FINANCIAL CENTRE REPORT 2017 Building Bridges 2 Financial Centre Report 2017 3

Dear Readers,

Just a few months ago, the federal state of Hessen celebrated its 70th anniversary. In the course of these seven decades, Frankfurt am Main has gradually become the most important financial centre in 1585FRANKFURT STOCK continental Europe. Frankfurt is where the European Central Bank (ECB), the European Insurance and Occupational Pensions Authority (EIOPA), the Deutsche Bundesbank, the Federal Financial Supervi- sory Authority (BaFin) and the Federal Agency for Financial Market Stabilisation (FMSA) are all based, EXCHANGE FOUNDED making it a centre of supervision and regulation for the whole of the EU. Even during the financial crisis, Frankfurt fared better than other financial hubs and perhaps even grew stronger compared to its rivals.

Nonetheless, like the financial industry as a whole, Frankfurt now faces a plethora of challenges. I would like to take this opportunity to home in on two of these, the first being digitisation. The rapid advance- ment of digitisation is forcing not only the financial sector to redesign its processes at ever-decreasing intervals and to fundamentally overhaul its business processes or indeed business models. Frankfurt as a financial centre has to seize this challenge as an opportunity, and the creation of TechQuartier sent out a strong signal that it is doing precisely that. The aim of TechQuartier is to serve as the central platform for the development of a fintech ecosystem, with the financial community, related technology fields and local academic institutions coming together to put Frankfurt on the global map in this emergent sector. 2017 The fact that the federal government has named Frankfurt one of five digital hubs can be marked up as the initiative’s first success and is a valuable boost for us. FOCUS ON The second key issue is, of course, the UK’s decision to exit the EU, which will undoubtedly lead to a reshuffle in Europe’s financial structure. This was not a decision that the Hessen state government wan- ted, but as it has now been made, what matters now is that here, too, we focus on the opportunities this offers Frankfurt as a financial hub. Many international financial service companies that had until now been handling their European business out of London will now have to look for bases within the EU. EUROPE The European Banking Authority (EBA) will likewise need to relocate. Frankfurt is competing with other financial hubs in this respect, and the key to this competition is Frankfurt having a clearly audible voice as a financial centre. Frankfurt Main Finance is this voice, and this yearbook demonstrates that it is backed up by sufficient substance to confidently rise to the chal- lenges and changes. I hope you find reading this yearbook interesting and informative.

Best regards,

Tarek Al-Wazir Hessian Minister of Economics, Energy, Transport and Regional Development Building Bridges 4 Financial Centre Report 2017 5

CONTENT

Preface 3

4 Editorial

Frankfurt after Brexit 6 Building Bridges 16 Science and Education Dear Readers, International, Interdisciplinary, Attractive Fintech 22 Tough Business, not Party 27 History The UK’s decision to leave the EU shocked more than just the world of finance. It was also a sign that The Spirit of the Free City Europe and the world are facing some challenging times. Not least the political developments seen else- An Expat's View 32 where since the Brexit decision demonstrate just how serious the situation is. And we don’t even have “We love the Mentality here” to look across the Atlantic – a look at France or the Netherlands or consideration of Poland or Hungary is more than enough for us to see that the idea of Europe hasn’t been in such a precarious state for a 36 Infographic long time. Focus on European Financial Centres Interview with Dr Gertrud Traud 40 It would therefore be totally inappropriate to indulge in short-sighted excitement about what oppor- “Frankfurt needs to be more confident” tunities Brexit and the possible resultant relocation of financial activities to the continent might offer Frankfurt and other cities. It is far more important that Europe be rethought and given new meaning in 48 The German Economy and Brexit the light of these developments. And as a main financial centre in Europe’s biggest economy, Frankfurt Still Strong, Despite All Challenges has a special role to play here. Regulation and Supervision 53 The Proximity Principle This Financial Centre Report, which continues the series of Frankfurt Main Finance Yearbooks, intends to shine a light on this role: how will Europe stay strong in the face of global competition? What 56 Property Markets role will Frankfurt assume in this network? What strengths do Frankfurt and Germany as a whole bring Frankfurt Will Benefit From Brexit – But How Much? to the table? How can a financial bridge be built to London post-Brexit (and, of course, to other cities Asset Management 64 in Europe)? Longevity Brings Opportunity

