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

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 tresor inflation - indexed ) have established themselves as the benchmark used to derive inflation expectations and real interest rates