1. 1 International Seminar Guarantee systems in European Union countries – searching for the best model The German Guarantee Banks Warsaw, 9th February 2011 Dr. Olaf Achtelik, Division Manager Legal & Regulatory Affairs Association of German Guarantee Banks (VDB)

2. 2 Agenda The Association of German Guarantee Banks The German Guarantee System The German Guarantee Banks Guarantees granted by Guarantee Banks State/ souvereign Counter Guarantees put to Guarantee Banks Statistics 2

3. The Association of German Guarantee Banks The Association of German Guarantee Banks is the voluntary union (lobby) of the legally and economically independent German Guarantee Banks and is based in Berlin; represents the joint business and general interests of its members in all matters relating to banking policy and banking law, promotes cooperation between member banks and supports them in the fulfillment of their missions; represents and promotes the interests of its members through communication with lawmakers on the national and state level, national and international regulatory authorities, the media and the public; briefs political decision maker and the public amongst other of the macroeconomic benefits of Guarantee Banks; is member of the European Association of Mutual Guarantee Banks (AECM); itself carries out no active guarantee business. 3

4. Agenda 4 The Association of German Guarantee Banks The German Guarantee System The German Guarantee Banks Guarantees granted by Guarantee Banks State/ souvereign Counter Guarantees put to Guarantee Banks Statistics

5. The public guarantee system in Germany (I) The public guarantee system in Germany can be sub-divided into three resp. four segments: Guarantees granted by Guarantee Banks Compentence: Guarantee Banks in each German Federal State (Bundesland). Amount of Guarantee: 1 Mio. Euro at most (until end of 2010 2 Mio. Euro at most due to the financial and economic crisis). Due to market failure of the remaining banking sector, Guarantee Banks are nearly in a position of a unique selling point in this segment. KfW, as the leading and nationwide acting German public development bank, offers indemnity products for house banks in this segment. Guarantees granted by Federal States Competence: German Federal State (acting by Ministry of Finance or Economics or public development banks in each Federal State). Amount of Guarantee: 10 Mio. Euro at most (new resp. eastern German Federal States) and 50 Mio. Euro at most (old resp. western German Federal States). 5

6. The public guarantee system in Germany (II) Guarantees granted by the Federal Republic of Germany Competence: Common Guarantee Committee of the German Federal Government and the German Federal States. Amount of Guarantee: More than 10 Mio. Euro (new German Federal States). Amount of Guarantee: More than 50 Mio. Euro (old German Federal States). Amount of Guarantee more than 300 Mio. Euro => special steering committe on German Federal Government level. 6

7. Agenda 7 The Association of German Guarantee Banks The German Guarantee System The German Guarantee Banks Guarantees granted by Guarantee Banks State/ souvereign Counter Guarantees put to Guarantee Banks Statistics

8. The German Guarantee Banks (I) Private self-help institutions The German Guarantee Banks are private self-help institutions (private limited companies) in form of credit institutions according to the German Banking Act. They are founded in the western part of Germany in the beginning of the 1950s and in the Eastern part – after the falling of the wall between Western and Eastern Europe – in the 1990s. In principle there is one Guarantee Bank in each of the sixteen German Federal States promoting small and medium-szied enterprises (SMEs) and free professionals in their Federal States or SMEs least investing in the Federal State they are based. Founders resp. shareholders of the Guarantee Banks Chambers of Crafts, of Industry, of Commerce, of free professions. Trade associations Credit institutions (principal resp. house banks), Insurance companies 8

9. The German Guarantee Banks (II) Generel object Assuming default / deficiency guarantees to SMEs to shore up the disadvantage SMEs face on the capital market. The guarantees make available credits to healthy companies and freelance professionals which do not have sufficient – if any – collateral for borrowing. In addition to granting guarantees to SMEs Guarantee Banks make possible equity financing by taking on the main part of default risk of participations by private equity investment companies in SMEs by providing guarantees. State / Souvereign Counter Guarantees Collateralisation of Guarantee Banks is based mainly on counter guarantees from the German Federal Government and the German Federal States. Defaults in the context of granting guarantees most only be borne partly by the Guarantee Banks themselves. 9

