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welcome everyone to this first lecture in the introduction to banking in this winter term 2020 in this very unusual year here at leipzig university my name is gregor vice i'm a professor of finance here and chair in sustainable finance and banking in the faculty of management and economics at leipzig university and this semester as every winter term i'll be teaching the introduction to banking [Music] we'll start with some background in the course organization i will tell you a little bit about where you can download the slides where you can get some additional information and as you can see from the outline we'll start even today with a short introduction and some basic characteristics of the germ banking sector and we'll continue with some theory this is one difference i guess between the universities of applied sciences and full universities that will also deal with some economic theory in banking we'll talk about uh the most famous models that explain the existence and the functions of banks banks obviously are connected to central banks so in the third section we'll talk about central banking and then continue because this is still a business class we'll talk about the business models uh the different income sources for banks and then continue to financial accounting risk management and regulation before ending this lecture with some special characteristics of foreign banking systems most notably not the german banking system we'll deal with this one today but with the us and maybe even the japanese banking system okay so let's start with the course organization you've probably noticed that usually we would have three hours that consists of two hours lecture and one hour tutorial uh the one our tutorial will be given in probably december and january stay tuned for the information to pop up in the moodle class but we'll have a two-hour weekly lecture here on every tuesday at 5 00 pm why a big blue button and for obvious reasons we'll have this one virtually wear a big blue button introduction to banking is an elective course in our bachelor's degree in economics you can get five ects points and it will conclude with a written exam that takes 60 minutes we'll have some previous exams uploaded to the moodle class so you can get a better idea of what the exam will look like if you're an erasmus dude if you're an exchange student here at leipzig you can take the class and you can either take the regular exam at the end of the semester or you can write a term paper which we here called rasmus paper and earn the five ects credit points now please keep in mind that the reset exam is at the end of the summer term so if you fail the exam you will only be able to earn the credits in the summer term which would mean that you have to take the exam probably in july early august 2021 so keep this in mind when planning your academic year all this lecture is supported by a lot of e-learning actually most of the information can be found in our moodle class you've probably noticed by now that all these lectures are recorded and i will upload them on youtube you can already watch some previous lectures from previous semesters on youtube but every year is slightly different the slides change from time to time but also i do put a different focus on some topics from time to time so it probably wise to watch the videos from this semester and only if you have too much time watch the old ones as well if you want to come to my consultation hour you can make an appointment wire calendly this is a link just by clicking on this link you will be prompted to my calendly website and then make an appointment this semester until we get a vaccine for kobit it'll probably be wire skype only and you can of course write me an email advice at viva dot uni minus leipzig dot d all the lectures are recorded and you can click on this link here on this huge youtube link and you will be directed to the youtube channel and you can subscribe to the channel but all those videos here in the introduction to banking are also made available publicly so you shouldn't have any problem finding the videos on youtube if you're more interested on my research if you're more interested on some current events and current topics in the economic discussion on banking banking regulation you can also follow me on twitter again also by clicking on this logo here and i've just seen that uh the first one of you has already subscribed to me via twitter and following me on twitter so thanks for that e-learning we also last but not least we have two mailing lists we have one uh this first one at banken it might be that some of you are not uh subscribed to this lecture or via our system alma web if you're not on alma web i cannot really send you any information via email so it would be wise if you subscribe to the ad banking mailing list and also i will not be redirecting job openings and job advertisements via alma web at least not the ones from external companies only internal job openings but if you're interested in receiving job openings for internships for student jobs but also for training positions and starting positions please subscribe to the jobs bank fin mailing list so that you can get these job openings okay now with the basic literature in this class again this class used to be held in german i switched to english some time ago and if you look at the literature especially at the textbooks at the at the beginner's level at the bachelor's level it's very difficult to find a good textbook on banking there are some around that are in english i don't particularly like them we do have a very good book in german that is bank between the german word for banking written by three colleagues hartmann vendels fingston and weber in germany this used to be the standard textbook on banking and i think it still is it's pretty good in many parts i don't particularly like some parts of it but most of the um most of this textbooks book is actually pretty good and um large parts of this lecture are based on this textbook i have to give you a disclaimer you don't need to read an additional textbook the slides should be sufficient for you to follow this introduction and the exam will of course be based on the textbooks no on these slides only so you don't need uh to read these textbooks along but of course if you are more interested in the topics of banking then i would advise you to every now and then have a look at one of these textbooks so the first one is bank between slaver banking by hartmann vendors fingston weber the standard textbook on banking i guess in