Basically, German public banks operate in the same fields of business as private banks including the European banks (Frenkel, et al 2004). However, there are significant differences between the German bank and other private banks in both domestic and foreign markets. The creditors of the German public banks are at no risk. This is because their investments are guaranteed by the state and the local governments. Therefore, the German banks are not risky as they reap refinancing advantages on the international capital markets and therefore it is almost impossible for the German public banks to go bankrupt (Lipponer, and Buch, 2007). The main point of contention between the German banks and the European competitors is the risk management and competitive advantage however, German banks are not any more risky than the European competitors. It is therefore important to not that the riskiness of a financial institution is basically based of the market base and competitive advantage against its competitors.
Literature review
The federal association of German banks as well as the European Banking Association, both of which represent the interest of the private banks, have continuously complained to the European Commission as they claim that there is a distortion of competition (MacAskill, Menon, 2009). This is because the German public banks are supported by the government and hence other banks, both domestic and foreign has seen this as a kind of a disloyal aid in the part of the government. This has given the German public banks a competitive advantage against other private banks including the European banks operating in the same market (Angermiller, et al 2005). The European commission regarded the existing liability structure of the German public banking system as a direct subsidising from the government and therefore the European Commission forced the German federal government to modify this structure in order to enable a healthy competition between the German banks and private banks including the European banks. Even though the structure was modified in 2005, the German banks had already set up a strong customer base and a competitive advantage against its competitors both in the foreign and domestic markets. Therefore, the German banks are not risky to its creditors as their financial capabilities have increased with a larger equity that has enabled them to expand tremendously
In support of the German banks as non risky financial institutions, the German financial and supervisory authority (BaFin) put forward a new draft of the minimum requirements for the risk management in connection with the German implementation of Basel II among the German banks (Lipponer, and Buch, 2007)..
This was intended to minimise the financial risk of the German banks and to ensure that their creditors are guaranteed of the stability of the financial institutions. Though this process is still under progress, the European Union will be introducing Basel II through the European directives. This is also intended to be a binding standard for all the financial institution with the union and therefore all the members of the union will be required to prepare for the implementation of this draft. This process will enable all the banks including the German and other European banks to be able to limit the financial risk and therefore enabling them to work effectively and efficiency without the fear of solvency as it has been witnessed in the past (MacAskill, Menon, 2009). While Basel II was regarded as the first and the largest pillar (pillar I) of the financial institutions, Pillar II has also been widely discussed recently. The European approach on Pillar II was intensified and made clear by the newly established Committee of European Banking Supervisors. This Pillar consists of the assessment of the capital adequacy of the internal capital of the banking institution and its risk management processes.
Therefore this enables the German banks to operate on minimal financial risk and therefore both German and European banks currently are not risky. Though most of the European banks are recovering from the recession, it is also important to note that both banking institutions were hit by the global economic crunch (MacAskill, Menon, 2009). The new management risk (MaRisk) is the German answer to the implementation of Pillar II. This process is not entirely new since the UK- based Baring banks crashed in the mid 1995. This enabled the sound practices of risk management to become officially regulated. In 1995, the German banks in both domestic and foreign markets had to comply with the minimum requirements for the conducts of operational and trading practices that were intended to minimise the financial risk of the organization which could affect the certainty of the future position of the organization. The German banking act on the other hand stipulates that proper organization of business activities is of dire importance to the organization (Lipponer, and Buch, 2007).
This enabled the introduction of other minimum requirements that concerns credit business, internal auditing and outsourcing. All this requirements was introduced in order to enable the organization to have as minimum risk as possible so that both the internal and external customers are guaranteed of the security of their investments. The structure of the MaRisk process is modular and this enables the future extension, expansion and changers easier. In general, the entire structure deals with the overreaching requirements for all the banks especially the German public banks (Lipponer, and Buch, 2007).. This process is consistent with the Basel II which requires the risk management process to focus on all the material risks. Management risks also extends the risk fields that is covered especially with regards to liquidity and the operational risks though the category of the operational risk is additionally covered in Pillar I by the explicit minimum capital requirements (Angermiller, et al 2005).
The German banks also offers a large customer base a diverse range of first class banking services its private clients receive an all round service extension from account keeping and cash and securities investments advisory to asset management. On the other hand, its corporate and institution clients receive a number of full products assortment of both international and corporate and investment banks from payments processing and corporate finance to support with initial public offers (IPOs) and market authorities (MA) advisory. In addition to this, the German banks also has a leading position in the international foreign exchange, fixed income and also equity trading. This has enabled the German banks, both public and private to obtain a competitive advantage and therefore has become less risky for investors, especially both the internal and external customers (Angermiller, et al 2005).
The European competitors on the other hand have strengthened the need to improve their risk management especially after the economic crisis that pushed the global economy in to the worst recession in over six decades. The risk management process has been improved by the involvement off market participants and financial institutions which has brought in a progressive normalization of the economy (MacAskill, Menon, 2009). With extensive consultations and comprehensive assessment of how the proposed regulatory changes would affect both financial companies and economy, it has enabled the European banking institutions to foresee the future positioning of the organizations and their for enabling them to set up strategies to eliminate major risks while also considering the emerging strategies. Therefore both the German banks and the European competitors have been able to eliminate risks that would otherwise lead to the insolvency and hence, enabling its customers to be guaranteed on their investments within these banking institutions and thus creating customer confidence.