10. Diversification of risks Western Federal States (In brackets – where differing – Eastern Federal States) 10

11. The German Guarantee Banks (III) Guarantee Banks and State Aid Law According to the Law of the European Union, state aid to companies given by a member state are generally forbidden. Reason: State aid could result in undesired distortions of competition in favour of/at the expense of single companies. The European Commission can allow exceptions from the general ban of state aid (e.g. in single cases, in general circumstances, up to certain amounts). Guarantee Banks obtain quotal state / soevereign counter guarantees by the German Federal Government and the German Federal States. State counter guarantees imply a state aid element in relation to the final beneficiary of the guarantee (there is e.g. no fee to be paid for the counter gurarantee – neither by the Guarantee Bank nor by the final beneficiary). Guarantee Banks therefore can carry on their business just in the legal framework of the European State Aid Law (leading to caps of guarantee quota, exclusion of certain commercial sectors, report obligations to the European Commission etc.). A methode to calculate the state aid amount of guarantees granted by Guarantee Banks had been approved by the European Commission in September 2009. 11

12. The German Guarantee Banks (IV) Approval of a method to calculate the aid element of state counter guarantees to guarantee banks by the European Commission Applicable inter alia for the calculation according to General Block Examtion Regulation and De- minimis Regulation as the most impoertant legal basis. Basis of of the calculation is the reimbursement plan of the underlying credit. Based on this reimbursement plan the amount of the market premium that should be paid for the counter guaranteed amount can be established for each year and compared with the premium actually paid (counter guarantee is granted free of charge -> this calculation element is nil). The yearly differences are then discounted to the moment of the granting of the counter guarantee and summed up to obtain the aid element. The (hypotetical) amount of the market premium is the addition of the administrative costs, the remunertion of capital for the year and the expected loss. For more tecnical details of the calculation compare the approval document: http://ec.europa.eu/competition/state_aid/register/ii/doc/N-365-2009-WLWL-en- 15.09.2009.pdf The Association of German Guarantee Banks had established an online state aid calculator needing as manual input just the approval data of the guarantee, the Federal State, the credit period, the counter guarantee quota, the credit-reimbursement plan and the rating of the final beneficiary according to the Associations Rating System to calculate the state aid element of the counter guarantee. 12

13. The German Guarantee Banks (V) Decision making structures Management board of the Guarantee Bank Obligation under company law Consisting of two or three members Is responsible für all business of the Guarantee Bank Supervisory board of the Guarantee Bank For private liability companies no obligation under company law but for credit institutions an obligation under banking supervisory law The supervisory board is responsible to control the activities of the management board. Guarantee/Approval Committe Body according to the articles of the Guarantee Bank Members are the management board, shareholders of the Guarantee Bank and representatives of the state / soevereign counter guarantors The Committe makes the final decision regarding the approval of each guarantee The state / souvereign counter guarantors have the power of veto. 13

14. Agenda 14 The Association of German Guarantee Banks The German Guarantee System The German Guarantee Banks Guarantees granted by Guarantee Banks State/ souvereign Counter Guarantees put to Guarantee Banks Statistics

15. What are the financial needs of SMEs? Business-orientated start-up and corporate financing. Adequate medium and long term financing of investments. Funding framework for financing of working capital. Pre-financing of orders. Adequate credit lines. Problem: The house bank demands collaterals for the financial or credit support. In many cases SMEs have no or insufficient collateral for borrowing. Solution: Guarantees of Guarantee Banks. 15 These guarantees could replace insufficient collaterals but not the credit rating or the profit ratio of the final beneficiary!