Our authors consider these and other questions from various perspectives. In the first part of the pub- 67 The German Banking Industry lication, they endeavour to capture as many as possible of the facets of (financial) life in “Mainhattan”, Strong Economies Need Strong Banks while in the second part, representatives of our members get to the bottom of this topic in their own Fintech in the Rhine-Main-Neckar Region 72 detailed articles. Partnership Replaces Rivalry

I hope you enjoy reading this report and the insights it gives. 78 Harmonisation of Covered Bonds An Important Step Towards Long-Term Preferential Treatment Higher Education 81 Promoting Hessen as a Place of Academia and Business

Yours, 86 Imprint

Dr Lutz Raettig Chairman of the Executive Committee, Frankfurt Main Finance Building Bridges 6 Financial Centre Report 2017 7

FRANKFURT AFTER BREXIT BUILDING BRIDGES

The UK’s “no” to the European Union came as a shock to Europe. Brexit threatens to be a heavy blow for the EU concept – and for London’s finance MY FAVOURITE sector too. With no passport to the EU, financial institutions there will have PLACE – SPOTS TO to look around for alternatives. Hessen is getting ready for its new role as FALL IN LOVE WITH London’s partner in the EU. Let’s take a stroll around Rhine-Main. “Love is a place” is the You could sense the uncertainty – title of a poem by “nobody knew what would happen next. Thursday, 11.30 a.m.: Architects and lawyers, graphic designers and PR E.E. Cummings. But people, bankers and investment managers mingle at the “Kaisermarkt” which places do people Gisela Paul market in the heart of Frankfurt. A long queue has formed in front of love in Frankfurt and the Gisela Paul’s stall. Together with her business partner Tina Bergmann, Rhine-Main region? Paul, a native of Frankfurt, sets up shop here twice a week to sell a local We asked bankers, speciality: “Frankfurter Grüne Soße” or green sauce. The original recipe politicians and other consists of precisely seven herbs. Her clientele is diverse, multifaceted experts. And we got and international, says Paul: “Few of them are true Frankfurters – I can interesting answers tell straight away.” And occasionally she sees a bank director, she says; which are presented on Gisela Paul sells Frankfurt’s green sauce. She doesn’t the banking towers that soar into the sky in the background are just a the next few pages. question the Brits’ love of the Frankfurt national dish. couple of hundred metres from here. Building Bridges 8 Financial Centre Report 2017 9

MY FAVOURITE PLACE: MY FAVOURITE PLACE: OPERNPLATZ SCHAUSPIEL THEATER

Robert Restani, CEO, Dr Johannes Reich, personally Frankfurter Sparkasse liable partner of B. Metzler seel. Sohn & Co. KGaA “Bustling city life, nature and, of course, the high culture “Theatre condenses, visualises, on offer at the important Alte interprets and abstracts social Oper opera house just a stone’s processes and issues. The throw from the key financial audience is called upon to institutions. Opernplatz brings rethink the issues, to question all the most endearing Frankfurt them and to expand their own attributes together in a vantage point to include new very small space.” views and perspectives. Theatre High quality of life thanks to multiple helps us tear down existing green spaces. Grüneburgpark is just internal barriers – a process one of a total of 40 parks in the greater MY FAVOURITE PLACE: Frankfurt area. that is becoming ever more LOHRBERG important in the current political and social environment.”

