1. Topic 4: Banking Structures Around the World The United Kingdom and Germany

2. UK Banking Sector Main Features Retail banking dominates. Investment banking and overseas expansion- Poor record. Concentration is high. Switch of status by building societies. High profits. Poor management? (a question you can answer in the coursework)

3. Banking Structure The Bank of England is the central bank, responsible for: The setting of base Interest Rates. Monetary stability. Management of national debt. Banker to government and monetary sector.

4. Banking Structure Financial Services Authority (FSA) Replaced 9 separate regulatory authorities Main responsibilities are:  Maintaining market confidence  Protection of consumers  Fighting of financial crime

5. The UK Retail Banking Sector Main Features Small number of banks (~20) with extensive branch networks. Large number of accounts. High degree of leverage / credit creation. Bulk of business in £ sterling.

6. The UK Wholesale Banking Sector Main Features Approximately 480 such ‘Merchant’ banks (e.g. NM Rothschild & Sons, SBC Warburg) Small number of large accounts (minimum deposits between £250k and £500k.) Large foreign currency business. Advice on privatisation-portfolio management- services to corporate sector Trade finance and foreign currency operation.

7. Building Societies Unique to UK, but share has declined after 1986. Now tend to be converting to banks. Products offered:  Mortgages  And now… Life Insurance Pensions Investment products

8. International Banks in UK Government encourages foreign bank operations. London is the most famous banking centre (with New York and Tokyo). Very significant share  375 foreign banks  200 representative offices  100 foreign securities houses

9. German Banking System Features German banks are typically universal  A universal bank provides a complete range of commercial and investment banking services The German Banking Act provides a detailed legal definition of a bank (taking into account the Universal trend)

10. German Banking System Banking Act Definition Includes FI who:  Accept funds w/wo interest paid (deposits)  Grant loans and acceptance credits (lending)  Purchase bills of exchange and cheques (discounting)  Purchase and sell securities for others (brokering)  Safe custody/admin. of securities (safe-store service)  Investment Fund Businesses  Guarantee and warrantee others (guarantees)  Provide cashless payment/clearing mechanisms (giro services)

11. German Banking System The Banking Act forms the legal basis for supervision of banks in Germany. FIs who provide any service detailed above are subject to regulation, with the exception of Bundesbank, the Federal Post Office and Insurance Enterprises  Any enterprises conducting banking activities are required to be licensed and supervised by both the Federal Banking Supervisory Office and the Bundesbank.

12. The Structure of German Banking German Banking Sector CommercialSavingCredit Co-opOther ‘Big’ Banks Foreign Banks Private Banks Regional + Other Local Savings State Savings Central Savings Local Co-op Regional Co-op Fed. Clearing Mortgage Banks Banks w/Sp.Functions

13. German Banking System The broad umbrella of ‘universal bank’ can be divided into three categories on the basis of ownership and legal form. These categories are:  commercial banking sector;  saving bank sector; and  credit co-operative sector These three categories of universal banks together account for roughly 80% of the volume of business in Germany.

14. Commercial Banks in Germany Commercial banks in Germany as a whole, account for roughly 25% share in the total volume of banking activity. There are four different classes of banks under commercial banks category:  The ‘Big’ Banks  Regional and other commercial banks  Foreign banks  Private banks

15. The ‘Big’ Banks Duetsche Bank, Dresdner Bank, Commerzbank and their Berlin subsidiaries operate nationally through network of local branch offices. Although these banks are major banks in term of their balance sheet volume, however, their volume is not as significant in terms of their share of the German banking sector. If their interest in private business (such as mortgages) is included in the volume, then the case may be different.

16. Regional and other Commercial Banks These banks are all banks other than those big banks. These banks concentrates on providing universal banking services in their particular regions, but some maintain their system of branches which had allowed them to operate on interregional or national basis. Two such banks with an extensive branch network are the Bayerische Vereinsbank and the Hypo-Bank.

17. Foreign and Private Banks Foreign banks in the German banking system have not been significant  Foreign banks are legally allowed to offer the same services which are allowed to domestic banks. Private banks consist of limited partnership (sole ownership is not allowed under German banking law)  Although private banker can conduct all banking activities, they specialise in export finance, securities trading, industrial finance, property management and housing finance etc.

18. Saving Bank Sector Savings Bank Sector had the largest share in the domestic volume of banking activity. Saving banks were originally conceived as non- profit making concerns  to serve relatively less well-off members of the community;  to give credit on favourable terms to public authorities;  to finance local investment in the region in which the saving bank was located These banks still follow these obligations but now they have become universal banks which compete with the commercial banks for most forms of banking services.

19. Saving Bank Sector There are three tiers within the saving bank sector. These are:  Local savings banks  State saving banks  Central saving banks

20. Local Saving Banks These are municipal or district institutions incorporated under public law as independent legal entities. Each state had its own Savings Bank Act, which specifies the structure and organisation of the saving banks in that state. A local saving bank is usually permitted to operate only in its own region and its investment in securities and other assets are subject to restrictions.

21. State Savings Banks (Central Giro Institutions) Each state saving bank is incorporated under public law and is owned by its respective sate government and state saving bank association  Works as clearing houses for their member local savings banks. They are state bankers in their respective states and can conduct their business on interregional and international basis.  The largest state saving bank is the Westduetsche Landesbank Girozentrale, which is roughly comparable to Commerzbank in terms of balance sheet assets.

22. Central Savings Bank Deutsche Girozentrale (DGZ) serves as the central clearing bank for the saving bank system and holds reserves for state saving banks Is similar to state saving banks in term of business it conducts, but it is smaller in size than many of them.  Although, both local saving banks and state savings banks are universal banks, some activities such as securities trading underwriting and international business are more important.

23. Credit Co-operative Sector The credit cooperative originated simply as cooperative banks. Provides credit to their members, but now have developed to universal banks. The organisation of the credit cooperative sector is similar to that of the saving bank sector. There are large numbers of local credit cooperatives and a system of larger regional banks headed by a central clearing- house institution. There are three tiers within the credit cooperative sector. These are:  Local cooperative banks  Regional central cooperative banks  Federal clearing house institutions

24. Local and Regional Co-operative Banks Local cooperative banks  The first tier of this sector comprises local banks organised as cooperatives, whose members are local individuals and businesses.  Members of the local credit cooperatives contribute capital. Regional Central cooperative banks  The local credit cooperative are headed by a second tier consisting of regional central cooperative banks, which are either stock corporations or registered cooperatives owned by the local credit cooperatives.

25. Federal Clearing House Institutions Third tier consists of a federal clearing- house institution, which is a stock corporation owned by the regional credit cooperatives.

26. Mortgage Banks Among those banks in Germany, which provides a specialised range of banking services rather than universal services, the most important group consists of the mortgage banks.  These banks are owned by public or private sectors.  The laws in Germany generally limits mortgage banks to making long term mortgage loans and loans to public authorities. These banks finance through bonds and long term deposits.  Most private mortgage banks are usually owned by commercial banks, which are interested to enter into this market.

27. Banks with Specialised Functions The group of banks offering specialised banking services comprises various public and private institutions  Their share in total volume of banking business in Germany has been in the range of 10-12%. These banks provide loans finance such as:  export finance;  finance of projects in less developed countries;  environmental programmes;  lending to small/medium sized German firms These banks finance through government funds, bank loans and other sources such as bond issues.