Bank Management

Bank Management
1 Bank and Banking Systems
Prof. Dr. Hans-Peter Burghof, University of Hohenheim, Bank Management
Agenda
g
1. Bank and Banking Systems
1.1 The Concept “Bank”
1 1 1 Legal Definition
1.1.1
1.1.2. German Banking Act (KWG)
g Busine
ess Areas
1.1.3. Classification of the Banking
1.2 Basic Structure of the German Banking System
1.2.1 Introduction
1.2.2 Universal Banks
1 2 3 Specialized Banks
1.2.3
1.3 Commercial vs. Investment Banking
1 3 1 Introduction
1.3.1
1.3.2 Systematization of Investment Banking
Prof. Dr. Hans-Peter Burghof, University of Hohenheim, Bank Management
2
1.1 The Concept “Bank”
1.1.1 Legal
g Definition
Definition: §1 (1) KWG
„Kreditinstitute sind Unternehmen, diie […] Bankgeschäfte […] betreiben.“
Banking
g Business (“Bankgeschäfte
(
g
”):
)
1. Deposit banking
6. Custody
C
business
2. Transactions in covered bonds
(since July 2005)
7. Guarantee
G
business
3. Credit business
(
(cash
h lloan und
d acceptance credit)
di )
8. Giro
G business
4. Bill-broking
9. Isssuance of securities
5. Financial commission business
10. E
E-money
money business
Prof. Dr. Hans-Peter Burghof, University of Hohenheim, Bank Management
3
1.1 The Concept “Bank”
1.1.2 German Banking
g Act ((KWG))
 Banks are subject to the German Banking Act (KWG)
 Institutions, which are subject to KWG (please
(p
see also next slide)
 Credit Institutions (Banks)
 Financial Service Institutions
 Financial Companies
Institutes in terms of
the “KWG”
 Banking supervision as protector of dep
positors with a focus on risk
 Adjusting the listing of financial compan
nies as required
Prof. Dr. Hans-Peter Burghof, University of Hohenheim, Bank Management
4
1.1 The Concept “Bank”
1.1.2 German Banking
g Act ((KWG))
 Institutions, which are covered by KWG
G (besides credit institutions):
,
 Investment Banks operate in the follow
wing fields:
1.
Investment intermediation
5.
Third country deposits
2.
Acquisition advisory
6.
Financial transfer business
3
3.
Portfolio management & maintenance
7
7.
Business in foreign currency cash
4.
Third-party proprietary trade
8.
Credit card business
 Financial companies, operate in the following fields:
1.
Private & public equity
5.
Investment advisory
2.
Acquisition of outstanding debt
6.
Corporate finance advisory
3.
Leasing business
7.
Financial brokerage
4.
Proprietary trading
Prof. Dr. Hans-Peter Burghof, University of Hohenheim, Bank Management
5
1.1 The Concept “Bank”
1.1.3 Classification of the Banking
g Business Areas
a) Product Range-Oriented Differentiatio
on (Büschgen/Börner, p.17 f.)
 Traditional product range
 Granting or taking out loans
 Services of money and credit transactio
ons and capital flows
 Other financial services
 Classification by means of on-balance sheet
s
activity
 Product range enlargement




Provision and establishment of bank faccilities
Provision and establishment of deposit accounts
Provision and establishment of paymen
nt and clearing services
Proprietary trade
 Bank activities from the customer‘s persspective
Prof. Dr. Hans-Peter Burghof, University of Hohenheim, Bank Management
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1.1 The Concept “Bank”
1.1.3 Classification of the Banking
g Business Areas
b) Task-Oriented Differentiation (see Hartmann-Wendels et al., p.13 ff.)
Bank
ks do
Commercial Banking
Investment Banking
ki
Financial intermediation
Trading support on financial
• Deposit taking
markets
k t
• Capital
p
transfers to capital
p
acquirer (loans and investments)
Prof. Dr. Hans-Peter Burghof, University of Hohenheim, Bank Management
7
1.1 The Concept “Bank”
1.1.3 Classification of the Banking
g Business Areas
c) Function-Oriented Differentiation
 Banks are service companies, which try
y to achieve the transformation function of
the financial markets through intermedia
ation ii.e.:
ation,
e:




Liability
Diversification
Information production
Special regulation (?)
 Challenge:
g
The inclusion of investment banking req
quires an extensive interpretation of the
transformation functions ((“information in
ntermediation”).
)
Prof. Dr. Hans-Peter Burghof, University of Hohenheim, Bank Management
8
1.2 Basic Structure of the German Banking System
1.2.1 Introduction
 Moderate universal banking system with
h some specialized banks
 Universal bank: Financial intermed
diary, who provides all banking activities
 Three main groups of universal banks: “3-Säulen-Modell”
“
 Private banks ((Private Kreditbanke
en))
 Public banks (öffentlich-rechtliche Kreditinstitute)
K
 Cooperative banks (genossenscha
aftliche Banken)
 Large number of credit institutions (with
h a strong trend to consolidation)
Prof. Dr. Hans-Peter Burghof, University of Hohenheim, Bank Management
9
1.2 Basic Structure of the German Banking System
1.2.1 Introduction
German Ba
anking System
(see Hartmann-W
Wendels et al., p.26 ff.)
Universal Banks
(Kap.1.2.1)
Kreditbanken
Sparkassen/ Genosse
enschaftsGirozentralen
ban
nken
Translations are
nott always
l
helpful
h l f l
below this level.
Special Banks
(Kap. 1.2.2)
• Realkreditinstitute
• Bausparkassen
• Großbanken
• Direktbanken
• Regionalbanken
• Kapitalanlagegesellschaften
• Sonstige Banken
• Wertpapiersammelbanken
W t
i
lb k
• Zweigstellen
ausländischer
Banken (branches
of foreign banks)
• Kreditinstitute mit
Sonderaufgaben
3 Sä l M d ll
3-Säulen-Modell
Prof. Dr. Hans-Peter Burghof, University of Hohenheim, Bank Management
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1.2 Basic Structure of the German Banking System
1.2.2 Universal Banks
a) Kreditbanken

Großbanken

The few largest private banks,
traditionally: Deutsche Bank, Dresdne
er Bank, Commerzbank
actually: Deutsche Bank, Bayrische HypoH
und Vereinsbank, Commerzbank



I t
International
ti
l ambitions
biti
( ft frustrat
(often
f t ted)
d)

“Hausbanken” of the largest German industry groups
Regionalbanken und sonstige Kreditb
banken

Formerly mainly regional banks

Today also banks that do not fit into the
t traditional scheme
Zweigstellen ausländischer Banken (b
branches of foreign banks)

Increasing number of branches of forreign banks in Germany
Prof. Dr. Hans-Peter Burghof, University of Hohenheim, Bank Management
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1.2 Basic Structure of the German Banking System
1.2.2 Universal Banks
b) Sparkassen/Landesbanken

Banks owned by a public entity:

The 434 Sparkassen are owned by a municipality or a district, the 10 Landesbanken
were originally owned by the federate
ed states.

After several crisis and consolidation activities, Landesbanken are often partly
owned by Sparkassen or other Lande
esbanken.

Landesbanken shall serve as central banks for the Sparkassen, but have often
developed rather different ambitions.
ambitions

Public Mandat

P
Promotion
ti off thriftiness
th ifti
and
d wealth
lth acccumulation
l ti

Credit supply for the population of the
e particular region

Support of the medium
medium-sized
sized enterpriises and of the economically weak population
(the latter especially in former times)
Prof. Dr. Hans-Peter Burghof, University of Hohenheim, Bank Management
12
1.2 Basic Structure of the German Banking System
1.2.2 Universal Banks


Anstaltslast and Gewährträgerhaftung
g (up to 2005)
 The public entity is liable to the extent off its property for the Sparkassen
Landesbanken

Intermediary for the Sparkassen and the federated states

House bank of the federated sates
Prof. Dr. Hans-Peter Burghof, University of Hohenheim, Bank Management
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1.2 Basic Structure of the German Banking System
1.2.2 Universal Banks
c) Genossenschaftsbanken

E.g.: Volks- und Raiffeisenbanken, Sp
par- und Darlehenskassen

Most numerous German banking grou
up (~
( 1184)

Originally founded to help poor farmers, craftspeople and small businesses

y the members,, acting
g in the
eir interest
Owned by

After a consolidation process, only tw
wo central banks remain in the group (DZBank and WGZ)