germany the second one is bank between switzerland by guido eilenberger also a german book this one is even easier to read and it is probably somewhere between an apprenticeship and a bachelor's degree so it's somewhere between the german lira and bankhouse building and bachelor's degree so at many points this textbook is has a more practical approach it is softer on the theoretical side so you don't don't expect this book to offer you any theoretical insights into banking it is very practice oriented but this doesn't need to be bad so every now and then you can take a look at this textbook um and have an insight into the practical side of banking okay so what i'm trying to do in this lecture is i want to give you an introduction to the very basic principles in banking you should know what is a bank why is banking special from other fields from other sectors uh you should know the peculiarities of the german banking system um we'll be also be talking a lot about the u.s banking system but obviously the focus of my class is on the german banking system but you will learn general theories for the existence of banking you will learn general principles in central banking in risk management in bank regulation so at the end of the semester you should have a good overview of what banks do what banks are why banks are special and from then concentrate more on say risk management in financial institutions regulation etc so this is what we'll be dealing with here in the introduction to banking one disclaimer and one caveat i have to mention is that because this is a class on the german banking system all the examples when it comes to banking law will of course be german this will be german law german regulatory statutes and this is from time to time this is a little bit weird because we will be talking about german laws in english and this is i guess the best way to handle this uh you can always look at the original german legal texts but you will also find the english translations here on the slides okay so this is uh what i wanted to talk about the course organization check moodle please you can watch the videos on youtube we'll have a 60-minute written exam if there is no change due to the pandemic but let's assume that we'll have a 60 minute exam at the end of probably in february and yeah i hope you have fun in this class and learn a lot about the german banking system and banking in general so let's start with um the introduction now uh some basic characteristics of what is a bank what is so special about banking and later on what is so special about the german banking system so first we need to define what is a bank every one of you knows what a bank is you've already seen a bank you're probably a customer of at least one bank but we need to find a general economic definition but also later on legal definition because um it does make a difference if you are legally a bank or if you are not the recent scandal about wirecart is just a just the most recent example where probably a company which should have been regarded legally as a bank wasn't really a bank at least not for the german regulators and supervisors so this is not an academic not just an academic discussion but uh this is also very important from a legal standpoint so in general what are banks banks are companies um in its most basic form that take on deposits and that give out loans so you have deposit taking on the one hand side and you have lending business on the other hand credit for gaba lending and ein lag the chef deposit business deposit taking so obviously this only applies to a certain subset of banks because there are many many more banking services that can be offered we'll be learning about these banking services later on but at this point um it is sufficient to say that if you start out by taking in deposits and if you give out loans you are a bank and you see that banks actually have similar properties as financial markets and they compete with financial markets in a number of ways so we need to define financial markets before and then distinguish a bank from just any other financial market and in finance we say that a financial market is a market on which financial contracts are traded um well we start out by defining the first term by inserting a second term that you might not be familiar with what is a financial contract a financial contract is simply a claim to present or future payments to future cash flows so if you have a claim to a present payment or future payment this is a contract that will be considered a financial contract in german we also say finance contracts finance fatrac financial contracts it's very general anything can be a financial contract it could be a stock it could be a bond it could be a loan and that's why we define it in such a very general way because we want we need one term that covers everything a bond a stock a loan etc even a deposit contract so that's a financial contract and if you are on a market in which financial contracts are traded this is considered a financial market now in simple terms financial markets are the place where you have lenders and borrowers where they meet they exchange payments so it is clear that a bank is something similar to a financial markets they have similar functions but in contrast to a trading platform so financial markets such as a stock exchange a bank itself appears as a market participant on that particular financial market so yes banks and financial markets are quite similar they have similar functions but one important distinction between a bank and a financial market is that the bank itself appears as a market participant on the financial market so let's then define a financial intermediary because this is actually what a bank is it's a financial intermediary that intermediates between borrowers and lenders so in a strict sense a financial intermediary is an institution is a company that receives capital from lenders and it passes it on to borrowers for example other banks insurance companies venture capital funds etc and in a broader sense a financial intermediary only makes trading financial contracts possible or easier so what does this mean a stock exchange is already a financial intermediary in the broader sense and finance intermediate inviters in why it facilitates trading of financial contracts makes it possible or easier so a stock exchange is a financial intermediary in the broader sense in a strict sense and finance intermediary in england is a company is an institution that receives capital from lenders and passes it on so it intermediates cash payments that's a financial intermediary