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”
11.1.1 1 1 Legal Definition
1.1.2. German Banking Act (KWG)
1.1.3. Classification of the Banking g Busineess
Areas
1.2 Basic Structure of the German Banking
1.2.1 Introduction
1.2.2 Universal Banks
11.2.3 2 3 Specialized Banks
1.3 Commercial vs. Investment Banking
11.3.1 3 1 Introduction
1.3.2 Systematization of Investment Banking
Prof. Dr. Hans-Peter Burghof, University of Hohenheim, Bank Management
System
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. CCustody
business
2. Transactions in covered bonds
(since July 2005)
3. Credit business
( (cash h lloan und d acceptance credit) di )
7. GGuarantee
business
8. GGiro
business
4. Bill-broking 9. Isssuance
of securities
5. Financial commission business 10.
Prof. Dr. Hans-Peter Burghof, University of Hohenheim, Bank Management
E-money E money business
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 (p
Credit Institutions (Banks)
Financial Service Institutions
Financial Companies
Banking supervision as protector of dep positors with a focus on risk
Adjusting the listing of financial compannies
as required
Prof. Dr. Hans-Peter Burghof, University of Hohenheim, Bank Management
(please see also next slide)
Institutes in terms of
the “KWG”
4

1.1 The Concept “Bank”
1.1.2 German Banking g Act ( (KWG) )
Institutions, which are covered by KWGG
(besides credit institutions):
Investment Banks, operate in the followwing
fields:
1. Investment intermediation
2. Acquisition advisory
33. Portfolio management & maintenance
4. Third-party proprietary trade
Financial companies, operate in the following
fields:
1. Private & public equity
2. Acquisition of outstanding debt
3. Leasing business
4. Proprietary trading
Prof. Dr. Hans-Peter Burghof, University of Hohenheim, Bank Management
5. Third country deposits
6. Financial transfer business
77. Business in foreign currency cash
8. Credit card business
5. Investment advisory
6. Corporate finance advisory
7. Financial brokerage
5

1.1 The Concept “Bank”
1.1.3 Classification of the Banking g Business
Areas
a) Product Range-Oriented Differentiatio
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 ssheet
activity
Product range enlargement
Provision and establishment of bank faccilities
Provision and establishment of deposit accounts
Provision and establishment of paymennt
and clearing services
Proprietary trade
Bank activities from the customer‘s persspective
Prof. Dr. Hans-Peter Burghof, University of Hohenheim, Bank Management
on (Büschgen/Börner, p.17 f.)
6

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.)
Commercial Banking
Financial intermediation
• Deposit taking
•Capital p transfers to capital p
acquirer (loans and investments)
Prof. Dr. Hans-Peter Burghof, University of Hohenheim, Bank Management
Bankks
do
Investment Banking ki
Trading support on financial
markets kt
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 tryy
to achieve the transformation function of
the financial markets through intermedia intermediaation
ation, ii.e.: e :
Liability
Diversification
Information production
Special regulation (?)
Challenge: g
The inclusion of investment banking reqquires
an extensive interpretation of the
transformation functions (“information (
inntermediation”).
)
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 withh
some specialized banks
Universal bank: Financial intermeddiary,
who provides all banking activities
Three main groups of universal banks: “ “3-Säulen-Modell”
Private banks (Private ( Kreditbankeen)
Public banks (öffentlich-rechtliche KKreditinstitute)
Cooperative banks (genossenschaaftliche
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 Baanking
System
Universal Banks
(Kap.1.2.1)
Kreditbanken Sparkassen/
Girozentralen
• Großbanken
• Regionalbanken
• Sonstige Banken
• Zweigstellen
ausländischer
Banken (branches
of foreign banks)
33-Säulen-Modell Sä l M d ll
Prof. Dr. Hans-Peter Burghof, University of Hohenheim, Bank Management
(see Hartmann-WWendels
et al., p.26 ff.)
Genosseenschafts
bannken
Special Banks
(Kap. 1.2.2)
• Realkreditinstitute
• Bausparkassen
• Direktbanken
Translations are
not t always l helpful h l f l
below this level.
• Kapitalanlagegesellschaften
• WWertpapiersammelbanken t i lb k
• Kreditinstitute mit
Sonderaufgaben
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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, Dresdneer
Bank, Commerzbank
actually: Deutsche Bank, Bayrische HHypo-
und Vereinsbank, Commerzbank
IInternational t ti l ambitions biti ( (often ft ffrustrat t ted)
d)
“Hausbanken” of the largest German
Regionalbanken und sonstige Kreditbbanken
Formerly mainly regional banks
Today also banks that do not fit into tthe
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
industry groups
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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
were originally owned by the federateed
states.
After several crisis and consolidation activities, Landesbanken are often partly
owned by Sparkassen or other Landeesbanken.
Landesbanken shall serve as central banks for the Sparkassen, but have often
developed rather different ambitions. ambitions
Public Mandat
PPromotion ti of f thriftiness th ifti and d wealth lth acccumulation
l ti
Credit supply for the population of thee
particular region
Support of the medium-sized medium sized enterpri ises and of the economically weak population
(the latter especially in former times)
Prof. Dr. Hans-Peter Burghof, University of Hohenheim, Bank Management
municipality or a district, the 10 Landesbanken
12