Liable equity consists of

paid-in capital
p
p
of the members

retained earnings

Haftsummenzuschlag (to be brought up by the members in case of bankruptcy only)
Only regional business activities
Prof. Dr. Hans-Peter Burghof, University of Hohenheim, Bank Management
14
1.2 Basic Structure of the German Banking System
1.2.2 Universal Banks
d) 3-Säulen-Modell – Comparison of the Sectors
Private Kreditbanken
explicit
li it
objectives
Genossenschaftliche
Kreditinstitute
Spark
kassensektor
profit
fit maximization
i i ti
public
bli contttract:
t
promotion
ti off the
th
members of the
Genossenschaft:
shareholder or
stakeholder approach
promotion of thriftiness and
wealth acccumulation
provision of banking
services
social obligation of
property
credit supp
ply for the
population of the particular
region
supply of better and more
convenient products
social man
ndat
implicit
objectives
economic p
power
arrea-wide p
provision of banking
g services
and regional competition
profit
Prof. Dr. Hans-Peter Burghof, University of Hohenheim, Bank Management
15
1.2 Basic Structure of the German Banking System
1.2.2 Universal Banks
Private Kreditbanken
derived
principles of
operation
private-sector
autonomy
Spa
parkassensektor
all actiion is tied to law
(Sparkkassen laws)
Genossenschaftliche
Kreditinstitute
self-help
self-responsibility
nal principle
region
self-administration
p
prohibition
of competition in the sector
legal forms
all legal forms of the
private-sector, except
sole
l proprietorship
i t hi
public institutions
Genossenschaft
(Freie
(F
i Sparkassen:
S k
a
BGB association,
founda
ation)
privvate legal form possible (if incorporated)
Prof. Dr. Hans-Peter Burghof, University of Hohenheim, Bank Management
16
1.2 Basic Structure of the German Banking System
1.2.2 Universal Banks
corporate
institutions
Genossenschaftliche
K diti tit t
Kreditinstitute
Private Kreditbanken
Spa
p rkassensektor
depends on legal form,
e g AG:
e.g.
Verwa
altungsrat
(Träge
erversammlung)
Generalversammlung
(members)
Hauptversammlung
(shareholders)
Vorsta
and
Aufsichtsrat
Aufsichtsrat
(Kredittausschuss)
Vorstand
equity
equity
(up to 2005:
Gewäh
hrträgerhaftung
and An
nstaltslast)
+ possibly Haftsumme
3 staged structure with
3-stag
usuallyy mid-sized
instituttes
Formerly 3-staged
3 staged
structure with partially
very small institutes
Vorstand
liability
structure
equity
concerns containing
major banks
Prof. Dr. Hans-Peter Burghof, University of Hohenheim, Bank Management
17
1.2 Basic Structure of the German Banking System
1.2.3 Specialized
p
Banks
 Realkreditinstitute
 Long-term housing credits and state financing
 Former: Privilege to refinance through Pfandbriefe
P
and Kommunalobligationen on the
capital market (similar to covered bondss)
 Deregulation led to very risky new busin
ness models (see HRE scandal)
 Bausparkassen
 Idea of an autarkic community of saverss to finance private housing
 Autarky as basis for interest rate guaran
ntees, but uncertainty about the date of the
granting of the loan
 “Learning contracts”, as debtors prove their
t
ability to save before getting the loan
 Seemingly fragile business concept, bu
ut strong resilience in the crisis
Prof. Dr. Hans-Peter Burghof, University of Hohenheim, Bank Management
18
1.2 Basic Structure of the German Banking System
1.2.3 Specialized
p
Banks
 Direktbanken (direct banks)
 Modern communication technology (tele
ephone, internet) to reduce costs
 Limited business concept, often only prrivate customers
 No special legal provisions
 Kapitalanlagegesellschaften (investmen
nt companies)
 Investment of clients money in Funds
 Investmentgesetz (formerly Gesetz übe
er Kapitalanlagegesellschaften)
 Wertpapiersammelbanken (collective se
ecurity deposit banks)
 …do exactly this for the banking commu
unity
 Kreditinstitute mit Sonderaufgaben
 Furtherance of special
p
g
groups
p or p
purpo
p ses
Prof. Dr. Hans-Peter Burghof, University of Hohenheim, Bank Management
19
1.2 Basic Structure of the German Banking System
1.2.3 Specialized
p
Banks
bank
P tb k
Postbank
alization
specialization specia
with
with
coope
eration
competition
economic
policy
social and
welfare policy
(X)
(X)
(X)
Pfandbriefbanken
X
(X)
(X)
Bausparkassen
X
(X)
(X)
Kapitalanlagegesellschaften
X
X
(X)
Wertpapiersammelbanken
X
Bürgschaftsbanken
X
Prof. Dr. Hans-Peter Burghof, University of Hohenheim, Bank Management
20
1.2 Basic Structure of the German Banking System
1.2.3 Specialized
p
Banks
 Kreditinstitute mit Sonderaufgaben in private legal form
AKA AusfuhrkreditGesellschaft
X
IKB Deutsche Industriebank
DVB (Deutsche VerkehrsVerkehrs
Bank) (owned by the DZ-Bank)
X
X
(see KfW)
X
(see KfW)
( )
(X)
Liquiditätskonsortialbank (von
AKA verwaltet))
system
stabilityy
Privatdiskont AG (in AKA)
Prof. Dr. Hans-Peter Burghof, University of Hohenheim, Bank Management
21
1.2 Basic Structure of the German Banking System
1.2.3 Specialized
p
Banks
 Öffentlich-rechtliche Sonderkreditins
stitute
bank
specialization
with
competition
titi
specialization
with
cooperation
ti
Kreditanstalt für Wiederaufbau
(KfW)
Landwirtschaftliche
Rentenbank
(X)
economic
policy
social and
welfare policy
X
(X)
X
(X)
(Deutsche Ausgleichsbank,
Ausgleichsbank
merged with KfW in 2003)
Deutsche Siedlungs
Siedlungs- und
Landesrentenbank (DSL-Bank),
since 2000 in Postbank-Gruppe
Prof. Dr. Hans-Peter Burghof, University of Hohenheim, Bank Management
22
1.3 Commercial Banking vs. Investment Banking
1.3.1 Introduction
Outline:
Investors
Ba
anks
Borrower
Commercia
al Banking
g
Investment Banking
g
Investors
Depositors
Institutional Investors
Instrument
Credit
Securities
Function
Supervisor
Decision Ma
aker
Analyst
Consultant
Market Risk
Take by ban
nk
Passed to Market
Stability
Change
Prof. Dr. Hans-Peter Burghof, University of Hohenheim, Bank Management
23
1.3 Commercial Banking vs. Investment Banking
1.3.1 Introduction
The Downfall of Investment Banking – th
he Year 2008:
The big investment banks were





