A year ago, despite the war in Ukraine, supply chain problems and inflation, we were confident about the new year, both economically and politically. In the meantime, the outlook has darkened. Nobody is talking about a victory over Russia anymore. Does the West have a convincing concept? Do we need a new iron curtain to provide a credible security guarantee for the free part of Ukraine? Are we experiencing a déjà vu in Syria like after the fall of Gaddafi in Libya? Protectionism could make a comeback in the USA. Germany and France are weakened and so is the EU as a negotiating partner for the USA. German industry is still waiting for positive impetus from China in the doldrums. Major financial support from the central and regional governments there is unlikely, as the previously generous regional governments are losing income from the privatization of state-owned properties as a result of the real estate crisis. Only the Chinese central bank can provide support with significant interest rate cuts. At the same time, as a result of Chinese overcapacity, more and more Chinese goods are entering the international market, now with quality standards that are common in the West. And the sword of Damocles of an escalating Taiwan conflict hangs over everything.
STABLE BANKS ARE AN IMPORTANT PREREQUISITE
Although the economy in the EU, especially in Germany, is not doing well, share prices are rising rapidly. The stability of European banks is an important prerequisite for the economy to flourish again. In its latest Financial Stability Report, the ECB confirms that European banks not only have a high CET 1 ratio, but also a substantial voluntary capital buffer. Despite the rise in bank share prices last year and this year, the price-to-book ratio remains below 0.8. Banks around the world are particularly poorly valued compared to other sectors.
A look at the annual surpluses after taxes of all German banks over the last 25 years shows a very mixed picture. The annual surpluses fluctuate greatly from year to year – sometimes slipping into negative territory. The significant increase in surpluses in 2023 is unlikely to be repeated. Excluding the year 2023, there is no clear positive trend in profit development over the last 25 years. This raises the question of whether there are new business areas that can free banks from this paralysis – despite the increase in regulation and the growth of shadow banks.
COMPANY ADVISORY BOARD TAKES INITIATIVE
It would be great if the various FIRM discussion rounds could help to find new ways out of this situation. Numerous current discussion rounds have been initiated by FIRM and will be continued in the new year. The Advisory Board is also intensively involved in this. A brief review of the past year documents the variety of topics and challenges. More detailed reports on the Advisory Board meetings can be found in the upcoming issues of the newsletter.
At the first Advisory Board meeting in February 2024, Katharina Hombach, Professor of Financial Accounting and Corporate Governance at Goethe University in Frankfurt, gave an overview of the current ESG reporting standards with a focus on “ESRS – European Sustainable Reporting Standards” and various approaches to implementing these standards in practice. The Chairman of the Advisory Board, Dr. Wilfried Paus (Deutsche Bank), then explained what requirements the implementation of the new capital requirements under CRR III entails in the management of operational risks. Here, the transition from the loss distribution-based AMA to the standardized measurement approach (SMA), which will replace the AMA model from 2025, complicates decision-making processes for risk distribution. At the end of the advisory board meeting, Dr. Christoph Wronka from Deloitte presented the current position paper of the Asset Management Round Table “Crypto assets and Digital Ledger Technology”. The position paper outlines recommendations for action for asset managers that are crucial for the successful integration of DLT and digital assets into their business models
FIRM AWARDS RESEARCH PRIZE
At the members’ meeting in March, FIRM CEO Gerold Grasshoff analyzed the impact of geopolitical risks on the banking industry. Jens Wilhelm from PeakBlau then took a deep dive into the complex risks currently lurking in the real estate market. The subsequent advisory board meeting then dealt with the question of how personal communication works in receivables management. In particular, the focus was on comparing the chances of success of different methods of persuading defaulting debtors to pay. Prof. Dr. Christine Laudenbach from the SAFE Institute and Dr. Marcus Siegl from Intrum were guests for this purpose.
At the FIRM research conference in June, three selected young researchers presented the key findings of their dissertations. The final winner of the FIRM Research Prize is always an exciting prospect. This year it was Dr. Sasan Mansouri, who completed his doctorate at Goethe University and was supervised by Prof. Dr. Mark Wahrenburg. His research is based on questions and answers in telephone conferences between companies and financial analysts. The results of the study show that financial markets react negatively when managers obstruct the flow of information with so-called “non-answers”.
The second dissertation was written by Dr. Alina Stehskova, who completed her doctorate at the Vienna University of Economics and Business. In her dissertation, she examined the transmission of monetary policy decisions by the Federal Reserve Board in the
financial markets, in particular the relationship between exchange rates, interest rates and share prices. Our third prize winner, Dr. Urban Ulrych, extended innovative
applications of statistical learning methods in quantitative finance in his dissertation written at the University of Zurich. He thus makes an important contribution to combining theoretical and numerical developments in finance.