1.2 Basic Structure of the German Banking
System
1.2.2 Universal Banks
Anstaltslast and Gewährträgerhaftungg
(up to 2005)
The public entity is liable to the extent off
its property for the Sparkassen
Landesbanken
Intermediary for the Sparkassen and
House bank of the federated sates
Prof. Dr. Hans-Peter Burghof, University of Hohenheim, Bank Management
the federated states
13

1.2 Basic Structure of the German Banking
System
1.2.2 Universal Banks
c) Genossenschaftsbanken
E.g.: Volks- und Raiffeisenbanken, Sppar-
und Darlehenskassen
Most numerous German banking grou up (~ ( 1184)
Originally founded to help poor farmers,
craftspeople and small businesses
Owned by y the members, , acting g in theeir
interest
After a consolidation process, only twwo
central banks remain in the group (DZ-
Bank and WGZ)
Liable equity consists of
paid-in p capital 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
Private Kreditbanken Sparkkassensektor
explicit li it profit fit maximization i i ti public bli cont t ttract: t promotion ti of f the th
objectives
members of the
Genossenschaft:
shareholder or
stakeholder approach
promotion of thriftiness and
wealth acccumulation
social obligation of credit supp ply for the
supply of better and more
property
population of the particular
region
convenient products
social manndat
implicit economic power p
arrea-wide
provision p of banking g services
objectives
and regional competition
Prof. Dr. Hans-Peter Burghof, University of Hohenheim, Bank Management
Sectors
profit
Genossenschaftliche
Kreditinstitute
provision of banking
services
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1.2 Basic Structure of the German Banking
System
1.2.2 Universal Banks
derived
principles of
operation
Private Kreditbanken Spa parkassensektor
private-sector
autonomy
all actiion
is tied to law
(Sparkkassen
laws)
legal forms all legal forms of the
private-sector, except
public institutions
sole l proprietorship i t hi (F (Freie i SSparkassen: k
BGB aassociation,
foundaation)
Prof. Dr. Hans-Peter Burghof, University of Hohenheim, Bank Management
Genossenschaftliche
Kreditinstitute
self-help
self-responsibility
regionnal
principle self-administration
p prohibition of competition in the sector
Genossenschaft
privvate
legal form possible (if incorporated)
16

1.2 Basic Structure of the German Banking
System
1.2.2 Universal Banks
Private Kreditbanken Spa p rkassensektor
corporate depends on legal form, Verwaaltungsrat
Generalversammlung
institutions eg e.g. AG: (Träge erversammlung) (members)
Hauptversammlung
(shareholders)
Vorstaand
Aufsichtsrat
Aufsichtsrat (Kredittausschuss)
Vorstand
Vorstand
liability equity equity
(up to 2005: + possibly Haftsumme
Gewähhrträgerhaftung
and Annstaltslast)
structure concerns containing 3-stag 3 stag ed structure with Formerly 3-staged 3 staged
major banks
usuallyy
mid-sized structure with partially
instituttes
very small institutes
Prof. Dr. Hans-Peter Burghof, University of Hohenheim, Bank Management
Genossenschaftliche
KKreditinstitute diti tit t
equity
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 PPfandbriefe
and Kommunalobligationen on the
capital market (similar to covered bondss)
Deregulation led to very risky new businness
models (see HRE scandal)
Bausparkassen
Idea of an autarkic community of savers s to finance private housing
Autarky as basis for interest rate guaranntees,
but uncertainty about the date of the
granting of the loan
“Learning contracts”, as debtors prove ttheir
ability to save before getting the loan
Seemingly fragile business concept, buut
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 (teleephone,
internet) to reduce costs
Limited business concept, often only prrivate
customers
No special legal provisions
Kapitalanlagegesellschaften (investmennt
companies)
Investment of clients money in Funds
Investmentgesetz (formerly Gesetz übeer
Kapitalanlagegesellschaften)
Wertpapiersammelbanken (collective seecurity
deposit banks)
…do exactly this for the banking commuunity
Kreditinstitute mit Sonderaufgaben
Furtherance of special p ggroups p or ppurpo 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
PPostbank tb k
bank
Pfandbriefbanken
Bausparkassen
Kapitalanlagegesellschaften
Wertpapiersammelbanken
Bürgschaftsbanken
specialization
with
competition
(X)
Prof. Dr. Hans-Peter Burghof, University of Hohenheim, Bank Management
X
X
X
speciaalization
with
coopeeration
X
X
economic
policy
(X)
(X)
(X)
X
social and
welfare policy
(X)
(X)
(X)
(X)
20

