Summary of the December Monthly Report

German enterprises' profitability and financing in 2014

In 2014, non-financial corporations markedly increased their profitability in a predominantly smooth macroeconomic environment, with export markets and the domestic economy both stimulating demand. Following a slump in 2013, pre-tax returns on sales returned to their level of the period from 2010 to 2012 (4¼%).

The higher profits were attributable, for one thing, to the fact that enterprises considerably increased the quantity of goods sold and services rendered. For another, the cost of materials fell, in particular due to a drop in crude oil prices in the second half of 2014. However, as in the previous years, personnel expenses increased perceptibly in the light of growing payrolls and higher compensation. Moreover, additional costs emerged as a result of higher write-downs.

For the most part, there were no unusual movements in asset and liability positions on non-financial corporations' balance sheets, which are prepared in accordance with German commercial accounting principles. The long-term trend towards strengthening the equity base persisted; in 2014 it was not only small and medium-sized enterprises - as had mainly been the case in previous years - but also large enterprises which contributed to this trend. By contrast, the balance sheets of listed enterprises, which are prepared according to international accounting standards, showed substantial shifts between equity and debt. The difference is essentially that, to determine pension provision values in the context of consolidated financial statements, market rates as of specific cut-off dates are used for discounting expected payment obligations, whereas under German commercial law a seven-year average rate is applied. The interest-related increase in pension provisions was a crucial reason why the equity ratio of listed enterprises declined considerably in 2014 and fluctuated significantly in 2015.

The expansion strategy of firms in the reporting period was particularly reflected in the extensive increase in participating interests, following a lull in 2013. Firms also expanded their own production capacities. In this context, employment growth once again appeared to play a greater role than the increase in fixed assets. Entrepreneurial activities in 2014 were largely financed using internal funds; the strong expansion in the cash flow was the main source of this funding. Borrowed funds were used extensively for large-scale investment in fixed assets and purchases of participating interests - as in the manufacture of transport equipment.

Deposit protection in Germany

The Deposit Guarantee Act (Einlagensicherungsgesetz) entered into force on 3 July 2015, transposing into German law the harmonised requirements of the amended European Deposit Guarantee Directive. The new Deposit Guarantee Act replaces the Deposit Guarantee and Investor Compensation Act (Einlagensicherungs- und Anlegerentschädigungsgesetz), which entered into force in 1998 and at the time implemented both the EU Deposit Guarantee Directive and the EU Investor Compensation Scheme Directive.

The report begins by summarising the current legal situation and then goes on to explain the new harmonised provisions and how they will be implemented in Germany. The statutory depositor compensation scheme set up in 1998 for private and public sector banks will remain in place, while important changes to the institutional protection schemes of the German banking industry will take place. Overall, the protection level for depositors will improve further.

On this basis, the German deposit protection system will remain anchored at the national level. The report will conclude by presenting and assessing the current plans for a common European deposit insurance scheme (EDIS). A key precondition for a common deposit protection scheme is banks de-risking. In addition to the supervisory rules that have already been adopted, abolishing the preferential supervisory treatment of sovereign exposures could also make a significant contribution in this regard, as it would help make the economic situation of banks less dependent on the situation of their respective home country. Otherwise, were the home country to default, there would be a danger of the direct economic fallout being communitised under an EDIS via the direct effects on national banks. Ultimately, there would be a danger that, indirectly via this contagion channel, the deposit protection scheme would be left to foot the bill for the sovereign debt of other countries. Another key point is insolvency law. Rules governing corporate or personal insolvency have direct consequences for the risk situation of banks and the burden that creditors must bear in the event of insolvency. If a common European deposit protection scheme is set up without the requisite preconditions being in place, this means that the consequences of insolvency regimes that favour the national private sector over creditor banks could, for example, be communitised. Until these steps have been taken, a common European deposit protection scheme must be rejected.