in the strict sense we have this um plot here that's still in german uh so that you already and also learn the german words for this you have the borrowers and the lenders capital giver capital nema and they give out loans and they receive loans and the bank facilitates this the bank is the intermediary that is put in between lenders and borrowers and for some reason it makes sense to have a bank between borrowers and lenders at this point in the lecture we do not know why it could be that the bank is completely obsolete it could be that this is simply a company that only rakes in rent and a company that could be substituted now we know this from many other companies and many other markets you probably know that uh the internet when the internet was introduced and at the start of the millennium increased its importance many intermediaries vanished because you could see that you can directly for example order some products from the manufacturers you don't need intermediaries this could be the same here why do we need a bank between the borrower and the lender there should be a good reason why the bank offers a service to both the borrower and the lender so that the bank has a right to exist and this is what we'll be dealing with probably next week and the week afterwards we'll be talking about theories that explain all that try to explain the very existence of a bank at this point we simply accept the fact that there are probably pretty good reasons why banks exist and the bank exists right between the borrower and the lender okay this is um the first way of defining what a bank is but in the end in every country um it's pretty much a question of a legal definition it's a question whether you are a bank under the law of that particular country so let's look at the german banking act um we translated it into a german banking act because this is what it's pretty much it it's the car viggi the kwg credits and gazettes and this is the the german banking act it's the one law that regulates everything that is concerned with banking in germany and in paragraph one section one sentence one so at the very beginning of the german banking act uh credit institutions credit institute are defined as banks companies that conduct banking operations commercially or on a scale which requires commercially organized business operations many things are important to note here first of all we don't particularly speak of banks we usually talk about credit institute credit institutions that's the word that is used in the german banking act second the definition doesn't really help at first because it simply says a bank is a company that does banking and that's not helpful at this point but it is important to stress that first of all it needs to be done commercially which means that if you give out as a private uh person if you give out a loan to a friend on an unregular basis and you don't do it commercially you don't do it as a business you're not automatically a credit institution and second if you're doing it on a scale which requires commercially organized business operations so if you're renting an office if you need staff etc then also you're a bank so next uh we need to know what are the banking operations and this is where paragraph one section one sentence two of the german banking act helps us it says that it actually um it enumerates all the different banking operations and it starts with deposit business so first deposit business acceptance of funds from others as deposits or unconditionally repayable funds from public unless the claim to repayment is securitized in germany briefed in the form of bearer or order bonds so in on contrast to bearer bonds order bonds are made out to the name of a specific creditor they can be transferred by endorsement [Music] in german but oddities either does these irrespective of whether or not interest is paid so if you accept deposits um you're a bank so if you do deposit business if you accept deposits from customers you are a credit institution full stop second one a fund brief business there is no english word for fund brief this german one it is the business specified in the german fund brief act i haven't found a very good translation for this upfront brief is an interest-bearing security that is issued by a mortgage bank usually and next to the solvency of the issuing bank in case of default you also have additional collaterals for example mortgages claims against the state bonds ship mortgages etc um fund briefers in the basement so if you're doing fun brief business if you're engaging in issuing these kinds of extra collateralized bonds then you are a credit institution credit business uh section two if you grant money loans and acceptance credits um as a vexel uh an accept credit um then your credit institution discount business uh purchase of bills of exchange and checks uh discount brief and discount shift principal broking serve brokering service purchase and sale of financial instruments in the credit institution's own name for the account of others so this is this is also a banking operation that will qualify your company as a credit institution under the german banking act five six seven eight you can see that it is a long list there are many things that are enumerated in paragraph 1 section 1 sentence 2 of the gem banking act and if you engage in any one of these operations you will be considered a credit institution there are some things that have been repealed for example e-money business why because e-money business used to be something very very old um that is nowadays uh that has actually become very current again you're probably not as old as i am so you don't remember this but a long time ago banks had already started to include something like a digital wallet on your euro check on your banking cards it used to be called gelt carter and the difference was that if you in germany if you pay with your banking card or a credit card this is basically you're giving a company you're giving a shop the right to withdraw some money and request some money from your checkings account from your bank account so what you are legally doing is you are signing out a right to the shop to request some money from your account so it's not really money that is exchanged but you're giving out you're signing a contract that the shop can request some money with e-money with the former guild card was different you could save money on your chip card and if you lost your banking card the money would have been lost as well so it's more closely related to what we would now consider a digital wallet that used to be called