The study scrutinizes the financial and the non-financial backgrounds of various banks in continental Europe comprising financial units in Germany in comparison with the individual as well as aggregated highlights of the performance of other banks in the rest of the European continent. The statistical and qualitative analysis of available data articulate a number of insights and objective implications about the risks and prospects of the European banking system focused primarily on risk aversion of the German banks against the non-German entities.
The core of the analysis is the risk factors associated with the financial and non-financial management aspects of the banks and the impact of operational and strategic decision-making against economic drivers prevailing in the environment. The prospect of losses and even corporate failure arising from capital inadequacy, liquidity, credit risks and system imbalance in the investment mix of the banks resources in Germany appear to be more sensitive and reactionary to economic variables. The rationale is obvious and clear an overheated economy where banks aggressive credit lending can result to uncontrolled credit risk taking, bad loans and an unfavorable residual effect on capital adequacy. Other European banks are more conservative and diversified giving more strength where they are needed far into the strategic period. Other banks in the European sector appear much luckier.
The financial volatility risks of European banks are becoming rigid and showing some signs of debt management pangs making it appear riskier than what markets actually think. Such a picture is not entirely surprising as European banks especially the German banking sector are more economically impacted by the developments in the United States and the major Asian regions. Banks hence, are becoming more wary of possible losses arising from market volatility, credit squeeze or aggressiveness and capital inadequacy issues.
The element of risk in the banking sector is one reality the sector is able to profit or lose from. In general, risks are events or drivers from all over the environment, expected of unexpected that may pose a threat to the ability of the company to achieve its goals and objectives. (Anthony Govindarajan, 2004) Risks are inherent in all business and financial activities and processes and while they are indeed varied and complex, facing those risks are what make banks profitable and the higher the risks, the higher are the expected returns. (Shaw, 2003)
However, with the deregulation of the industry in many countries all over, these financial institutions no longer operate under a protected and regulated environment. (Scribd, 2010 p 1) Banks now face a greater number of risks spawned by the global surge of business. (Hill, 2008) Risks can be in the area of interest rate, capital adequacy, credit, operations, market, liquidity, country or the management itself. (Scrbd 2010 p. 24) However, it is similarly the factor that has caused many banks to undertake major organizational changes such as mergers, consolidations, restructuring and even collapse.
Review of Literature and Theory
The German banking sector is currently experiencing the pangs of the global financial and economic crisis, primarily the reason the sector is undergoing tremendous changes. Its vaunted time-tested three-pillar model has come under closer scrutiny from many sectors with competition and intense rivalry increasing. Bent on liberalizing the market, the European Union is forcing the German government to remove the state guarantees enjoyed by the public sector banks. This scenario is likely to set the stage for the entry of foreign banks on account of the globalization and the political extension of the European Union.
The move by the government is expected to put unusual pressure on German banks to perform better. Retail lenders and customers, who were looked down upon by many big banks but are better served by medium-sized bank, are suddenly being wooed again by all the big banks. Consider the competition in the current business environment being full and the pressure to consolidate likely to occur becoming an uncertainty. In this scenario, it is becoming normal for banks, especially the bigger ones are today faced with the need to become more innovative, that is, ideas to sustain operations and extend their customer base while trying to address profitability.
A background overview over the developments as provided by (Taiwaril Buce2, 2010), show German banks coming under pressure for their dismal profitability status. Assessments and rankings made of developed European nations along the profitability indicator place Germany at the tail end of the queue as well. Experts attribute that situation mainly to the German banking system being over-banked and over-branched. (Heir Weib, 2006) This means that an overheated economy is translating into
Methodology and Data
Data for this study are taken from the statistical data base of European banks operating in the countries of France, Italy, Austria, Ireland, Belgium, Portugal, Spain, Holland and Germany. Data on assets, liabilities including deposits and equity accounts were taken including the qualitative aspects of the various banks such as status or on listing in the bourse. Ratio such as loan to deposit ratio, loan to asset ratio, liquidity indicators, equity issues are used to compare and contrast the banking units in the area.