Methodology and data
In order to determine whether the German banks are risky than the European competitors, the financial history of the banking institution was analysed. The method of data collection was based on the past and the present financial position with regards to the policies, objectives and goals of the banking institutions. In order to collect the relevant and accurate data, an excel sheet was used. The sheet contained the name of the bank, year, equity, personnel expenses, total revenue, assets, loans, net income, net interest, deposits and short-term funding and loans. All this was compared with progressive years and the following deductions was made.
Results and discussion
The loan assets of the Europe banks have continually increased over the years. During the late 1990s, the loan asset was at 11.33 in which it increase up to 13.97 while the German banks like the Banque Diamanta increased its loans on assets from 74.82 to 81.10. On the other hand, their loan dependencies have reduced over the years. This depicts that the financial position of the banking institutions is stable and hence less risky for the investors and creditors. The German and European banks have both increased the expenses on personnel significantly. This is a positive progress as it implies that the personnel are well remunerated and therefore enabling the workforce to work effectively and efficiently because of the motivation they obtain. Both financial institutions have also increased their assets to significantly huge amounts ranging from 900 to 3061 depending on the banking institution.
This means that the institutions have expanded tremendously over the years and therefore can be able to finance its operations effectively. Their securities and deposits also are of significantly huge amounts. Though other German banks have been dissolved in the past because of their poor performance, it can be seen that these financial institutions have expanded their assets and securities and therefore have set up a huge customer base while reducing their risk significantly as a result of the risk management processes. Other German public banks have recorded huge percentage with regards to their liquidity while the status of the banking institutions was also found to be active.
Financial risk of a banking institution depicts negatively in the entire corporate image and therefore the organization will be most likely to loose the customer confidence. Risk management in banking institution is of outmost importance, it is therefore imperative that processes of risk management are put in place in order to avoid adverse effects of solvency (Frenkel, et al 2004). Banking institutions that carry out these processes are likely to succeed as this will enable the organization to strategise and predict the future position of the organization. On the other hand, in order to avoid high financial risk of the banking institution, it is important for the management and leaders of the institution to set strategies while considering the emerging strategies in order to avoid financial risks (Frenkel, et al 2004). In order for the institutions to have a competitive advantage over other competitors, it is imperative that high technological innovation like mobile banking and creativity is achieved. This will enable the banking institutions to be able to operate effectively and to provide quality services for its customers. Moreover, this will increase the customer confidence as well as reducing the financial risks of the banking organization. It is also important to recommend the expansion of the banking institutions to new markets this will enable the organization to set up a diverse customer base that will in turn increase the profits and hence reducing the risk of the customers, creditors and that of the organization.
Literature review
The federal association of German banks as well as the European Banking Association, both of which represent the interest of the private banks, have continuously complained to the European Commission as they claim that there is a distortion of competition (MacAskill, Menon, 2009). This is because the German public banks are supported by the government and hence other banks, both domestic and foreign has seen this as a kind of a disloyal aid in the part of the government. This has given the German public banks a competitive advantage against other private banks including the European banks operating in the same market (Angermiller, et al 2005). The European commission regarded the existing liability structure of the German public banking system as a direct subsidising from the government and therefore the European Commission forced the German federal government to modify this structure in order to enable a healthy competition between the German banks and private banks including the European banks. Even though the structure was modified in 2005, the German banks had already set up a strong customer base and a competitive advantage against its competitors both in the foreign and domestic markets. Therefore, the German banks are not risky to its creditors as their financial capabilities have increased with a larger equity that has enabled them to expand tremendously
In support of the German banks as non risky financial institutions, the German financial and supervisory authority (BaFin) put forward a new draft of the minimum requirements for the risk management in connection with the German implementation of Basel II among the German banks (Lipponer, and Buch, 2007)..
This was intended to minimise the financial risk of the German banks and to ensure that their creditors are guaranteed of the stability of the financial institutions. Though this process is still under progress, the European Union will be introducing Basel II through the European directives. This is also intended to be a binding standard for all the financial institution with the union and therefore all the members of the union will be required to prepare for the implementation of this draft. This process will enable all the banks including the German and other European banks to be able to limit the financial risk and therefore enabling them to work effectively and efficiency without the fear of solvency as it has been witnessed in the past (MacAskill, Menon, 2009). While Basel II was regarded as the first and the largest pillar (pillar I) of the financial institutions, Pillar II has also been widely discussed recently. The European approach on Pillar II was intensified and made clear by the newly established Committee of European Banking Supervisors. This Pillar consists of the assessment of the capital adequacy of the internal capital of the banking institution and its risk management processes.