igeldgescheft in germany and this one has been repealed because it's no longer really current and now it's a little bit different okay so if you engage in any one of these banking operations you will be considered a credit institution now in addition to the list of banking operations the german banking act the cavity the kwg also distinguishes between different kinds of credit institutions the first one is a deposit taking bank this is a credit institution which operates operates financial commission business as well as credit business especially eindhlager shift this is important eindhlagen actually you have to know the german words the deposit taking bank in paragraph 1 section 3d of the kaviki distinguishes credit institutions from a deposit-taking bank why actually the deposit taking bank the ein lung institute is the strictest and the most important form of a credit institution you can be a credit institution if you only do for example a financial commission business or if you're engaged only in fund briefcraft but if you accept customer deposits then you are a full bank you are a bank which should be hit by the full force of financial supervision regulation that's why the german banking act is particularly stipulates that if you accept deposits you're a deposit-taking bank and then you will have to face full regulation in full supervision if you sometimes hear the words [Music] full bank lead sense in german newspapers so full banking license this means that uh the german banking supervision has accepted you and considers you to be a deposit taking bank because this is probably the most important and most dangerous type of bank that needs to be supervised if you operate financial commission business investment brokerage but if you're not a deposit taking bank then you're a securities trading bank and we also have so-called e-money institutions if you only operate e-money business okay so let's continue can you call yourself a bank a banker or a savings bank banki bank space etc no all these terms are legally protected by paragraphs 39 and 40 of the german banking act so you cannot simply open a company and call yourself leipzig bank that's not allowed if you operate under the name on the legal name with bank banker or savings bank you need an authorization of baffin to conduct banking business what is baffin baffin is the federal financial supervisory authority with its headquarters in bonn and a second office in frankfurt and it's the bundesliga financing livestream we'll talk a lot about financial supervision in germany later on but at this point it suffices to say that barfin together with the european central bank and german deutsche bundesbank is the head financial supervisor for credit institutions insurance companies and also other other financial services companies in germany now same with credit union or fox bank in german and savings and loan banks so-called spa and darlene's cousin you cannot simply open a business and call yourself a fox bank or sparta bank these terms are protected and they may only be used by credit institutions that operate in the legal form of a registered cooperative society belonging to an audit association what is that this is the german iggy in preference for bands what does it mean iggy is the german word for a cooperative registered cooperative and it means that you do have stockholders but all the stockholders are only allowed to own the same share in the company and this is a very socialist type of legal form actually a socialist type of business and it's a registered cooperative and uh it's in ein provence so if it belongs to an audit association means that all those small credit unions have formed together an association that is responsible for for a standardized auditing of all those different credit unions okay same with savings bank space may only be used by public savings banks and the so-called free or independent savings banks is this is very very german peculiarity savings bank sparkassen are usually banks that belong to a legal to a local to a locality for example to a county or to a city for example here in leipzig we have the city savings bank that is owned by the city of leipzig in some other large cities uh usually we have two savings banks one stat spa casa which is the savings bank of the city and one chris barcasser a savings bank that is owned by the county these banks are publicly owned these are government-owned banks there are a few banks a few savings banks that are not owned by a local entity like a city or a county but they are actually owned by themselves so they have a foundation and a stiftung and the savings bank is in the possession of that foundation this is why some of these very few spark houses very few savings banks are called free-saving springs freight parkers i think this is the case uh with husba the hamburger sparkers we also have some other names and some other terms building society bausch bar castle capital unlargo the investment gazette is an investment company these terms are also protected so you cannot really form a company and call yourself bausch bakas if you do you are supervised by baffin and baffin will have to give you an authorization will have to give out a license for you to operate under this name now in addition to credit institutions we also have financial service institutions financial companies finance the insulation financial services institutions they are companies which provide financial services to others commercially or again on a scale that requires a commercially organized business operation and which are not credit institutions what are some examples are proprietary trading investment brokering advice foreign currency dealing and much much more so these are some companies what are then finance not financial service companies but financial companies those are companies which are not credit institutions investment management companies or externally managed investment companies and whose principal activities involve those listed in section two of paragraph one of the german banking act like acquiring and holding ownership interest claims again payments leasing companies trading in financial instruments for own account etc so we have three types of financial companies we have credit institutions which are basically banks we have financial service companies and financial companies and if you go down this list starting from credit institutions financial service companies and financial companies you will have less and less supervision because we have less and less interaction with private customers okay some other types of financial