The information taken from the data gathering procedures are to be tallied and entered in a spreadsheet application to generate ratios, percentages and even ranking as means of comparing and contrasting in terms of risk. Financial analysis of corporate data was likewise made to ensure that the decisions made under prevailing in the circumstances.
Results and discussions
Part of the component intents of this paper is to analyze and examine data on the German market and the competitive landscape of the banking sector. The analysis contains four sections, the first one being the profitability ratios and indicators of German banks to their peers performances in the European area. Here, the study provides surprising results in the bottom line and despite the high branch density and the claim of over banking. Germanys banks operate with cost efficiency. Thus, it is in the lack of ability to generate adequate additional income that results in the general slowdown and sluggishness in the net earnings. In the second section, the authors examine the German banking system. The purpose of the method is to compare and contrast the peculiarities and distinctions to find out if the income and other operating problems are inherent in the system. Germany, more than in any other country, public banks dominate the industry together with the cooperative banks. However, banks hardly adhere to the economic principle of profit maximization common under privatization and deregulation.
Moreover, the public banks have also received unjust government subsidies in the form of the operating maintenance and guarantee of obligations. Thus, this may be construed as presuming that private German banks operate in a very difficult system with public banks enjoying all the privileges. The next section then takes a closer look at the market and analyzes the bank density, branch density and competition which the system produces. In the past, consolidations have occurred but branch networks have been reduced and thinned out by the private banks in an effort to manage operating costs. However, the result show that the current situation does not appear overly over-banked considering the demographic profile of the country including the business and economic environments. Further into the information, German banks were asked to discard the three-pillar model which includes the participation of the government sector in terms of subsidy and guarantee and move towards a market economy where competition takes into account the best options available to the customer. As it is, the German banks are now haunted by an open economy where competition is likely to call the benchmarking shots for globally prepared banks. Experts believe that the long period of government subsidy may not only hamper the weaning out of the banks, but may likely bring the
German banks into the risk area with less preparation.
It appears that the scenario in which German banks find themselves in is because of misguided actions and wrong strategies that have led them into crisis situations. Experts agree that the way out of German banks is to strengthen the German banking market with interest focused on the consolidating and not fragmenting of the savings bank finance group. However, experts also stress the public character of the savings banks and the importance of the regional principle, which applies both to the savings banks and to the co-operative banks common in the German economy. This implies the pragmatic strength and presence of the government behind the German monetary system. This scenario however does not appear to be among the priorities of the European Union.
Nevertheless, the German banking sector has been very competitive, and calls for further consolidations are aimed at decreasing competition rather than realizing synergies. From another viewpoint, an appraisal of the current system is presented, is less risky considering that German banking customers benefit from the current market structure as it allows for easier access to credit compared to other countries. The establishment of smaller cooperative banks appears to have alleviated the economic plight of business and industry. Here, the technique is to offer banking services to everybody at low costs. Thus, Germany is over banked from the point of view of high competition which negatively impacts upon bank profitability, but positively impacts society more via the services provided.
MacAskill and Menon (2009) warn that German banks have yet to finalize participation in the open market with its resource strength. Although there are at least 353 European lenders that have increased in size since the beginning of 2007, fifteen European banks now have assets larger than their home economies, compared with 10 lenders three years ago.
Although this scenario indicates prospects for the banking industry, the degree of risk is equally stabilized, but not as much in German banks where services beyond risks appear to be paramount. While the European Union has made headlines for deconsolidating and breaking up rescued banks, regulators have not looked and reined in firms that avoided as well as shunned government assistance aid either because they are too big to fail or simply failed to comply with assistance guidelines. Nevertheless, European bank assets have grown 25 percent since the start of 2007 compared with a 20 percent increase with American lenders, (Bloomberg, 2010)
The profitability of the German banking sector is one of the main focus of the study that even if German banks are riskier than other European competitors, it is likely because their services are directed primarily towards the goals and objectives of their mandates as the public financing sector of the economy. Here, profitability is secondary to the mandates of real government support. Other European competitors apparently considered more the aspect of shareholder value over other priorities. Thus, while Germany is over banked, pressure by certain institutions and the advent of Basel II have put more pressure on these German banks to improve their earnings. Thus, it is important to equally understand the components of profitability, costs and income, and other key performance indicators of German banks. This study thus clarifies and provides understanding to the relative risks showcased by German banks.