1.2 Basic Structure of the German Banking
System
1.2.3 Specialized p Banks
Kreditinstitute mit Sonderaufgaben in
private legal form
AKA Ausfuhrkredit-
Gesellschaft
IKB Deutsche Industriebank
DVB (Deutsche Verkehrs- Verkehrs
Bank) (owned by the DZ-Bank)
Liquiditätskonsortialbank (von
AKA verwaltet) )
Privatdiskont AG (in AKA)
( (X) )
Prof. Dr. Hans-Peter Burghof, University of Hohenheim, Bank Management
X
X
X
(see KfW)
X
(see KfW)
system
stability
21

1.2 Basic Structure of the German Banking
System
1.2.3 Specialized p Banks
Öffentlich-rechtliche Sonderkreditinsstitute
bank
Kreditanstalt für Wiederaufbau
(KfW)
Landwirtschaftliche
Rentenbank
(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
specialization
with
competition titi
specialization
with
cooperation ti
economic
policy
social and
welfare policy
X (X)
(X) X (X)
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1.3 Commercial Banking vs. Investment Banking
1.3.1 Introduction
Outline:
Investors Baanks
Borrower
Investors Depositors
Instrument Credit
Commerciaal
Bankingg Investment Bankingg
Function Supervisor
Analyst
Decision Ma aker Consultant
Market Risk Take by bannk
Passed to Market
Prof. Dr. Hans-Peter Burghof, University of Hohenheim, Bank Management
Stability
Institutional Investors
Securities
Change
23

1.3 Commercial Banking vs. Investment Banking
1.3.1 Introduction
The Downfall of Investment Banking – thhe
Year 2008:
The big investment banks were
Goldman Sachs gave up its investment
bank privileges
Merrill Lynch bought by Ba ank of America
Morgan Stanley gave up its investment
bank privileges
Lehman Brothers went bankruupt
Bear Stearns bought by JPPMorgan
Chase
Prof. Dr. Hans-Peter Burghof, University of Hohenheim, Bank Management
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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 investmen t banks do” do
“Goldman Sachs’ Investment Banking DDivision
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. gg.
fixed income, commodity and proprietary
trading, hedging…)
AActivities 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 Bankinng
a) Business Activities:
clients
· industrial coompanies
· financial serrvice
firms
· public instituutions
· wealthy indi
viduals
· small custommers
· own accounnt
· 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
· equity
· mezzanine
business areas · debt
· derivatives
· currencies
· commodities
· real estate
26

1.3 Commercial Banking vs. Investment Banking
1.3.2 Systematization y
of Investment Bankinng
b) Business Areas:
Only activities that are remunerated directlyy
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-sidde
First: identification of potential buyers oor
sellers
Valuation, negotiations, contract-making,
structured finance
Conducting or defending against hostilee
takeovers
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 Bankinng
Corporate finance
Sometimes called Financial Advisory
Restructuring of passives
Emission of equity or issuance of bonds s or other more complex financing
IPO, recapitalization, restructuring
St Structured 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 Bankinng
Asset management
Investment of clients’ funds
Assessment of risk and return
Creating portfolios
Cp. private banking
Pi Principal i liinvestment 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 Bankinng
c) Instruments:
Equity
Debt
Either stocks or parts of equity
Advantages: managerial, informational, , control, and financial rights
Remuneration by dividends, shares of pprofit,
stock price improvement
Provision of funds to private or public se ector
Fixed or floating interest
The higher the risk, the higher the spreaad
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 Bankinng
g
Derivatives
Based on another instrument
Increases flexibility
Most popular: options, futures
Currencies
Important for cross-border investments
Commodities
Trade in standardized goods and servicces
Most important: oil, metals, food, energy
Real estate
Costly y individual pricingg
Important asset class
Trade got easier with REITs
Important sector for investment banks
Prof. Dr. Hans-Peter Burghof, University of Hohenheim, Bank Management
– hedging!
31

1.3 Commercial Banking vs. Investment Banking
1.3.2 Systematization y
of Investment Bankinng
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 ccompanies
as potential clients
Financial service firms
Providing services with special knowleddge
Acting as counterparty, e. g. in swap traansactions
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 Bankinng
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 firmms
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 Bankinng
Small customers
Sales-intensive
Can be important for IPOs or even M&AA
Market for some types of structured sec
curities – e. g. “Zertifikate” Zertifikate
Own account
Proprietary trading
Spot and futures markets
Short-term transactions (≠ ( principal p p inveestment!)
Prof. Dr. Hans-Peter Burghof, University of Hohenheim, Bank Management
34

Literature
Liaw, K. Thomas (2006): The Business
Hockmann, H.-J. and Thießen, (2007) FF.:
Investment Banking, ch. 1.1 and 1.5.
Achleitner, A.-K. (2002): Handbuch Inveestment
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
of Investment Banking, ch. 1 and 2.
35