There are now groups of people around the poseur tables dotted It therefore comes as no surprise that the city is heavily plugging itself among the numerous food stalls, all engaged in animated conversation. as a place of refuge for those looking to flee London. Just a day after the “The market is life,” says Paul. “This is where people communicate and UK’s “no” to the EU, a website had been set up together with a hotline exchange ideas.” Last June’s Brexit decision was a major topic at the for frustrated British bankers. And Hessen’s Minister of Economics Tarek market, with many discussions being held in the queues and at the tables Al-Wazir travelled to London with a delegation in order to forge ties in the days following the referendum, Paul relates. “People can be more and showcase Frankfurt as a continental European partner. According to frank here,” the market woman says. “Including about business. That’s Al-Wazir, the Rhine-Main region’s winning arguments include its good something they can’t do in the company canteen.” But the mood and digital infrastructure, its ease of accessibility, its closeness to the European situation weren’t clear, Paul says, thinking back, “You could sense the Central Bank (ECB) and a high quality of life. uncertainty – nobody knew what would happen next”. Uwe Becker, This quality of life is palpable in the Grüneburgpark in the Westend-Nord Nonetheless, there is an air of confidence in Frankfurt that the city can mayor and city treasurer, part of town. People looking to escape the hustle and bustle of the city still benefit from this situation as a centre of finance. Because were it Frankfurt am Main can come here to enjoy the trees and small lakes, and unwind over a cap- to come to a hard Brexit, the UK would be excluded from the European puccino at one of the park’s cafes. One such person is Karin Schambach, single market. London-based financial institutions would then forfeit “The city skyline is so near founder and managing director of Indigo Headhunters, whose office is their “EU passports”. The set-up known as passporting currently allows when you’re at Lohrberg, and just two streets from here. The recruitment consultant specialises in asset institutions in the UK to manage their EU business activities from there yet there is still a great deal and wealth management, and is always on the lookout for new talent. without the need for an office in each of the EU member states. It is of greenery. Up there, you can She knows that quality of life in the city has a major bearing on people’s therefore quite probable that companies and financial institutions will show people how Frankfurt is career decisions. “Work-life balance has a hugely important role to play,” now be looking for alternatives in order not to lose their access to really just a village, on the one explains Schambach. “It’s no longer just a question of higher, further, continental Europe. Frankfurt could be that alternative, serving as a hand, but city-like and inter­ faster.” Frankfurt wins people round with its spirit – albeit perhaps not bridge from London to the eurozone. national, on the other.” immediately. “Many people come here with few expectations. But once Building Bridges 10 Financial Centre Report 2017 11

MY FAVOURITE PLACE: MY FAVOURITE PLACE: CAFÉ WACKER BIEBERER BERG AM UHRTÜRMCHEN STADIUM

they are here, they are taken by surprise and are delighted.” According to opportunities to be exploited too: Frankfurt is the centre of international Schambach, what makes Frankfurt so special is the fact that it is highly attention thanks to the presence of the ECB. Deutsche Börse and the international on the one hand, but personal, pedestrian-friendly and server farms based in the surrounding area are other major advantages, manageable on the other. It takes just 20 minutes to cycle all the way Schambach says. “Thanks to the IT infrastructure, the technical con- across the city. It is also very green, the recruitment consultant adds. ditions here are really very good.” “You can still get hay fever here,” she says, grinning, “unlike in London or Paris.” More than half of Frankfurt is made up of green space or water, Schambach doesn’t expect to see London pale into insignificance with more than 40 parks dotted around the city. According to a recent post-Brexit, but believes that the UK’s decision certainly can’t hurt ranking put together by the management consultancy Mercer, Frankfurt Europe’s other centres of finance: “London will always be there. But the is a country mile ahead of its European rivals in terms of quality of life: institutions based there will no doubt strengthen their representation Germany’s centre of finance is ranked seventh – far above Dublin (34th), here in Europe.” Karin Schambach is already seeing expats in London Paris (38th) and London (40th). increasingly turning their attentions to Germany. “This is mainly due to Stephan Ortolf, the uncertainties about future business,” says Schambach. “In particular Tarek Al-Wazir, And while quality of life may be something of a soft factor, Landesbank Head of Corporate Client Busi- in sales positions, people are suffering from existential fears. We are Hessian Minister of Hessen-Thüringen (Helaba) nevertheless expects to see the number of ness, Central Germany, also seeing a decline in spending on headcounts in London.” The recruit- Economics, Energy, people working in Frankfurt’s finance sector rise by approximately 2,000 DZ BANK AG ment expert believes that this development will intensify as soon as the Transport and Regional by 2018. Deutsche Bank is anticipating a rise of 5,000 office workers up parameters for Brexit have been established. “The significance of Brexit Development to 2020, while others are forecasting as many as 10,000 new jobs over “Inside it smells like tradition, and also its repercussions are increasingly dawning on people and the next five years. Karin Schambach is more cautious: “I obviously can’t while outside the sun shines organisations.” “A place for the important gaze into a crystal ball. Frankfurt does have opportunities that other almost all day and you can soak lessons in life: that the places in Europe don’t, but it also faces stiff competition.” When it comes up the hustle and bustle – with There would be more than enough room for exiled Brits in Frankfurt journey itself is the reward, and to languages, cities such as Dublin and Amsterdam are more appealing to a nice, strong espresso in front – and Jan Linsin, Head of Research at the real estate company CBRE, that even defeat has English speakers, she says. But the headhunter believes there are of you on the table.” agrees. He knows that interest is being shown in Frankfurt from abroad, a meaning – even if it’s simply and Frankfurt is well prepared: “We have good supply reserves.” The city that you get back up when already has close to 1.3 million square metres of unoccupied office space knocked down. And that team – that’s around eleven percent of the city’s office space. In comparison, spirit and motivation are more seven percent of Paris’s office space is unoccupied. Dublin has a vacancy important in the long run than rate of approximately eight percent, while in Luxembourg the vacancy individual players – rate is only a little over four percent. These are the findings of a short something I learned over many report published by the Cologne Institute for Economic Research (IW). weekends here.” Frankfurt’s office rents are likely to make London bankers prick up their ears too. It has an average prime rent for the year of EUR 474 per square metre – the equivalents in Paris (EUR 810m²/year), London City (GBP 700m²/year) and Dublin (EUR 673m²/year) are between 40 and a good 70 percent higher.