The core of the analysis is the risk factors associated with the financial and non-financial management aspects of the banks and the impact of operational and strategic decision-making against economic drivers prevailing in the environment. The prospect of losses and even corporate failure arising from capital inadequacy, liquidity, credit risks and system imbalance in the investment mix of the banks resources in Germany appear to be more sensitive and reactionary to economic variables. The rationale is obvious and clear an overheated economy where banks aggressive credit lending can result to uncontrolled credit risk taking, bad loans and an unfavorable residual effect on capital adequacy. Other European banks are more conservative and diversified giving more strength where they are needed far into the strategic period. Other banks in the European sector appear much luckier.
The financial volatility risks of European banks are becoming rigid and showing some signs of debt management pangs making it appear riskier than what markets actually think. Such a picture is not entirely surprising as European banks especially the German banking sector are more economically impacted by the developments in the United States and the major Asian regions. Banks hence, are becoming more wary of possible losses arising from market volatility, credit squeeze or aggressiveness and capital inadequacy issues.
The element of risk in the banking sector is one reality the sector is able to profit or lose from. In general, risks are events or drivers from all over the environment, expected of unexpected that may pose a threat to the ability of the company to achieve its goals and objectives. (Anthony Govindarajan, 2004) Risks are inherent in all business and financial activities and processes and while they are indeed varied and complex, facing those risks are what make banks profitable and the higher the risks, the higher are the expected returns. (Shaw, 2003)
However, with the deregulation of the industry in many countries all over, these financial institutions no longer operate under a protected and regulated environment. (Scribd, 2010 p 1) Banks now face a greater number of risks spawned by the global surge of business. (Hill, 2008) Risks can be in the area of interest rate, capital adequacy, credit, operations, market, liquidity, country or the management itself. (Scrbd 2010 p. 24) However, it is similarly the factor that has caused many banks to undertake major organizational changes such as mergers, consolidations, restructuring and even collapse.
Review of Literature and Theory
The German banking sector is currently experiencing the pangs of the global financial and economic crisis, primarily the reason the sector is undergoing tremendous changes. Its vaunted time-tested three-pillar model has come under closer scrutiny from many sectors with competition and intense rivalry increasing. Bent on liberalizing the market, the European Union is forcing the German government to remove the state guarantees enjoyed by the public sector banks. This scenario is likely to set the stage for the entry of foreign banks on account of the globalization and the political extension of the European Union.
The move by the government is expected to put unusual pressure on German banks to perform better. Retail lenders and customers, who were looked down upon by many big banks but are better served by medium-sized bank, are suddenly being wooed again by all the big banks. Consider the competition in the current business environment being full and the pressure to consolidate likely to occur becoming an uncertainty. In this scenario, it is becoming normal for banks, especially the bigger ones are today faced with the need to become more innovative, that is, ideas to sustain operations and extend their customer base while trying to address profitability.
A background overview over the developments as provided by (Taiwaril Buce2, 2010), show German banks coming under pressure for their dismal profitability status. Assessments and rankings made of developed European nations along the profitability indicator place Germany at the tail end of the queue as well. Experts attribute that situation mainly to the German banking system being over-banked and over-branched. (Heir Weib, 2006) This means that an overheated economy is translating into
Methodology and Data
Data for this study are taken from the statistical data base of European banks operating in the countries of France, Italy, Austria, Ireland, Belgium, Portugal, Spain, Holland and Germany. Data on assets, liabilities including deposits and equity accounts were taken including the qualitative aspects of the various banks such as status or on listing in the bourse. Ratio such as loan to deposit ratio, loan to asset ratio, liquidity indicators, equity issues are used to compare and contrast the banking units in the area.
The information taken from the data gathering procedures are to be tallied and entered in a spreadsheet application to generate ratios, percentages and even ranking as means of comparing and contrasting in terms of risk. Financial analysis of corporate data was likewise made to ensure that the decisions made under prevailing in the circumstances.
