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


1.1.1 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. 


E-money E money business 

3


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 


(please see also next slide) 

Institutes in terms of 

the “KWG” 

4


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 


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


1.1.3 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 


on (Büschgen/Börner, p.17 f.) 

6



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) 


Bankks 

do 

Investment Banking ki 

Trading support on financial 

markets kt 

7



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”). 

) 


8


System 


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) 


9


System 


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 


(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 

10


System 


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 


industry groups 

11


System 


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) 


municipality or a district, the 10 Landesbanken 

12


System 


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 


the federated states 

13


System 


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 


14


System 


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 


Sectors 

profit 

Genossenschaftliche 

Kreditinstitute 

provision of banking 

services 

15


System 


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) 



Kreditinstitute 

self-help 

self-responsibility 

regionnal 

principle self-administration 

p prohibition of competition in the sector 

Genossenschaft 

privvate 

legal form possible (if incorporated) 

16


System 


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 



KKreditinstitute diti tit t 

equity 

17


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 


18


System 


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 


19


System 


PPostbank tb k 

bank 

Pfandbriefbanken 

Bausparkassen 

Kapitalanlagegesellschaften 

Wertpapiersammelbanken 

Bürgschaftsbanken 

specialization 

with 

competition 

(X) 


X 

X 

X 

speciaalization 

with 

coopeeration 

X 

X 

economic 

policy 

(X) 

(X) 

(X) 

X 

social and 

welfare policy 

(X) 

(X) 

(X) 

(X) 

20


System 


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) ) 


X 

X 

X 

(see KfW) 

X 

(see KfW) 

system 

stability 

21


System 


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 



with 

competition titi 


with 

cooperation ti 

economic 

policy 

social and 

welfare policy 

X (X) 

(X) X (X) 

22

1.3 Commercial Banking vs. Investment Banking 


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 


Stability 

Institutional Investors 

Securities 

Change 

23



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 


24



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 ) 


25


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 


· equity 

· mezzanine 

business areas · debt 

· derivatives 

· currencies 

· commodities 

· real estate 

26




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 


27




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 


28




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 


29




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 


30




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 


– hedging! 

31




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 


32




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 


33




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!) 


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. 


of Investment Banking, ch. 1 and 2. 

35

Bank Management

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