Many people come here with few “expectations. But once they are here, they are taken by surprise and are delighted.

Karin Schambach Building Bridges 12 Financial Centre Report 2017 13

Foreign banks will now have to weigh “up how to get their hands on an EU pass­ port. A letter box alone won’t cut it.

Jan Linsin

MY FAVOURITE PLACE: MAIN RIVERSIDE

“Companies and institutions won’t wait until prices have soared,” Linsin suggests. “Relocating is a lengthy process lasting several years.” It is in particular the foreign financial institutions looking for a new European base that might opt for Frankfurt over London. For example, the Swiss bank UBS announced in December that it had chosen Frankfurt as the location of its European bank UBS Europe SE. Russia’s VTB Bank likewise intends to manage its European business from Frankfurt in the future. And if media speculation is to be believed, Goldman Sachs plans to relocate up to 1,000 jobs from London to Frankfurt. “Foreign banks will now have to weigh up how to get their hands on an EU passport. A letter box alone won’t cut it,” says Jan Linsin.

In view of this, there are many new projects currently under development, Roland Boekhout, to add to the existing office space. “More than 400,000 square metres CEO of ING-DiBa AG of office space are planned in Frankfurt over the next three years,” says Linsin. Take the MainTor district, for example: the WINX building being “For me, the riverside of the developed between Untermainkai and Neue Mainzer Straße will result in Main is one of the best places an additional 35,000 square metres of office space by 2018. When comple- to be in Frankfurt. It offers a ted, the 110-metre-tall tower will fit into the Frankfurt skyline perfectly. very special and beautiful view Those who then work there will have a panoramic view of the city and over Frankfurt, showing both of the winding River Main. There is also the Omniturm tower, which is the historical as well as the getting taller and taller nearby. Its almost 54,000 square metres of space international character of this will house not only offices, but also residential units – something which is city. At weekends and on warm There’s a good view of Frankfurt’s desperately needed, according to Linsin. “The housing market is very tight and summer evenings in particular, growing skyline from the banks the city continues to grow. If there is now an influx of people, things could get it is a perfect place to meet of the Main. There are lots of new office towers here, including the cosy.” The intercommunal procurement of residential space, in other words people and have a relaxed walk WINX. beyond the city limits too, is therefore all the more important, says Linsin. along the riverside.” Building Bridges 14 Financial Centre Report 2017 15

City developer Dong-Mi Park-Shin is convinced that Eschborn wins double points: the city entices with its international firms and proximity to the Taunus mountains.

MY FAVOURITE PLACE: ALTE SCHIFFSMELDE- STELLE IN HÖCHST

The town of Eschborn is just around the corner, approximately 14 kilo- metres north-west of Frankfurt. Its approximately 21,000 inhabitants can travel to Frankfurt’s central station by train in a quarter of an hour, and they also have the Taunus mountain range with its recreational areas on We need to promote the Rhine-Main their doorstep. The town is well prepared to receive people getting out of London. “Companies were initially confused by the Brexit result, but this “region as a whole. was soon followed by a sense of confidence,” explains Dong-Mi Park- Shin, head of Eschborn’s economic development department. “Every Dong-Mi Park-Shin change also represents an opportunity.”