Goldman Sachs
Merrill Lynch
Morgan Stanley
Lehman Brothers
Bear Stearns
 gave up its investment bank privileges
 bought by Ba
ank of America
 gave up its investment bank privileges
 went bankru
upt
 bought by JP
PMorgan Chase
Prof. Dr. Hans-Peter Burghof, University of Hohenheim, Bank Management
24
1.3 Commercial Banking vs. Investment Banking
1.3.1 Introduction
Definition of Investment Banking:
 Very diffuse business – large variety of services
 “Investment
Investment Banking is what investment banks do”
do
 “Goldman Sachs’ Investment Banking Division
D
identifies, structures and executes
diverse and innovative public and privatte market transactions for corporations,
financial institutions and governments. Transactions include mergers, acquisitions,
divestitures, the issuance of equity or debt capital, or a combination of these.”
 Definition by
y areas of business?
 (international) issuance of securities
 Special financial services (e. g. structurring and issuance of derivatives, market
making )
making…)
 Trading activity in various markets (e. g.
g fixed income, commodity and proprietary
trading, hedging…)
 Activities
A ti iti in
i capital
it l markets
k t ((e. g. M&A
M&A, corporate
t finance,
fi
IPOs…)
IPO )
Prof. Dr. Hans-Peter Burghof, University of Hohenheim, Bank Management
25
1.3 Commercial Banking vs. Investment Banking
1.3.2 Systematization
y
of Investment Bankin
ng
g
a) Business Activities:
· industrial co
ompanies
· financial serrvice firms
clients · public instituutions
· wealthy individuals
· small custom
mers
· own accoun
nt
· equity
· mezzanine
business areas · debt
· derivatives
· currencies
· commodities
· real estate
· mergers and acquisitions
· corporate finance
· structured finance
instruments · capital markets
· sales and trading
· asset management
· principal investment
Prof. Dr. Hans-Peter Burghof, University of Hohenheim, Bank Management
26
1.3 Commercial Banking vs. Investment Banking
1.3.2 Systematization
y
of Investment Bankin
ng
g
b) Business Areas:
Only activities that are remunerated directly
y by the client. Sometimes use of trojan
horses – small initial activities are performe
ed at a low price (or free) to attract larger
projects later on offsetting the initial costs
 M&A






Mergers and Acquisitions
More activity on acquisitions
Consultancy services for buy- or sell-sid
de
First: identification of potential buyers or
o sellers
Valuation, negotiations, contract-making, structured finance
e takeovers
Conducting or defending against hostile
Prof. Dr. Hans-Peter Burghof, University of Hohenheim, Bank Management
27
1.3 Commercial Banking vs. Investment Banking
1.3.2 Systematization
y
of Investment Bankin
ng
g
 Corporate finance