Results and discussions
Part of the component intents of this paper is to analyze and examine data on the German market and the competitive landscape of the banking sector. The analysis contains four sections, the first one being the profitability ratios and indicators of German banks to their peers performances in the European area. Here, the study provides surprising results in the bottom line and despite the high branch density and the claim of over banking. Germanys banks operate with cost efficiency. Thus, it is in the lack of ability to generate adequate additional income that results in the general slowdown and sluggishness in the net earnings. In the second section, the authors examine the German banking system. The purpose of the method is to compare and contrast the peculiarities and distinctions to find out if the income and other operating problems are inherent in the system. Germany, more than in any other country, public banks dominate the industry together with the cooperative banks. However, banks hardly adhere to the economic principle of profit maximization common under privatization and deregulation.
Moreover, the public banks have also received unjust government subsidies in the form of the operating maintenance and guarantee of obligations. Thus, this may be construed as presuming that private German banks operate in a very difficult system with public banks enjoying all the privileges. The next section then takes a closer look at the market and analyzes the bank density, branch density and competition which the system produces. In the past, consolidations have occurred but branch networks have been reduced and thinned out by the private banks in an effort to manage operating costs. However, the result show that the current situation does not appear overly over-banked considering the demographic profile of the country including the business and economic environments. Further into the information, German banks were asked to discard the three-pillar model which includes the participation of the government sector in terms of subsidy and guarantee and move towards a market economy where competition takes into account the best options available to the customer. As it is, the German banks are now haunted by an open economy where competition is likely to call the benchmarking shots for globally prepared banks. Experts believe that the long period of government subsidy may not only hamper the weaning out of the banks, but may likely bring the
German banks into the risk area with less preparation.
It appears that the scenario in which German banks find themselves in is because of misguided actions and wrong strategies that have led them into crisis situations. Experts agree that the way out of German banks is to strengthen the German banking market with interest focused on the consolidating and not fragmenting of the savings bank finance group. However, experts also stress the public character of the savings banks and the importance of the regional principle, which applies both to the savings banks and to the co-operative banks common in the German economy. This implies the pragmatic strength and presence of the government behind the German monetary system. This scenario however does not appear to be among the priorities of the European Union.
Nevertheless, the German banking sector has been very competitive, and calls for further consolidations are aimed at decreasing competition rather than realizing synergies. From another viewpoint, an appraisal of the current system is presented, is less risky considering that German banking customers benefit from the current market structure as it allows for easier access to credit compared to other countries. The establishment of smaller cooperative banks appears to have alleviated the economic plight of business and industry. Here, the technique is to offer banking services to everybody at low costs. Thus, Germany is over banked from the point of view of high competition which negatively impacts upon bank profitability, but positively impacts society more via the services provided.
MacAskill and Menon (2009) warn that German banks have yet to finalize participation in the open market with its resource strength. Although there are at least 353 European lenders that have increased in size since the beginning of 2007, fifteen European banks now have assets larger than their home economies, compared with 10 lenders three years ago.
Although this scenario indicates prospects for the banking industry, the degree of risk is equally stabilized, but not as much in German banks where services beyond risks appear to be paramount. While the European Union has made headlines for deconsolidating and breaking up rescued banks, regulators have not looked and reined in firms that avoided as well as shunned government assistance aid either because they are too big to fail or simply failed to comply with assistance guidelines. Nevertheless, European bank assets have grown 25 percent since the start of 2007 compared with a 20 percent increase with American lenders, (Bloomberg, 2010)
The profitability of the German banking sector is one of the main focus of the study that even if German banks are riskier than other European competitors, it is likely because their services are directed primarily towards the goals and objectives of their mandates as the public financing sector of the economy. Here, profitability is secondary to the mandates of real government support. Other European competitors apparently considered more the aspect of shareholder value over other priorities. Thus, while Germany is over banked, pressure by certain institutions and the advent of Basel II have put more pressure on these German banks to improve their earnings. Thus, it is important to equally understand the components of profitability, costs and income, and other key performance indicators of German banks. This study thus clarifies and provides understanding to the relative risks showcased by German banks.
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