Therefore this enables the German banks to operate on minimal financial risk and therefore both German and European banks currently are not risky. Though most of the European banks are recovering from the recession, it is also important to note that both banking institutions were hit by the global economic crunch (MacAskill, Menon, 2009). The new management risk (MaRisk) is the German answer to the implementation of Pillar II. This process is not entirely new since the UK- based Baring banks crashed in the mid 1995. This enabled the sound practices of risk management to become officially regulated. In 1995, the German banks in both domestic and foreign markets had to comply with the minimum requirements for the conducts of operational and trading practices that were intended to minimise the financial risk of the organization which could affect the certainty of the future position of the organization. The German banking act on the other hand stipulates that proper organization of business activities is of dire importance to the organization (Lipponer, and Buch, 2007).
This enabled the introduction of other minimum requirements that concerns credit business, internal auditing and outsourcing. All this requirements was introduced in order to enable the organization to have as minimum risk as possible so that both the internal and external customers are guaranteed of the security of their investments. The structure of the MaRisk process is modular and this enables the future extension, expansion and changers easier. In general, the entire structure deals with the overreaching requirements for all the banks especially the German public banks (Lipponer, and Buch, 2007).. This process is consistent with the Basel II which requires the risk management process to focus on all the material risks. Management risks also extends the risk fields that is covered especially with regards to liquidity and the operational risks though the category of the operational risk is additionally covered in Pillar I by the explicit minimum capital requirements (Angermiller, et al 2005).
The German banks also offers a large customer base a diverse range of first class banking services its private clients receive an all round service extension from account keeping and cash and securities investments advisory to asset management. On the other hand, its corporate and institution clients receive a number of full products assortment of both international and corporate and investment banks from payments processing and corporate finance to support with initial public offers (IPOs) and market authorities (MA) advisory. In addition to this, the German banks also has a leading position in the international foreign exchange, fixed income and also equity trading. This has enabled the German banks, both public and private to obtain a competitive advantage and therefore has become less risky for investors, especially both the internal and external customers (Angermiller, et al 2005).
The European competitors on the other hand have strengthened the need to improve their risk management especially after the economic crisis that pushed the global economy in to the worst recession in over six decades. The risk management process has been improved by the involvement off market participants and financial institutions which has brought in a progressive normalization of the economy (MacAskill, Menon, 2009). With extensive consultations and comprehensive assessment of how the proposed regulatory changes would affect both financial companies and economy, it has enabled the European banking institutions to foresee the future positioning of the organizations and their for enabling them to set up strategies to eliminate major risks while also considering the emerging strategies. Therefore both the German banks and the European competitors have been able to eliminate risks that would otherwise lead to the insolvency and hence, enabling its customers to be guaranteed on their investments within these banking institutions and thus creating customer confidence.
Methodology and data
In order to determine whether the German banks are risky than the European competitors, the financial history of the banking institution was analysed. The method of data collection was based on the past and the present financial position with regards to the policies, objectives and goals of the banking institutions. In order to collect the relevant and accurate data, an excel sheet was used. The sheet contained the name of the bank, year, equity, personnel expenses, total revenue, assets, loans, net income, net interest, deposits and short-term funding and loans. All this was compared with progressive years and the following deductions was made.
Results and discussion
The loan assets of the Europe banks have continually increased over the years. During the late 1990s, the loan asset was at 11.33 in which it increase up to 13.97 while the German banks like the Banque Diamanta increased its loans on assets from 74.82 to 81.10. On the other hand, their loan dependencies have reduced over the years. This depicts that the financial position of the banking institutions is stable and hence less risky for the investors and creditors. The German and European banks have both increased the expenses on personnel significantly. This is a positive progress as it implies that the personnel are well remunerated and therefore enabling the workforce to work effectively and efficiently because of the motivation they obtain. Both financial institutions have also increased their assets to significantly huge amounts ranging from 900 to 3061 depending on the banking institution.
This means that the institutions have expanded tremendously over the years and therefore can be able to finance its operations effectively. Their securities and deposits also are of significantly huge amounts. Though other German banks have been dissolved in the past because of their poor performance, it can be seen that these financial institutions have expanded their assets and securities and therefore have set up a huge customer base while reducing their risk significantly as a result of the risk management processes. Other German public banks have recorded huge percentage with regards to their liquidity while the status of the banking institutions was also found to be active.
Financial risk of a banking institution depicts negatively in the entire corporate image and therefore the organization will be most likely to loose the customer confidence. Risk management in banking institution is of outmost importance, it is therefore imperative that processes of risk management are put in place in order to avoid adverse effects of solvency (Frenkel, et al 2004). Banking institutions that carry out these processes are likely to succeed as this will enable the organization to strategise and predict the future position of the organization. On the other hand, in order to avoid high financial risk of the banking institution, it is important for the management and leaders of the institution to set strategies while considering the emerging strategies in order to avoid financial risks (Frenkel, et al 2004). In order for the institutions to have a competitive advantage over other competitors, it is imperative that high technological innovation like mobile banking and creativity is achieved. This will enable the banking institutions to be able to operate effectively and to provide quality services for its customers. Moreover, this will increase the customer confidence as well as reducing the financial risks of the banking organization. It is also important to recommend the expansion of the banking institutions to new markets this will enable the organization to set up a diverse customer base that will in turn increase the profits and hence reducing the risk of the customers, creditors and that of the organization.
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