16. Eligible development measures Guarantees regarding the financing by principle banks: Business start-up Investment and/or working capital, cost for tapping a new market etc. Corporate succession Purchasing price of shares, company value. Existing SMEs Corporate extension, relocation, development costs, cost for tapping new markets, modernisation, working capital. 16

17. Uneligible development measures Conversion of debts Discharge of existing credits / loans given by the principal bannk, discharge of overdue tax Financing of losses Financial restructuring Auccouting insolvency Sectoral and other exclusions based on European State Aid Law Sectorale exclusions (e.g. undertakings active in fishery, aquaculture, primary production, processing and marketing of certain agricultural products, coal sector, road transport vehicles) Other exclusions (most important one: undertakings in difficulties, compare Art. 1 (7) of the General Block Exemption Regulation ). 17

18. Mandate of development The Guarantee Banks guarantee for conomically appropriate and promising investments projects; by granting guarantees up to an amount of 1 Mil. EUR at most (during the current financial and economic crises 2 Mil. EUR at most) and up to a guarantee quota of 80 % of the credit at most; in general independent of other collateral (in case other collaterals exist, they have to be provided); in general the personal liability (e.g. guarantee) of the natural person behind the SME, the initiator of the undertaking, is necessary. 18

19. Advantages of the guarantee for the parties Advantage in favour of the principal bank Gets a sustainable and valuable collateral. Has lower capital adequacy requirements because of the collateral. Advantage in favour of the SME resp. final beneficiary Gets a business-orientated financing. Has scope for further growth. Advantages for both parties External expert knowledge through assessment of the undertaking by commercial and trade chambers. 19

20. Application of a guarantee SME Chambers, Associations Invlovement in assessment Guarantee Bank Assessment, Customer meeting Guarantee Bank Approval by Credit Committtee Application filed by house bank Antragsstellung Alternative: Guarantee without a bank Deed of Guarantee Send to house Bank 20

21. Required data Dependending on the complexitiy of the undertaking the Guarantee Bank needs for a guarantee decision et al. the following data and information: Annual accounts of the last three years and additional data of the ongoing business year Description of the undertaking Liquidity planning of the SME Expected profitability (best-/worst case) Indication of capital needs Overview of existing interest payments of the SME Financial circumstances of the SME (including personal financial situation of the management) Positive assessment of the responsible chamber, association etc. Significant business contracts of the SME Adequate own funds of the SME CV and financial disclosure of the initiators resp. the management Proffesionalo and commercial qualifikation of the initiators Adequate calculation of the borrowing requirement (borrowing amount). 21

22. Common rating system of the German Guarantee Banks (I) The German Guarantee Banks had developed their own rating system to analyse the required data / information for a final decision regarding the granting of a guarantee. The rating consists of qualitative, quantitative and macro-economic elememts and results in a total score for each final beneficiary and the total score corresponds to a probability of default on the basis of histrorical data. 22

23. Common rating system of the German Guarantee Banks (II) Qualitative modul Based on expertise of evaluators and amounts to a future oriented estimation of the default risk. Involves the assessment of factors relating to the market, the management and the enterprise in question. Quantitative modul Based on a balance sheet scoring system and has been developed on the basis of financial statements of over 25.000 German companies forming a representative sample of clients of German Guarantee Banks. Macro-economic modul Covering specific information on the risk profile of the sector and the legal form of the respective enterprise and more general information of the business climate index. 23

24. Fees and charges One-off processing fee: 1,0 % - 1,5 % of the guarantee or credit amount Guarantee commission: 1,0 % - 1,5 % p.a. of remaing guarantee or loan amount on January, 1st Fees have to be paid by the SME, bank is free of charge State / souvereign counter guarantees for free 24

25. Agenda 25 The Association of German Guarantee Banks The German Guarantee System The German Guarantee Banks Guarantees granted by Guarantee Banks State/ souvereign Counter Guarantees put to Guarantee Banks Statistics

26. Relation to public authorities (I) Structur of the state / souvereign counter guarantee First level Federal Republic and Federal Statss provide in their budget acts items for the counter guarantees granted to Guarantee Banks (first level: sovereign acting) Second level Granting of counter guarantees takes place on a second, civil law, level. Federal Republic and Federal States execute deeds of guarantees and forward them to the Guarantee Banks. The maturity of the state / souvereign (portfolio) counter guarantee amounts in general to five years and covers all gurarantees granted by the guarantee bank within the maturity. 26

