonds outstanding are held by
foreign investors. This shows that the long-standing benchmark position of German Federal bonds rests
on a sound real base. And it is surely not surprising either that, with a 42% market share, the trade in
D-Mark-denominated interest-related products is the leading business in the European financial futures
exchanges. Annual net sales of fixed-rate bonds issued by German borrowers amounted to the equivalent
of more than US$ 100 billion in each of the past few years. The primary and the secondary markets
exhibit a very high degree of liquidity, especially in respect of Federal securities.
In order to maintain its leading position in the market, the Federal Government has
gradually streamlined its array of issue instruments. Thus, the maturity range was complemented both at
the short end ("Bubills") and at the long end of the market (30-year bonds). The further fixing of issue
dates has meanwhile led in effect to a regular issuance calendar over the entire year. The concentration on
standardised instruments and regular issue dates, in combination with re-openings of issues, ensures large
and liquid issue amounts. The introduction of stripping for Federal bonds is likewise part of the strategy
to protect the Federal Government's benchmark position. Whereas in the primary market the Government
focuses on certain maturity segments, by allowing the stripping of government bonds it offers
international institutional investors facilities for investment along the entire yield curve.
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Some regional Land governments in Germany have meanwhile started to combine their
issues into joint bonds, which has proved to be rather successful. Another important segment of the
German debt securities market is constituted by mortgage bonds (Pfandbriefe) which, as "jumbo" issues,
have met with a positive response in the international capital market for some time now. The picture is
complemented by the German Financial Futures Exchange (DTB). Although it was established relatively
late, it has already conquered a major market position.
In conjunction with MATIF in Paris and SOFFEX in Zurich, the DTB is seeking to build
a joint continental European trading and clearing platform. Not least because of its efficient settlement
and its electronic access facilities installed in foreign financial centres, the DTB offers global capital
market players access to all derivative business. In its efforts to catch up with the longer-established
futures exchanges, it has already made ground especially with the introduction of the Bobl future; in this
respect, it has even surpassed LIFFE. The DTB's range of products meanwhile cover maturities from one
month to ten years. Contracts such as the 1-month and the 3-month Euro-Mark future and the future on
2-year Federal Treasury notes are the most recent examples of the DTB's market orientation.
2. Further capital market improvements in the pipeline
The launch of European monetary union will change the operating framework in Europe.
Thus, the D-Mark will cease to exist as an internationally renowned reserve currency. For the emerging
single currency area and the larger single financial market, a number of European Union directives will
have to be incorporated into national law.
You may rest assured that in doing so we will endeavour to further strengthen Germany
as a financial centre. These measures are being supported by practical considerations aimed at smoothing
the transition from the D-Mark to the euro for capital market players. The Federal Government will do
justice to its leading position as an issuer also by converting its marketable old issues to euros right at the
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start of monetary union on January 1, 1999. That will prevent any split in the market between D-Mark
and euro-denominated Federal Government bonds. In other words, large and liquid euro issues covering
the entire maturity range will be available from the outset.
With regard to the conversion procedures, due consideration has to be given, among
other things, to avoiding costs and to agreeing general practical rules in the interest of ensuring a
smoothly functioning capital market. This includes a simple and relatively cost-effective concept for
bonds in respect of the conversion of (even) D-Mark nominal amounts into (odd) euro amounts, i.e. the
so-called 1-cent method. As far as equities are concerned, conversion is likely to be facilitated by the
introduction of stock based not on par values, but on divisible units. Thus an instrument which has long
been common in the United States will be established in Germany, too.
To put it in a nutshell: the German capital market is itself in excellent shape and is or
will be very well prepared for the future challenges.
3. Trends in other market sectors
3.1. Foreign exchange market
The launch of monetary union in Europe will definitely have far-reaching consequences
for the foreign exchange market, too. Monetary union will lead to the elimination of dealings in
currencies belonging to the European Monetary System. On the other hand, the odds are that the
remaining foreign exchange dealings will concentrate further within continental Europe in favour of
Frankfurt.
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At a roughly constant level of trade in US dollars, German banks have been able to
increase their operations in sterling, Swiss francs and yen distinctly already during the past few years.
And further growth prospects look likely. Another cause of optimism is undoubtedly that Frankfurt will
continue to be the location of one of the three central banks which issue the major international
currencies, i.e. the US dollar, yen and euro.
3.2. Money market
In the German money market, too, progress has been recorded in the past few years. And
the Bundesbank has made a major contribution to that. The list is headed by the drastic lowering of the
minimum reserve ratios to a level of 1.5% to 2.0% in several stages up to 1995. That has lessened the
incentives to circumvent the regulations while preserving the instrument's functional effectiveness. Since
then the growth of short-term D-Mark-denominated deposits in the Euro-market has come to a halt. This
effect has been reinforced by the exemption from minimum reserve requirements of liabilities under repo
transactions with maturities of up to one year, which came into force at the beginning of this year. Within
a short period of time this measure fostered the growth of a repo market in Germany and led to a shift of
D-Mark-denominated repo business from the Euro-market, particularly London, back to Germany.
The set of monetary policy instruments of the future European Central Bank are expected
to incorporate key elements of the Bundesbank's tried and tested toolkit. And I am convinced that even if
the minimum reserve instrument is likewise employed, solutions will be found which exclude any
negative effects on financial markets in the euro area, especially shifts to offshore financial centres.
In comparison to the existing national markets, the money market in the euro area is
likely to become considerably wider and deeper. The harmonisation of market practices which is
currently being vigorously pursued will create a level playing field conducive to boosting competition. A
European Interbank Offered Rate (EURIBOR) is to be determined by a representative selection of banks
from the euro area as the benchmark interest rate for the financial markets. It will enhance the profile of
the European continent and of Frankfurt against London's Euro-Libor. The EURIBOR will establish
itself as a major benchmark for derivative financial instruments such as options, futures, floating-rate
notes, etc. The fast, smooth and secure settlement of money market transactions is ensured by efficient
payment systems.
One of the linchpins of the Bundesbank's payment system facility is the Frankfurt
Electronic Clearing System (EAF 2). This system is exceptional in that it combines the
liquidity-conserving elements of a net settlement procedure with the risk-reducing features of gross
settlement systems. The second linchpin is the express electronic intercity credit transfer system known
as EIL-ZV. This gross settlement system will constitute the interface to the ESCB's TARGET system in
stage 3 of EMU which links the national RTGS systems. Money market transactions within the euro area
will then take just a few seconds.
4. Concluding remark
Ladies and Gentlemen, as you can see, Finanzplatz Deutschland -- the German financial
centre -- is entering the European competition from a good starting position. We are in favour of an open
exchange with other financial centres in Europe and are looking forward to this competition. No one
should have any doubt that our ambition is to remain the best in those fields which we already lead and
to become the best in those fields in which we are still trailing at the moment.
Colour charts for this text can be found on the BIS Website (for address see last page)