Hermann Remsperger: Financial market trends in Germany
Speech by Professor Hermann Remsperger, Member of the Directorate of the Deutsche Bundesbank,
at the European Summit of Financial Journalists, Frankfurt, 29 October 2001.
* * *
Banks play a relatively dominant role in the German financial system. At the end of 2000 bank lending
amounted to Ε 3 trillion, and Ε 2.2 trillion worth of debt securities were in circulation. That means loans
by banks accounted for most of the finance raised by the economy as a whole. Of those debt
securities again, Ε 1.4 trillion were issued by banks, which used this instrument to refinance their
lending business. The market capitalisation of all companies listed on German stock exchanges was
Ε 1.4 trillion in December 2000. That is around 70 % of GDP, which is relatively low by international
standards.
However, the German financial system is going through a period of considerable change. Important
longer-term trends include the mounting importance of securities markets, the increasing
institutionalisation of investment and the German financial system's deepening integration with
international financial markets in general and with other European financial markets in particular. Entry
into Stage Three of EMU at the beginning of 1999 caused the elimination of intra-European exchange
rate risk and the lifting of foreign exchange restrictions on investors in the euro area, and therefore
made a major contribution to broadening the base of investors in bonds and equities and to fostering
an increasingly European outlook in investment strategy.
1. Increased significance of securities markets
The sharp increase in sales of corporate bonds in 1999 and 2000 as well as the record amounts of
stock market issues during the same period are particular testimony to the increasing importance of
the securities markets in Germany. Over 80 % of the total amounts outstanding of Ε 200 billion of
German companies' debt securities are issued via their foreign financial subsidiaries. These financial
resources are then channelled back to the parent company as loans. Advantages relating to the trade
earnings tax are likely to be the main reason for this "indirect" method of raising finance in the capital
market; 50 % of the interest on long-term debt (bonds) is included in the tax base, whereas interest on
short-term loans - lending by the foreign financial subsidiary to the parent institution - remains
tax-free.1 The increasing substitution of bonds for bank loans has proved to be particularly effective in
raising the large volume of funding needed by the telecommunications sector and other big
corporations.
Whereas the amount outstanding of corporate bonds and commercial paper rose by nearly 80 % in
each of the last two years, it grew at a considerably slower pace in the first six months of this year. In
August of this year, in particular, hardly any long-term corporate debt instruments were issued in
Germany. That is probably because companies, facing increasingly bleak economic prospects, have
reduced their demand for capital. The larger spread of premiums for varying risk categories of bonds
shows in addition, that investors are increasingly aware of higher risks. That development has also
been observed in the "more mature" Anglo-American bond markets.
Following the two boom years of 1999 and 2000, share-issuing activity in Germany also slowed down
as prices began to slide. The value of equities issued in German markets was less than Ε 3 billion in
the first half of 2001, whereas in the first half of the preceding year the volume of IPOs overshot the
Ε
17 billion mark.
Despite the currently very volatile state of equity markets, marked by setbacks in share prices, the
establishment of new market segments - examples being the Neuer Markt for innovative growth
industries or the SMAX for small and medium-sized enterprises - will in the long run represent an
additional source of external own funds for corporations. The market for venture capital, which has
been growing strongly since 1997 - although at a slower pace in the first half of the year 2001, will
also make it increasingly possible to raise equity finance rather than debt finance for risky new
enterprises through holding companies as well as through insurance companies, banks and pension
funds. The tax-exempt status of corporate capital gains from the sale of participating interests, which
will take effect from 2002, will have a positive impact.2 Corporate bonds are attractive to yield-oriented
investors and can help brand-name enterprises raise large amounts of funds. On the whole, in the
future capital market-based corporate finance will probably gain in importance.
2. Institutionalisation of investment
A further development which can be observed in German capital markets is the growing
institutionalisation of investment through the increased involvement of insurance companies and asset
management companies. At the end of 2000 insurance companies held over Ε 600 billion worth of
securitised capital investments (debt securities, shares and investment fund certificates issued by
residents and non-residents).3 Along with the growing involvement of institutional investors in the
markets, an increasing volume of funds is being invested in professionally managed products and
thereby entering the capital market indirectly rather than directly. In the past ten years this kind of
institutionalisation has led to an eightfold rise in the value of investment fund certificates issued by
residents and non-residents held in safe-custody accounts with credit institutions. In 2000 these
investment fund certificates represented a value of over Ε 800 billion.4
With the introduction of a government-promoted funded pension scheme, the additional promotion of
corporate pension funds and the growth of private retirement plans due to demographics, the demand
for professionally managed investment instruments will probably expand strongly in the future. The
institutionalisation of investment in German capital markets will continue to grow.
3. European and international integration
German financial markets' fortunes are increasingly tied up with those of other European financial
markets, and international integration is also on the rise. Whereas European financial market
integration is being given a special boost by the introduction of the euro, international integration on
the supply side is based on increasing cooperation with the world's financial centres. On the demand
side, international integration is being propelled by the increasingly global orientation of investors and
the rise in world trade. In the past five years, the value of foreign sales and purchases of equities by
residents has gone up more than tenfold, reaching Ε 1.5 trillion in 2000. In the same year, foreign
investors sold and purchased German stocks to the same value, a sixfold increase compared with
1995. The volume of foreign bonds traded in Germany trebled in the same period, to Ε 2.4 trillion in
2000. During that time, sales of German bonds abroad remained largely unchanged; these also
amounted to Ε 2.4 trillion in 2000.
The integration of securities markets, however, has not always been accompanied by a harmonisation
of structures and uniformity in European products. In some sub-segments, national methods of
launching issues have certainly been preserved. Whereas the bond market can now be described as a
largely single European market for corporate bonds, individual segments of the government bond
sector are still marked by the use of national debt securities as benchmarks. Ten-year German Bunds
are a benchmark for long-term capital market yields in the entire euro area. This position is
underscored by the fourfold increase in option contracts on the Bund future issued since the end of
1998. For indexed bonds the French OATis (Obligations Assimilables du Trésor inflation-indexed)
have established themselves as the benchmark used to derive inflation expectations and real interest
rates for the entire euro area.
Bank-issued Pfandbriefe have also prevailed in competition; they provide security independently of the
individual debtor by having a public-sector body provide a guarantee or through the existence of a
real-estate lien. With the introduction of Jumbo Pfandbriefe, with an issue volume of over
Ε 500 million, the establishment of book-building as a method of issue and the assignment of an
2
This tax exemption applies to participating interests held by the seller for at least one year and, in the event of a
disinvestment, will increase yield after taxes.
external rating, which is not yet standard practice for private bonds in the euro area - for German
Pfandbrief Pfandbriefe
issuers this rating is mostly AAA - have evolved from a German speciality to an
international investment vehicle.5
German share markets have been marked by a tendency to adapt to Anglo-American structures. In
addition to the increasing importance of sector indices - including pan-European indices - and the
establishment of a market segment for high-tech, innovative enterprises, the number of cross-listings
of German shares abroad and foreign shares here in Germany has increased. In 1997 there were 700
domestic companies and 2,784 foreign companies listed on German stock exchanges; by August of
this year the figure had ballooned to 1,080 domestic companies and 9,964 foreign companies.
However, it remains to be seen whether the stock market downturn could lead to greater concentration
on the more familiar domestic markets.
Outlook
On the whole, the German financial system can expect to see a further expansion of more
marketoriented structures. However, the identity of the German financial system will remain intact. That will
be particularly true of historically evolved financial relationships, especially the bank-lending based
financing of small and medium-sized enterprises. And that will also be true of the particularly
prominent position of Pfandbriefe in Germany.