Sometimes called Financial Advisory
Restructuring of passives
Emission of equity or issuance of bondss or other more complex financing
IPO, recapitalization, restructuring
 Structured
St t d finance
fi
 ABS
 Project
j
financing
g
 Leasing
 Capital markets





Traditional playing field of investment banks
Emission and placement of securities
Consultancy, underwriting, distribution
Equity capital markets
Debt capital markets
Prof. Dr. Hans-Peter Burghof, University of Hohenheim, Bank Management
28
1.3 Commercial Banking vs. Investment Banking
1.3.2 Systematization
y
of Investment Bankin
ng
g
 Asset management




Investment of clients’ funds
Assessment of risk and return
Creating portfolios
Cp. private banking
 Principal
P i i l iinvestment
t
t




Investment in companies to generate profit
Taking
g influence on management
g
Time horizon: some years
Exit via going public
Prof. Dr. Hans-Peter Burghof, University of Hohenheim, Bank Management
29
1.3 Commercial Banking vs. Investment Banking
1.3.2 Systematization
y
of Investment Bankin
ng
g
c) Instruments:
 Equity
 Either stocks or parts of equity
 Advantages: managerial, informational,, control, and financial rights
 Remuneration by dividends, shares of profit,
p
stock price improvement
 Debt




Provision of funds to private or public se
ector
Fixed or floating interest
The higher the risk, the higher the sprea
ad
High importance
 Mezzanine
 Hybrid form of equity and debt
Prof. Dr. Hans-Peter Burghof, University of Hohenheim, Bank Management
30
1.3 Commercial Banking vs. Investment Banking
1.3.2 Systematization
y
of Investment Bankin
ng
g
 Derivatives
 Based on another instrument
 Increases flexibility
 Most popular: options, futures
 Currencies
 Important for cross-border investments – hedging!
 Commodities
 Trade in standardized goods and servicces
 Most important: oil, metals, food, energy
 Real estate




Costlyy individual pricing
g
Important asset class
Trade got easier with REITs
Important sector for investment banks
Prof. Dr. Hans-Peter Burghof, University of Hohenheim, Bank Management
31
1.3 Commercial Banking vs. Investment Banking
1.3.2 Systematization
y
of Investment Bankin
ng
g
d) Clients:
 Industrial companies





Need all services of the investment ban
nk
Financing needs differ
Traditional focus on large multinationalss with complex finance structures
In the last years: trend towards M&A
Especially in Germany: medium-sized companies
c
as potential clients
 Financial service firms
 Providing services with special knowled
dge
 Acting as counterparty, e. g. in swap tra
ansactions
Prof. Dr. Hans-Peter Burghof, University of Hohenheim, Bank Management
32
1.3 Commercial Banking vs. Investment Banking
1.3.2 Systematization
y
of Investment Bankin
ng
g
 Public sector






Important clients
Large capital needs
Rolling of debt
Opens up for structured finance
Margins are low, but volumes are high
Privatization of former state-owned firm
ms
 Institutional investors
 Insurances, mutual funds, etc.
 Wealthy individuals
 HNWI, UHNWI
 Large
g volumes
 Attractive market
Prof. Dr. Hans-Peter Burghof, University of Hohenheim, Bank Management
33
1.3 Commercial Banking vs. Investment Banking
1.3.2 Systematization
y
of Investment Bankin
ng
g
 Small customers
 Sales-intensive
 Can be important for IPOs or even M&A
A
 Market for some types of structured seccurities – e. g. “Zertifikate”
Zertifikate
 Own account
 Proprietary trading
 Spot and futures markets
 Short-term transactions ((≠ p
principal
p inve
estment!))
Prof. Dr. Hans-Peter Burghof, University of Hohenheim, Bank Management
34
Literature
 Liaw, K. Thomas (2006): The Business of Investment Banking, ch. 1 and 2.
 Hockmann, H.-J. and Thießen, (2007) F.:
F Investment Banking, ch. 1.1 and 1.5.
 Achleitner, A.-K. (2002): Handbuch Inve
estment Banking, pp. 3-45.
 Rich, G. and Walter, C. (1993): The Futture of Universal Banking, CATO Journal.
Prof. Dr. Hans-Peter Burghof, University of Hohenheim, Bank Management
35