Directly after the Brexit referendum, real estate developers bought up space in Eschborn. Plans have been drawn up for some 130,000 square metres of tailor-made office space. And according to Park-Shin, this could Hauke Stars, be ready within just twelve months. “Our project developers are ready member of the Executive and waiting to assist new companies,” she says. The surrounding area is Board, Deutsche Börse AG very attractive, with more than 4,200 companies based in the five local However, she doesn’t see Eschborn as competition for Frankfurt. The business parks. “We’re small, but smart,” says Dong-Mi Park-Shin of “There are all sorts of great economic developer thinks there is only one way in which to appeal to her town. places and oases of green along foreign companies: “We need to promote the Rhine-Main region as a the banks of the River Main in whole.” Eschborn’s southerly business park is a prime example of this, boasting Frankfurt. The site of the former Deutsche Börse AG’s glass cube, Deutsche Bank’s high-rise building and ship reporting office in Höchst Back in Frankfurt, Gisela Paul is shutting up her stall. Tomorrow, she will the head office of EY, all side by side. And at the beginning of the year, came as a great surprise to me. reopen her “green sauce-mobile” on Schillermarkt, where she will sell they were joined by the South Korean company LG, which closed its of- The garden, which is open in the local speciality right by Frankfurt’s Bull and Bear. Demand for her fices in London and Ratingen in order to open its European headquarters the warmer months, invites you speciality is high there. “It can get really busy,” Paul says. Does she think in the Taunus region. While it wasn’t a decision prompted by Brexit, it still to relax by the water – far from she can perhaps win over the odd new arrival from the UK with her green means something to Park-Shin: “We see this as a compliment, because the skyscrapers and the hustle sauce in the future, we ask? For Gisela Paul, there’s no doubt about it: they can see that the future lies here and in the region.” and bustle of the big city.” “You bet!”  Building Bridges 16 Financial Centre Report 2017 17

SCIENCE AND EDUCATION INTERNATIONAL, INTERDISCIPLINARY, ATTRACTIVE

The Rhine-Main region leads the way in Europe in research and in vocational A campus full of atmosphere, with digital innovation for some years, for example. With digitisation in the and further training. The representatives of five educational institutions in the lecture halls bursting at the seams: finance sector advancing, these are areas of expertise which are in great the Frankfurt School of Finance & region explain what sets it apart in this respect and how it positions itself in Management. demand. the international competitive arena. Prof Dr Christoph Schalast: I think that as a financial hub, the Rhine-Main region has a very good set-up in the area of research and education; The Rhine-Main region competes internationally not only as a especially in comparison to our continental European rivals such as Paris place of business and finance but also with its teaching and or Amsterdam. More than anywhere else, Frankfurt stands for dialogue research on finance topics. In your opinion, how does the region between the field of teaching and high-end practice. fare in comparison to London or Paris? Prof Dr Lutz Johanning: The figures speak for themselves: there are six Ralf Frank: I don’t want to philosophise about whether the Rhine-Main state-run universities alone within a radius of approximately 100 kilo- region is ahead of, behind or on a par with London, Paris or Amsterdam. metres or within an hour’s drive in the Rhine-Main region, of which at But one thing’s for certain: Frankfurt is very important internationally as least two – the Goethe University Frankfurt and the University of Mann- a place of finance sector education too. Prof Dr Lutz Johanning heim – are top-class institutions that also compete internationally with Chair of Empirical Capital their excellent education in finance. TU Darmstadt stands for teaching In addition to the region’s strengths, where do you see room for Market Research, in computer science and engineering, which is becoming increasingly improvement? WHU – Otto Beisheim important in finance education. There are also three business schools in Buxmann: We have excellent universities and education institutions in School of Management, the area, including the specialist Frankfurt School of Finance & the Rhine-Main region. I think there is room for improvement in terms of Vallendar Management. We at WHU likewise offer specialised finance education how the universities work together. with an international focus, with our master’s degree in finance. Schalast: Overall, we rank very highly, as demonstrated by the internatio- Prof Dr Wolfgang König: We have one of the biggest research clusters for nal accreditations earned by, for example, the Frankfurt School. But Paris finance topics in continental Europe here in Frankfurt. This makes our and London are certainly in front in the MBA market. We are catching up study and education programmes in this sector all the more attractive quickly, though, as demonstrated by the success achieved in recent years. and diverse – including in conjunction with what our neighbouring universities and research institutions offer – and makes our competitive position that much stronger.