intermediaries you don't need to remember this but again this is quite quite complicated in the german banking act because you need to consider all those different types of financial companies and you need to make sure that all companies that are connected to the financial market are actually regulated and this is one problem with wirecart large parts of wirecard weren't under the supervision of barfin because they couldn't be found here in these different legal definitions of financial holding companies financial institutions etc last but not least you should remember the word bank assurance what is bank assurance this is the english term for the german alphenance institute and it means that you as company you offer banking and insurance services so if you're a bank and an insurance company this is what we call bank assurance or in german alfinance unternee okay so these are the different definitions of the term bank and now let's continue to the different functions of banks one way to define the term bank was to show what a bank is under german law a different way of defining a bank is to show what functions a company can offer that make the company a bank so let's take a look at the most important market functions a financial market has different important functions it is important for coordination allocation and selection of capital it is important for lot size transformation low scores and transformation and maturity transformation um and last but not least risk transformation in every of these aspects banks which are in a way also a financial market they can also um [Music] offer these services in these functions so let's start with coordination financial markets basically help to match lenders with borrowers i have too much money i want to lend money someone else needs capital and he or she wants to borrow money so a financial market could help me find the borrower who i can give money to allocation financial markets allow for the efficient allocation of scarce resources in this case capital so a financial market or a bank could could help me as an investor find someone whom to whom i should give my money to whom should i should give my capital because i can get the best return selection in some cases access to financial markets is limited by certain regulations for example you have a credit score that is just too bad you don't have qualification as a trader you don't have enough capital you have too much risk so financial markets could help exclude some market participants and include others that's also uh one thing financial markets can achieve the next lot size transformation i want to give out 20 000 euros someone else only needs a loan of 5 000 euros what should we do i can give out 5 000 i want to give out more if i only want to invest 2 000 euros but someone else needs 500 000 euros for buying a house we have differences in the lot sizes the low scores and you buy so banks can try to do what they can rake in all the capital from different investors with different uh investment amounts and then they can take all these little cash sums they can sum it up and give out large loans so lot size transformation is definitely one of the functions of modern banks next banks also match investments of different maturities i want to invest short term the person who needs a loan for his or her house needs a long-term loan so different maturities can be matched and how is this done by banks they take in usually they take in short-term investments and they give out long-term loans and this is what we call maturity transformation and you have a maturity mismatch on the balance sheet on the two balance sheet sides of the bank so you have short-term funding and long-term investment when it comes to the maturity transformation of a regular bank and last but not least we have risk transformation maybe i as an investor i want to invest short term and without any large risk and the bank takes on a loan from a high risk person so we need to match the acceptable risk when it comes to funding and investment so this is risk transformation we have different financial contracts on the asset and the liability side of a bank and the risk of these different financial contracts of the funding and the investment they need to be matched by the bank okay now in addition to these rather abstract services for their customers banks also fulfill very important functions for the economy first of all they supply and they create money banks do not only match borrowers and lenders within a zero-sum game but they are also able to create commercial bank money um bank get shuffling this is shown later on when we talk about central banking but there are very simple ideas how you can show that actually because you have electronic electronic bank accounts you can create money and banks create money and they increase the money supply within a banking sector and second and perhaps most importantly they provide liquidity by investment services and they facilitate money transfer the banking and salons for if you don't have a bank account you cannot pay your rent you cannot transfer money easily so this is especially the facilitation of money and capital transfers silence repair payment services this is highly important and one of the most important reasons why banks are supervised and regulated okay now let's concentrate next on the two main areas in banking commercial banking the investment banking what is the one what is the other now in addition to the legal definition of the gem banking act in addition to the classification and the um the specification of the kwg of the cavity and in addition to the functions we've just talked about you can also very roughly separate banks into investment banks and commercial banks what is commercial banking commercial banking basically is traditional banking it's deposit taking and lending business and also payment services in contrast investment banking is everything that is related to capital markets and any service that is related to the capital needs of companies and anything that is related to capital ma kets so it could be asset management trading activities raising capital facilitating mergers and acquisitions facilitating loan acquisitions and all these things so what is an investment bank because for a commercial bank i think most of you are quite clear what a commercial bank is if you take a regular spa casa a savings bank or a credit union they take in deposits on their account they give out loans that's a bank sure but what is an investment bank an investment bank is a financial institution that helps their clients usually large institutional