Mansouri received the 15,000 euro research prize, as did his supervisor. Stehskova, Ulrych and their supervisors each received 1,000 euros.
EXCITING PRESENTATIONS AT THE RESEARCH CONFERENCE
The research conference and the subsequent advisory board meeting covered a wide range of topics: Dr. Franziska Hünnekes and Petra Köhler-Ulbrich (ECB) used a large bank-firm panel to investigate which determinants influence banks’ credit standards. The study shows that banks with a riskier clientele of borrowers tighten their credit standards more when risks increase – unless the bank itself is financially very stable.
Tim Schneider (Deutsche Bank) captivated the participants with insights into the fundamentals and current developments in quantum computing. The era of quantum computing is approaching and with it the opportunities and risks. Schneider sees the effects of quantum computing on encryption technologies as a particularly important topic for banks.
In a position paper, the ESG Round Table examined how the different approaches of the European Union (EU) and the United States (US) affect climate policy and the resulting economic risks and opportunities. The authors Dr. Til Bünder and Nicholas Martin presented the key findings. Prof. Michael Nietsch spent several weeks in Washington D.C. to get a first-hand impression of the status quo and important developments in climate regulation. His report covered the SEC’s rules, California’s specific climate disclosure regulations and an assessment of the future relevance of these regulations.
FALL CONFERENCE AT VILLA METZLER
The round of Advisory Board meetings ended in September at the historic manor house of the Metzler banking family in Alt-Bonames. The hospitality and glorious sunshine gave our autumn conference a special
setting.
After a friendly welcome by Stefanie Buchmann, member of the Management Board of Bankhaus Metzler, Joshua Jung from ING Germany started with the topic: “Why ESG Matters”. Jung pointed out that the tide is likely to turn in the coming legislative period. Then it will no longer be climate protection that is at the top of the agenda, but competitiveness.
Nevertheless, decarbonization is becoming an economic reality. Prof. Dr. Josef Scherer from Deggendorf Institute of Technology addressed the current requirements in the area of governance in his presentation “Governance for fewer liability risks”. He sees the increasing importance of heightened liability risks
for managers as a key point here.
Dr. Michael Riecker and Saed Alavi from Protiviti spoke about “Penetration tests for more digital resilience”, with a focus on the practical application of Open Source Intelligence (OSINT) in the context of the Digital Operational Resi
lience Act (DORA). Strengthening digital resilience includes, for example, attack simulations to uncover vulnerabilities in a financial institution’s security measures.
PRACTICAL TOPICS AND PLENTY OF ROOM FOR DISCUSSION
In her presentation “Outsourcing in the financial sector: monitoring critical third-party IT providers”, Dr. Sibel Kocatepe from BaFin emphasized the growing dependence of the financial market on IT services and the associated risks. This makes it all the more important to monitor outsourcing. Since 2022, financial institutions in Germany have had to report their significant outsourcing arrangements in order to provide a better overview of critical dependencies
and prevent them.
In his presentation “From individual misconduct to corporate crisis”, Dr Sebastian Fritz-Morgenthal from Advisense addressed the transition from organizational misconduct to organizational resilience. Using
prominent examples, he showed how individual misconduct, group mechanisms and organizational weaknesses can lead to major scandals and corporate crises. He then offered concepts for organizational resilience.
Hannah Dimpker and Mark Rosenberg from Fitch concluded the event with their presentation “Geopolitical risks from the perspective of a rating agency”. They use modern data analysis and machine learning technologies to measure and predict political risks in real time. By combining large amounts of data, machine learning and expert knowledge, they create detailed and continuously updated risk assessments for countries, markets and political events worldwide.
The fall conference concluded with a guided tour of the Villa Metzler and a culinary dinner.
OUTLOOK DATES 2025
The FIRM Advisory Board will continue to actively monitor current developments in and around the financial sector in 2025. The following events are planned:
– January 30 in the afternoon: Online meeting of the Advisory Board (invitation already sent out).
– March 12 in the afternoon: FIRM General Assembly and subsequent Advisory Board meeting at the House of Finance
– June 5 all day: FIRM research conference followed by advisory board meeting at Frankfurt School
– September 25 all day: Final Advisory Board meeting of the coming year, by invitation at ING Bank in Frankfurt am Main
FIRM draws your attention separately to the various Round Tables, which will also meet several times in the coming year and form the thematic backbone of our Advisory Board.
We look forward to your active participation in the meetings, and in particular to your suggestions for topics that you find exciting. We would be particularly pleased if you would contact us yourself with a presentation proposal.
Your
Günter Franke and Wilfried Paus