Prof Dr Peter Buxmann: In addition to the very good education on offer at Frankfurt stands for dialogue between teaching and the universities, there are the opportunities to pursue dual or combined “high-end practice. studies at many of the banks in the region – the combination of theory and practice, so to speak, right at the source. As the technical university, we have been international trailblazers in the areas of IT security and Prof Dr Christoph Schalast Building Bridges 18 Financial Centre Report 2017 19

The PhD students at our graduate school come “from more than 40 different countries.

Prof Dr Wolfgang König

Johanning: We at WHU Otto Beisheim School of Management offer not way to becoming this. Education in these financial market areas is there- only a Master in Finance but also very internationally oriented finance fore developing strongly. education in all our programmes – Full-Time MBA, Part-Time MBA, Executive MBA and Executive Education. Above all, I see room for Buxmann: The increased significance and visibility of the Rhine-Main improvement in the fact that Rhine-Main does not yet have the inter­ financial hub will also boost the profile of the region’s educational insti- national renown as a place of education that it deserves with regard tutions. This represents an opportunity. to its size and the learning opportunities offered here. Are the education options offered in the Rhine-Main region in Prof Dr Wolfgang König König: In addition to the established stability of the financial systems and particular diverse enough and are they structured in a way that can Executive Director, House of the high degree of social protection afforded to people compared with attract international students? Finance, Goethe University elsewhere around the world, we benefit here from the close correlation Buxmann: Yes, they definitely are. The proportion of international students Frankfurt between the banking and finance sector and the production of real goods. at TU Darmstadt is already 18 per cent, and it is a similar story at the A good position can and must be improved upon, of course. For example, other universities in the region. We offer a wide array of disciplines that there are strong arguments for expanding and focusing more on the will appeal to any international student, be it medicine, natural sciences, topics of asset and wealth management and also digitisation. The new humanities, social sciences, engineering or computer science.

Schalast: Making the student base and faculty more international has been an important issue at the Frankfurt School for some time. In parti- Rhine-Main does not yet have the international cular in our MBA and master’s programmes, the majority of our students are now from all around the world and less so from Germany. Most of our “renown it deserves. courses run entirely in English, which makes things easier for our inter- national students. And to help our international students whose German Prof Dr Lutz Johanning is not very good start their careers, we offer them targeted German lan- guage courses and special support from our Career Services department. Digital Transformation Management master’s programme offered by the Goethe Business School together with the universities in Darmstadt and Johanning: The content of the courses we offer at WHU is very internati- Kassel, which is starting in October 2017, is an example of how this can work. onal. All our courses are offered in English, and all of our study program- mes include mandatory semesters abroad or international modules. The Rhine-Main financial hub hopes to play an even more impor­ tant role in Europe post-Brexit and to serve as a bridge to post- König: I agree with everyone else. We already have very high num- Brexit London. Will this also boost the region’s standing as a place bers of applicants at the Goethe University Frankfurt. We receive ten of education? applications for each place on our bachelor’s programmes, for example. König: As it is not yet clear what shape Brexit will take, we can’t make any This allows us to choose the best candidates. We offer multiple English concrete forecasts about the consequences right now. Speaking generally, language master’s programmes in the area of economics and business it can be said that a strong financial hub needs to have strong research Tradition meets innovation: the administration – with no fees involved, which is virtually unique around and education by its side. So if the financial hub Frankfurt plays a more state-of-the-art lecture theatre the world. The PhD students at our graduate school come from more in the Altes Maschinenhaus (old important role in Europe in the future, this will also boost the importance machine hall) at TU Darmstadt, than 40 different countries, and only about half of them are German. The of research and education here. the Piloty Building on the campus fee-based master’s and LLM programmes at the Goethe Business School and the university’s administration and the Institute for Law and Finance are likewise selected by a large centre (from top to bottom). Schalast: Further development of the financial hub is generally a positive proportion of international students. thing for the region as a place of education. It gives us more potential cooperative partners and means there are more opportunities for intern- The finance sector is undergoing structural change and is facing ships and career starts for our students. the challenge of digitisation. How do university courses need to respond to this? Prof Dr Peter Buxmann Frank: I concur with Prof König in that it is still too early to make any Buxmann: When I was working at the Goethe University in a post-docto- detailed forecasts. But I do think Frankfurt’s status will be boosted by ral programme in the mid-1990s, we were already warning the worlds of Professor of information Brexit, and that will certainly benefit it as a place of education too. business and finance about the various impacts that digitisation would systems and head of the have. At the time, we weren’t taken seriously. We have been scientifically HIGHEST centre for innovation Johanning: Even without Brexit, the Rhine-Main region will become more studying the topic of digitisation and its economic impact for years, and business creation, and more attractive to the finance sector because it is the top European and we prepare our students for it. Many industries, including the world of Technische Universität location for risk management and monetary policy – or is at least on its finance, have taken a long time to accept the new reality of the digital world. Darmstadt Building Bridges 20 Financial Centre Report 2017 21