investors with wealth management raising capital and trading securities and in contrast to commercial banks investment banks do not take deposits at least not in their investment banking business so what can you do on the so-called buy side and the sell side now again investment banks are concerned about providing their customers with capital with capital services and they have a buy side and they have a sell side on the buy side they are advising customers what to buy and on the sell side they are advising their customers to sell financial products so on the buy side for example you have is this this is the side of the financial market that buys and invests large portions of securities uh you as an investment bank you advise companies regarding future investments so for example if i'm an investment bank and you are daimler or bmw i would advise you maybe you should be buying stocks of say samsung you should be buying uh stocks of apple um you securitize and you sell you sell and financially engineered products to investment banks clients so this is the buy side the customer buys something from the investment bank or the investment bank advises the customer what to buy on the south side this is the other side of the financial market so it deals with the creation promotion and selling of traded securities to the public if you are daimler and you want to raise capital you want to increase the number of stocks and you want to sell your stocks to other investors you ask me as an investment bank to advise you to help you how to sell sell your stocks how to sell your bonds so securities trading market making underwriting ipos mergers and acquisitions but also research those are the activities you will find on the sell side business of an investment bank now ultimately the definition of a bank given in the german banking act is a description of what we would consider as so-called universal bank meaning commercial and investment banking and in germany we do have a universal banking system meaning what german banks are not restricted from doing commercial or and or investment bank at the same time they can do both you can do investment banking and commercial banking just like for example commerce bank and deutsche bank are doing it in germany they can offer both commercial banking and investment banking in some countries this is forbidden in some countries you have what we call a separate banking system where you have to decide do you want to do investment banking or commercial banking you cannot do both germany is a universal banking system so most large banks are universal banks they offer both that is why you have to be careful with this definition in contrast to commercial banks investment banks do not take deposits this is clear deutsche bank does both but they do not take deposits in their com investment banking activities this is part of their commercial banking so be careful when distinguishing commercial from investment banking so a universal banking system consists of both universal banks in general one entity could provide all kinds of services we call this in german full bank lead sense or the deposit taking institute ein lange credit institute meaning that you're allowed to offer any type of banking service in germany in a separate banking system you have to decide commercial banking or investment banking okay so by now you should know what a commercial bank is what an investment bank is we'll talk a little bit more in detail about these two types of banking services later on but for now let's uh continue with the peculiarities of the german banking system now the german banking system as i've told you is a universal banking system so we have some universal banks but of course we also have specialized banks that have decided freely to only offer a subset of banking services now the universal banks cover the credit banks credit banking the private universal banks we have the savings bank and the cooperative banks or the credit unions and these are the famous three pillars of the german banking system those are the three pillars in german the derailed zoilin this deutsche bahn systems private shafts bank sparkassen and fox and reif eisenbaum so you have the private sector the government sector and the union sector or the cooperative sector those are the three sectors the three pillars of the german banking system some specialty banks include specialized credit institutions we have mortgage banks investment companies and so on but usually most banks are larger only the savings banks and the credit unions they are smaller in size now you could also argue that the german banking system of course doesn't only exist and consist of these banks but they also consist of the european central bank the ecb deutsche bundesbank as part of the european central banking system and buffing the federal financial supervisory authority in bond side note again the german banking system is a universal banking system if you do find a credit institution that has specialized on say investment banking this is for its on on the basis of its own decision it doesn't have um to decide it can offer both just like deutsche bank or commerce bank do so this is important to keep in mind this is a a plot and a tape no it's a it's a graph from the hartman vendel sphinx v babu uh you do have universal banks the three pillars and you have some specialized bank especially uh the online direct banks here uh they are probably very large uh but you also have some mortgage banks and their papier zamelbangs so investment companies but actually this one these three pillars are the most important ones okay we do have baffin we have european central bank and deutsche bundesbank and last but not least we also have the affiliates with my cursor this year where the affiliates of foreign banks operating in germany and we have the affiliates are and subsidiaries of german banks that operate in other countries and sometimes they are also supervised by baffin but also by the foreign regulators and supervisors okay let's start with the private banks the private chef spa the first of the three pillars are most important fact about the private business and private banks is they are privately owned um usually you have profit maximization and shareholder value as the sole business objective and they trade under the legal form of a stock company or a so-called commanding zeldschaft of actin so these are stock companies and this is important if you ever see a bank that operates as a stock company as a as a corporation it's a private bank and they often have their focus on investment banking