Summary of the September Monthly Report
Ownership structure in the German equity market: general trends and changes in the financial crisis
The bulk of German equities are held by non-residents. The share of domestic stocks in foreign ownership declined during the financial crisis, heightened uncertainty and substantial liquidity needs prompting many investors worldwide to repatriate their assets, before going back up again in recent years; at last count, it stood at nearly 60%. A likely key explanation for the high share of foreign ownership is the cross-border activity of investors, predominantly in the institutional segment, and the significant investment flows they can generate. The percentage of foreign ownership in the flagship index DAX is higher still. This is probably due to the high profile of its constituent enterprises, not to mention the comprehensive analyst and media coverage it receives, which ensures that information on the DAX is just as readily available for investors outside Germany. DAX paper is, moreover, highly liquid.
In the domestic segment, institutional investors are by far the largest group of investors, and their share has remained largely static over time, although a shift has taken place within this sector. By and large, banks and financial investors have tapered their exposures to German equities over the course of the crisis, probably primarily in response to tighter regulatory requirements. They have been replaced by non-financial institutional investors such as holding companies, which have enlarged their stakes in resident listed enterprises. There exists a preference for larger German enterprises, especially among domestic financial investors. Private investors appear to prefer investments in smaller public limited enterprises.
Reform of federal financial relationships
German fiscal policymakers are facing the task of deciding on a reform of the complex distribution of finances among the federal states by 2020. The existing state government revenue-sharing scheme, including the special transfers for the states in eastern Germany, runs until 2019. The reform is concerned, on the one hand, with giving due consideration to the individual responsibility of the federal states consistent with their budgetary autonomy. On the other hand, Germany's Basic Law provides for a reasonable equalisation of the financial capacities of the federal states. The federal states are also to implement the debt brake by 2020; this is designed to stop or prevent excessive borrowing by individual federal states. The existing regulations, which involve soft debt limits and de facto implicit debt guarantees between central and state governments, have not proven effective. Some federal states are, however, facing considerable challenges in achieving a (structurally) close-to-balance budget by 2020 and thereafter.
Given the strict rules on borrowing and individual fiscal responsibility, the obvious thing to do – in addition to the federal governments’ already increased discretionary scope on the expenditure side – would seem to be to give them greater tax autonomy, say, by means of limited surcharges and deductions for specific types of taxes. In this way, greater consideration can also be given to varying preferences, and the perception of a link between taxes and spending can be strengthened.
This could result in government activity becoming more economic and targeted. Various forms of federal government aid are under discussion at present to make the transition easier for federal states with a very difficult budgetary situation. If such assistance were to be introduced, granting it should be linked to strict implementation of the debt brake. The desired level of equalisation in revenue-sharing is ultimately a political decision; in view of the cost differences and the federal states’ own incentives to strengthen their financial capacities, it would seem worthwhile to consider a reduction. If the level of equalisation is largely maintained, a federal tax administration might help to limit negative incentives in the collection of taxes. In any event, it would appear desirable to put the revenue-sharing scheme on a more transparent and easily understandable basis.
The performance of German credit institutions in 2013
The 2013 reporting year saw the German banking industry achieve operating income which, against the backdrop of a declining volume in balance sheet business, was well below the previous year's level; indeed, at €120 billion, it was the lowest level since the crisis year of 2008. This decline has to be seen in the context of what continued to be a challenging environment characterised by interest rates at an all-time low, subdued overall demand for bank-specific products and an ongoing need for regulatory adjustments. This contrasted, however, with an improvement in capital-related resilience and progress in the restructuring of core business areas.
With the exception of net commissions received, there were losses in all the components of operational business. Net interest received, by far banks' most important source of income, contracted by almost €6 billion, or 6.4%. Net income from the traditional deposit and lending business, on the other hand, was comparatively stable with largely unchanged margins. Owing to the sharply reduced balance sheet total resulting from a further reduction in holdings of trading derivatives, the (unadjusted) interest rate spread was somewhat higher than its very low figure in the previous year. Net trading income, which is typically very volatile, showed a considerable decline of €1.3 billion (18%) in the reporting year, with special factors and valuation effects having an impact. Other operating income amounted to -€0.9 billion, dropping to its lowest level since 1993 in fact.
Owing to a deterioration in the cost/income ratio along with virtually unchanged operating costs, there was a significant fall in the operating result before the valuation of assets of €9.1 billion to €37.1 billion. Thanks to the fact that the valuation result was still very moderate (-€6.5 billion), the operating result after valuation (operating result) was, at €30.6 billion, nevertheless still clearly above the long-term average of €22.8 billion.
Of banks’ profit for the year after taxes, €7.9 billion at the aggregate level is earmarked for the further strengthening of banks’ balance sheet capital as part of the appropriation of profit. Taking into account the further increase, to €8.1 billion, in net losses brought forward, banks posted a balance sheet loss for the 2013 financial year, as in the previous five years; at €1.7 billion, the loss in 2013 was higher than in the previous year.