27. Relation to public authorities (II) Main tenor of the deeds of the guarantee: Admissible final beneficiaries (e.g. SMEs, free professionals) Maximum amount of the total counter guarantee sum (portfolio guarantee) Requirements for the inclusion of guarantees under the counter guarantee (e.g. credit has to be granted by a credit institution, definition of credit, maximum quota of the guarantee granted by the Guarantee Bank in relation to the credit amount, power of veto, criterion for exclusion of applicants, ban of cession of the guaranteed credit exposure) Obligations of the Guarantee Bank (e.g. maximum amount of guarantees, maximum maturity of the guarantee, quota of guarantees for working capital in relation to total guarantee volume, covering of incidental claims like interests, forwarding obligations of the guarantee bank to the principal bank, e.g. reports regarding declinig of credit rating of final beneficiary, right of inspections of counter guarantors ) Definition of loss (e.g. beneficiary is definitely not able to repay the loan as result of insolvency or unsuccessful enforcement or a period of 12 month after loss is expired) and modalities of allocations of cash benefits, proceeds of enforcement. 27

28. Guarantee/Approval Committee Members of the Guarantee/Approval Committee are the management board, shareholders of the Guarantee Bank and representatives of the state counter guarantors. The Committe is responsible for the final decision regarding the approval of guarantees. Partially Guarantee banks distinguish between a large committee and a small committee. Members of the small committe are just one member of the management board, one member of the shareholders and the state counter guarantors. The smaller committee just has limited responsibilities (e.g. maximum amount of 25 % of the highest guarantee quota). Because of the high counter guarantee quota and the application of public money in case of a loss of the underlying credit representatives of the state counter guarantors have the power of veto in the Guarantee / Approval Committee. Guarantee/Approval Committee meets generally biweekly. Members of the Committee receive decision memos one week before the meeting, so they are able to prepare it sufficiently. 28

29. Agenda 29 The Association of German Guarantee Banks The German Guarantee System The German Guarantee Banks Guarantees granted by Guarantee Banks State/ souvereign Counter Guarantees put to Guarantee Banks Statistics

30. Business volume of German Guarantee Banks in 2010 In 2010 the German Guarantee Banks have granted guarantees for credits and equities in the amount of 1,8 milliard Euro. This amount corresponds to an investment volume of 5,0 milliarde Euro. Approximately 8.000 guarantees had been granted by the German Guarantee Banks in 2010. More than 90.000 jobs had been maintained or created in 2010 as a result of the guarantees. 3.000 business start-ups had been promoted in 2010 (33 % of the total guarantee business). Total Guarantee Assets of the Guarantee Banks at the end of 2010 (number):45.500 Total Guarantee assets of the Guarantee Banks at the end of 2010 (absolut value): 5,6 Mrd. Euro 30

31. Macroeeconomic benefit of German Guarantee Banks In 2006 and 2010 two studies of the Institute for Small- and Medium-Sized Enterprises at the University of Trier/Germany had been carried out and demonstrated the significant value of the Guarantee Banking System. Compared to a scenario where Guarantee Banks did not exist,… … the gross domestic product increases by an average of 3,4 Mrd. Euro p.a. … the number of employed grows by an average of 29.500 p.a. … the number of unemployed falls by an average of 23.200 p.a. … social insurance contributions by the corporate sector are in average of 100 Mio. lower in the longer term. … tax an goods increases by an average of 500 Mio. EUR and income and wealth tax by an average of 500 Mio. EUR. You can download the studies on the website of the Association of Guarantee Banks under www.vdb-info.de 31

32. Thank you for your attention! Dr. Olaf Achtelik, Lawyer Division Manager Legal & Regulatory Affairs Association of German Guarantee Banks (VDB) Schillstrasse 10, 10785 Berlin Tel.: +49 (0) 30 263 96 54 16 Fax: +49 (0) 30 263 96 54 20 E-Mail: achtelik@vdb-info.de www.vdb-info.de 32