securities business and very few ones like deutsche bank and commerce bank are universal banks now why is it important to stress that they operate as a stock company well you do have some companies some banks that operate under the legal form of a general partnership that is the german ohagie often handles gazelle shaft or a limited partnership that's a commanding gesture shaft but those are called private banks or private bankers or banking houses bank hoiser or private banking this is something weird or something special in germany historically we have had some banks that have been around for centuries even before german stock companies and the german stock act were put in place for example bierenbergbank bankhouse lumper sal oppenheim very very old very famous banks and they are still allowed according to paragraph 32 of the german banking act they are still allowed to operate as a general or a limited partnership but those are exception exceptions they are allowed to continue operation under these legal forms but you cannot found a new company as a limited or a general partnership this is no longer allowed since 1976 why because the german regulator thinks that these that banks shouldn't be allowed to operate as a general partnership or a limited partnership those are exceptions that were made for very famous banking houses bank hoisa that existed even centuries ago and most of these banking houses or these private bankers they offer services in the field of private banking or wealth management and investment banking be careful private banking is not to be is not to be misunderstood by retail banking if you as a student go to a bank and open an account this is retail banking this is not the german private kundan private banking is uh banking and offering financial services to wealthy customers so usually banks will require that you have at least one million euros of assets under management by this bank so you need to open an account with a lot of money so that's why or that's what private banking is now the private banks in germany consist basically of the four large banks deutsche bank plus post bank commerce bank and half of b hub of einsberg unique credit uh hypothesman is a very large bank that was bought by a unique creditor it used to be called like that and it's now unicredit a large banking company from milan from italy and half ob hooper feinstein is its german subsidiary and this is one of the large four major branch banks of the filial bank there are some banks that operate only regionally for example national bank the west bank and we have the large direct internet banks ing debug from direct uh used to be and uh dkb uh so these are internet banks we also have foreign banks uh banco santander which is called santander bank in germany some people call it santander bank but it's a spanish city of santander targo bank used to be the branch of citigroup until citigroup in 2008 sold what used to be called city bank in germany then to credit mutual and since then it has been called targo bank and we also have some banks like abn amro which only operate branches in germany to cater to their customers from for example the netherlands and then we have some private mortgage banks private building societies bauschbakas hippo real estate and so on now the private banks um are represented by a lobby group which is the bundesvar bank deutsche bank and they also operate the compensation fund of german banks and the deposit protection fund of the association of german banks and shillings foreign those are the deposit insurance schemes for this pillar so if a bank fails within this first pillar of private banks in germany the customers the depositors are being paid back their deposits from this deposit protection fund of the german federal association of german banks by bundesvarband in 2010 we had approximately 200 private banks uh in 2006. there used to be 357 and obviously the number of banks is decreasing as is the number of branches branches are being cut down they're being closed down and rationalized and this is yeah the german first pillar uh with private banks um you can see here an abstract from the annual report of deutsche bank uh you can immediately see that it has a pretty large pretty huge income statement and balance sheet for example in 2014 they reported a net income of almost 1.7 um billion euros and they had net interest income of 14 billion euros so pretty good year back then and they had close to 2 trillion euros it's my billion this is given in million euros so the total assets were close to 2 trillion 5 billion euros in 2014 and those were the liabilities side this liability side of the balance sheet just a quick look at the equity we'll deal about this and talk about this later on but notice the ridiculously small amount of 68 million no 68 billion equity euros in equity compared to almost 1.7 trillion euros in assets this is very special for deutsche bank but it's also very common for most banks that you have an equity ratio that is much much lower for a bank than it would be for example for an industrial company okay so let's turn to the second pillar of the german banking sector public sector public credit institutions spa now public sector credit institutions they are usually held completely or mainly by the state by the government even by state i mean usually the county or a city chris or so normally the federation a federal state a community an administrative union or another public agency is the owner or responsible body of the bank either state or they owe their existence to specific public interest the government didn't found these banks for no reason but usually it was to supply population with money or with credit with loans and often but on always they have the legal form of a public agency institution which means in german unstyled so it's not a private company it's not a stock company but it's actually a legal form that belongs to the state to the government and in many cases they restrict business to this particular city or to this particular county and they only offer specific banking products now in germany the following banks are considered to be the public sector credit institutions you start with deutsche bundesbank which is the federal central bank you have deca bank deutsche zero central which is the head institute for the whole savings bank sector you have the different londos button the the state banks which are state-owned regional banks like hillaba bayern lb not lb lbb you have savings banks actually this number is decreasing by the day it used to be 417 independent savings banks or savings banks