Germany s three-pillar banking system from a corporate governance perspective Money, Macro and Finance Research conference

Transcription

1 Germany s three-pillar banking system from a corporate governance perspective Money, Macro and Finance Research conference Birmingham, 14 th September 2007 Horst Gischer Peter Reichling Mike Stiele 1

2 Agenda 1 Corporate governance systems Corporate governance structure in the German banking system Structure of the German banking system Criteria of performance and competition Summary 2

3 1 Corporate governance systems Anglo-Saxon literature on corporate governance mostly deals with relationship between top management and shareholders of a company Task of management Increase equity s (market) value (shareholder value) One-tier board consisting of internal executives and non-executive outside directors Separation of management and supervisory boards is not necessary in the Anglo-Saxon corporate governance system since it is shareholder- and capital market-oriented 3

4 1 Corporate governance systems Continental European corporate governance system: Balance different interests Separation of management and supervisory boards Supervisory board comprises of major shareholders, employee representatives, representatives of loan granting banks, etc. Main task of management board Act on behalf of the company 4

5 1 Corporategovernancesystems Hirschmann (1970): A stakeholder of a company can react on misguided developments with objection or migration A stakeholder with short-term migration opportunities by means of, e.g., the labor or capital market is less dependent on objection opportunities than a stakeholder who faces less flexible markets. Therefore the latter insists on having a voice in the company. Hence this stakeholder embarks on a longterm strategy Design of corporate governance system depends on time horizon and opportunities to reduce risk in case of misguided developments via markets 5

6 1 Corporate governance systems 1.1 Shareholders Shareholders as a whole or major shareholders can not sell their shares via the stock exchange at a price equal to the market value. Without the opportunity of a buy-out, liquidation would be the only exit strategy, with the result that specific investments are only saleable if a sizeable discount is accepted (sunk costs) As long as there is no market for buy-outs, control and codetermination rights are needed by shareholders since they have financed specific investments 6

7 1 Corporate governance systems 1.2 Loan granting banks Lenders, whose loans are short-term or fully collateralised, are hardly threatened in case of misguided developments If granted loans are long-term and not provided with full collateral (e.g. if the market for equity is not able to provide the capital needed to the full extent), lenders bear a part of the business risk in terms of default risk because their capital in turn is bounded in specific investments. Thus codetermination and monitoring rights are required Financing structure of a company and corporate governance system are interrelated 7

8 1 Corporate governance systems 1.3 Employees Employees, whose knowledge can easily be used in other companies, can quickly find a new employer in a flexible labour market and a company can immediately deploy these employees. No special protection is required for such employees Employees, whose human capital is characterised by specific know-how, are not easily transferable to other companies and from the company s perspective these employees are hardly replaceable. Sunk costs may arise for companies and employees Investments in specific human capital are only taken if they are protected by codetermination and control rights. Otherwise employees would rather acquire general and marketable know-how 8

9 1 Corporate governance systems Corporate governance system Business objective Investment projects Anglo-Saxon system Shareholder value maximization Marketable Continental European system Corporate interests (stakeholder value approach) Company specific Time horizon Short-term Long-term Protection mechanism Flexible capital and labour markets Codetermination and control rights 9

10 Agenda 1 Corporate governance systems Corporate governance structure in the German banking system Structure of the German banking system Criteria of performance and competition Summary 10

11 2 Corporate governance structure in Germany Private commercial banks Mutual cooperative banks Savings banks Savings banks ( Sparkassen ) are subject to public law. Their primary goals are to supply the population with safe investment opportunities and to meet regional demands for loans. All three pillars of the German banking system represent full service banks. Bearer of the economic risk Shareholder Member Responsible body (municipality) Shareholders meeting (and employees) elects Representatives meeting elects delegates Supervisory body Board of directors Board of directors Board of administration Appoints and monitors Appoints and monitors Appoints, advises and monitors Management Executive board Executive board Executive board 11

12 Agenda 1 Corporate governance systems Corporate governance structure in the German banking system Structure of the German banking system Criteria of performance and competition Summary 12

13 3 Structure of the German banking system 3.1 Consolidation in the German banking business Financial institutes in Germany Commercial banks Savings banks Cooperative banks Number of cooperative banks and savings banks has decreased by 60 % and 35 %, respectively since

14 3 Structure of the German banking system 3.1 Consolidation in the German banking business Local branches Statistical record of Postbank 20,000 15,000 10,000 5, Commercial banks Savings banks Cooperative banks 14

15 3 Structure of the German banking system 3.1 Consolidation in the German banking business 300,000 Employees 250, , , ,000 50, Commercial banks Savings banks Cooperative banks 18 % reduction of the workforce of commercial banks since 2001 (savings banks 9 %, cooperative banks 7 %) 15

16 3 Structure of the German banking system 3.2 Loans to non-banks 50 Share of cumulated loans to non-banks in % Commercial banks Savings banks Cooperative banks Market shares of savings and cooperative banks in the past years at least stabilised 16

17 3 Structure of the German banking system 3.2 Loans to non-banks Ratio of short-term loans to all loans to non-banks in % Commercial banks Savings banks Cooperative banks The allocation of credits by commercial banks is increasingly short-term oriented 17

18 Agenda 1 Corporate governance systems Corporate governance structure in the German banking system Structure of the German banking system Criteria of performance and competition Summary 18

19 4 Criteria of performance and competition 4.1 Workforce-oriented ratios Net return per employee in Commercial banks Savings banks Cooperative banks Employees of commercial banks generate more than twice as much profit than their counterparts in other bank sectors Different technologies and/or market segments 19

20 4 Criteria of performance and competition 4.1 Workforce-oriented ratios Personnel expenses per employee in Commercial banks Savings banks Cooperative banks In the course of intensified activities of commercial banks in the field of investment banking, personnel expenses per employee have risen significantly 20

21 4 Criteria of performance and competition 4.2 Cost of capital Return on equity after tax in % Commercial banks Savings banks Cooperative banks Average return on equity: Commercial banks 4,8 % Cooperative banks 5,7 % Savings banks 6,1 % 21

22 4 Criteria of performance and competition 4.2 Cost of capital Interest rate on deposits and borrowed funds in % Commercial banks Savings banks Cooperative banks Maintaining a widespread network of local branches is considerably more cost-effective than refinancing at the interbank market 22

23 4 Criteria of performance and competition 4.3 Competition-oriented ratios 0,6 Lerner coefficient 0,5 0,4 0,3 0,2 0,1 0, Commercial banks Savings banks Cooperative banks Lerner coefficient = (Market price Marginal cost of production) / Market price (Price cost spread) = (Interest income/total assets Interest cost/total assets)/ Interest income/total assets 23

24 4 Criteria of performance and competition 4.3 Competition-oriented ratios 100 Cost income ratio 90 in % Target benchmark Commercial banks Savings banks Cooperative banks 24

25 Agenda 1 Corporate governance systems Corporate governance structure in the German banking system Structure of the German banking system Criteria of performance and competition Summary 25

26 5 Summary A recommendation for a shift to the Anglo-Saxon system not only requires that all elements of this system have to be adjusted to again achieve a coherent system of corporate governance and labour and capital markets. Additionally a system transfer requires the proof that the desired corporate governance system is overall economically beneficial The dimension of market access has to be emphasized in our initially formulated list of distinguishing features for types of corporate governance systems. Here we do not focus on the access to publicly traded capital but instead on the access to regional, private and cost-effective capital 26