What are German banks for?
04 Apr 2017 | Richard Kemmish
A small German bank that I follow closely recently released its
results. The first sentence of the accompanying press release
said that 2016 was a very successful year for them because they
significantly expanded their corporate loan book. That was it.
Details about profitability and credit were in the second
paragraph of the press release. The return on equity
wasnt mentioned at all.
Only in Germany.
The symbiotic relationship between corporates and
their banks is frequently cited as a cause of the
German economic success story. What if it is, as I hypothesise,
an effect? Vast deposits, historically low interest rates and
low risk loan books all results of German industrial
growth - allow the banking sector to be a service provider to
the real economy and disregard RoEs so low that, in other
countries the banks would have been embarrassed into a wave of
None of which would really matter to the average German
corporate treasurer enjoying the current set-up if it were not
for the fundamental changes to the European banking system that
are afoot and the disruption that they threaten.
To take just a few of those changes.
It is no wonder that Capital Markets Union is the biggest
financial project of this parliament. The real economy in many
member states remains in the doldrums and the banking system is
not fit for purpose. I dont think I am exaggerating to
say that the suffering that this is causing is an existential
threat to the Union. The fact that Germany does not have these
problems and does have a banking system that is fit for
purpose is irrelevant. Capital Markets Union is
inevitable, many of the work streams will have profound, often
unpalatable consequences for the German banking system.
Then there is the new approach to risk weighted assets. Readers
of my covered bond commentary will know that this is something
of an obsession of mine, but I make no apologies: It is
important. The leverage ratio and/or the floor under risk
weights in internal capital models are inevitable, fundamental
and, no doubt about it, they punish the prudent. The biggest
losers will be the banks with the lowest risk balance sheets,
particularly residential mortgages and corporate loan books.
Guess who Im talking about here.
Finally, interest rates. The ECBs deposit rate has been
negligible for about 6 years now. We may be starting to see the
first awakening of Eurozone consumer inflation, and therefore
of justification to start the rate hike cycle. But this
monetary policy has already caused vast asset price inflation.
Anyone else see the parallels to the relationship between the
Fed Funds rate and US inflation (CPI and financial assets) from
2000 to 2005? Anyone remember what happened next?
Corporate treasuers of Germany have enjoyed incredible funding
from the banking system for decades. Time to think of plan
Im looking forward to discussing plan B at the Euromoney
German Forum in Berlin later this month. For more information
about the event and to view the agenda, please visit the
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