in independent savings banks like husband you have some public law real estate credit agencies you don't really need to be concerned about these what is interesting is kfw kfv what is kfw the credit installed for vida aufbau the public sector bank federal bank for reconstruction was founded after the second world fort to help germany rebuild um obviously germany has been rebuilt by then and kfw is now the basically um the bank of the federal government by which it can stimulate and can support economic policy for example all those emergency loans given out by the federal government now as part of our pandemic plan most of these loans are given out by the kfw by kyv because this is uh the house banked so to say of the federal government okay now in 2006 savings banks in germany had 14 000 branches they are famous for a huge uh system of branches and they're cutting down on branches every day now and they had total assets of around 1 trillion euro the institutional liability uh which in germany called unstyled lust and the guarantor liability the get right after they were very important for the public sector banks until 2005 which meant that because they are state-owned you always have a public uh body a city or a council or a land a state in the background as the owner of this public sector bank and because these regional bodies are virtually default free and have no risk of default the banks themselves were almost risk-free and this gave them an advantage uh in the banking sector within the european union and this is why the european union abolished uh both these guarantees uh based on an initiative of the eu commission because the eu commission said that german banks if we want one common and one single banking sector one banking union german banks need to compete with spanish banks and italian banks and french banks in all european union countries but it also means that gem banks should not have an advantage over banks from other countries and the german state should not protect savings banks this is why the european union commission abolished these two guarantees and nowadays savings banks have to compete with other private banks and credit unions this is the balance sheet of husband as you can see uh public sector credit institutions especially sparcas and savings banks they have a huge focus on deposit taking and lending so you see landing here on the asset side and you see deposits here is my cursor here so that's basically what t ey do deposit taking and landing okay and last but not least we have the third pillar the cooperative credit institutions now the most important feature is that it's a cooperative an eintrache that is followed where the name is followed by e and capital g f then this is a credit union this is a cooperative and it means that the liable equity capital consists of the credit balances of the members so every client is a member and every member is a client so shareholders are clients et cetera they usually only do regional business they primarily grant loans and in this respect they're very similar to savings banks and again they are registered cooperative companies and this is what is so special about the credit unions now we do have again one central group institute which is the dz bank in frankfurt you did said bank and it acts and it functions as sort of a central bank for the whole third pillar with approximately and again the number of this is decreasing we have to uh look at the current number here uh we have approximately 1 000 credit operatives and approximately 10 spa and darlings bank we have five so-called psd banks those are pure retail banks some specialized institutions that offer special services to all those member cooperatives which is union investment this is the asset manager for all co-operative banks and rnv insurance and far fascism which is the insurance company for the whole pillar for this whole sector and also last but not least some specialized cooperative for example church-owned banks we have one bank that is owned by the catholic church and the largest cooperative is actually apple bank if you come out of the uh of leipzig central station take a look at the buildings and the advertisements on those buildings right in front of german of leipzig central station and you will see apple bank earthstone apoteca bank which is a credit union that was formed by pharmacists and physicians because they have they realized that if you start out as a doctor as a pharmacist after your studies it is very difficult for you to get a loan for setting up your business for setting up your practice going to a regular bank and that's why they form their own uh credit union so these are the 10 biggest banking companies in germany used to be in 2012. changes every now and then of course deutsche bank commerce bank kfw dzd bank unicredit the london bank bandwidth back lbbw lbbw had to buy the former saxon lb um the former uh lundusbunk of saxony so this is why we have lbbw here in leipzig as well uh not lb landsbank has touring hilar and postbank so these are the different um the different um banks in germany and to get a better idea here are the number of institutions the number of branches so it's pretty much uh equally distributed between uh the credit unions and the savings banks when it comes to branches but every bank is closing down branches because more and more online banking is done especially now in times of the code pandemic okay and this is also a table which should give you an idea where the money is usually it's pretty much in the deposits of non-banks which is customer deposits and they give out loans to banks and also to non-banks that is customers like you and yeah we can skip this you can have a look at these statistics and you can also take some more recent statistics from deutsche bundesbank to get a better idea of which importance each pillar has but one can say that those three pillars are equally important for the jump banking system okay so this was a first introduction to the german banking sector um by now you should know how to define a bank which main functions a bank has you should know that we have the german banking act the cave cricket business which is the most important piece of legislation we have in german banking at least and you should know about the three pillars of the jamming banking system so this is i guess enough for today i will not start the second chapter already um if you do have any questions please wait um in the big blue button room uh you can ask some questions and thank you for your attention up to this point and see you in the next lecture thank you you