The Rhine-Main region boasts a great deal of highly Frank: In terms of conventional knowledge, those who work here are “qualified professionals. undoubtedly good or very good. But employees can and should further their training in the area of digitisation.

Prof Dr Peter Buxmann König: As a rule, we give our students a theory-based education in order to avoid just reflecting the latest trends. Nonetheless, we put a great deal of emphasis on the application of theoretical implications to regu- lar work practices. The more general this kind of theory-based academic education is kept, the more able the graduates will be in their later careers and managerial capacities to find the right answers themselves to the new challenges they face, drawing on these lasting foundations. The fact that the Faculty of Economics and Business Administration König: I, too, think that university teaching is way ahead of the primary users in this area. When it comes to digitisation, it is definitely the universities that are driving this development. We can undoubtedly offer even more academic courses in this area – but demand in the practical field needs to keep pace with us. The future of education lies in its digitisation.

Johanning: Fields such as risk management and regulation are already “Ralf Frank increasingly being incorporated into teaching programmes. We see Prof Dr Christoph Schalast room for improvement in terms of the integration of interdisciplinary Professor of Mergers & Acqui- topics such as psychology, because these disciplines can offer important sitions, Legal Studies & Ethics insights into how the masses behave and therefore into how to win over at the Goethe University regularly performs well in the various surveys Department, Frankfurt School markets. We have embraced these topics too at WHU. conducted among HR managers indicates that we have adopted the right of Finance & Management approach. Schalast: Structural change first and foremost means those working in the finance sector and elsewhere need to engage in continuing profes- Johanning: We at WHU address the challenges of digitisation not only sional development. And knowing how to deal with digital technologies with innovative teaching but also, among other things, with our dedicated has an important part to play here. We have just initiated our Frankfurt Center for Digitization. School Blockchain Center, one of the aims of which is to integrate this Ralf Frank new technology into our curricula. In addition, regulatory requirements Finally, what should your students definitely have learned in their and the topics of compliance and sustainability are becoming increa- time at your respective institutions? Managing director and singly important in education. Johanning: International, practical business administration and entre- secretary general, DVFA e.V. preneurship. And especially considering the financial crisis, we set great Frank: From my perspective, that first and foremost being the field of store by imparting social values and corporate social responsibility. in-service qualification, vocational training needs to be more tailored to the training participants’ needs. The participants need to be able Schalast: More than anything else, we want to provide our students with to select what they learn themselves and need to have the freedom to problem-solving skills. Sound expertise is important too, of course – but decide when and how they learn. In a nutshell, this can really only mean if you can’t apply that expertise to different situations, you won’t get that the future of education likewise lies in its digitisation. E-learning very far. We also take our students’ responsibility for ethical and sustain- and greater use of educational games are two facets of this – even though able behaviour very seriously, integrate this as a topic into our curricula the idea of games perhaps goes against the grain for those of us who are and are developing the faculty accordingly. more advanced in age. Frank: There are two skill areas involved in investment expertise and How well prepared are the graduates/employees for meeting future methodology: technical skills – what you invest in – and ethical skills – career requirements, for example, in relation to digitisation? how you invest ethically and well. Both of these have a key role to play in Schalast: The Frankfurt School came 67th in the world in Times Higher the education we offer. Education and Trendence’s Employability Ranking published last November and ranked first in Germany. The ranking is based on the Buxmann: A university’s education remit obviously comprises the impart­ opinions of HR managers and managing directors of global and German ing of expertise and methodologies on the one hand but also a practical businesses regarding which universities produce the best graduates – focus on the other. We take this and interdisciplinary education very not only in terms of their expertise but also their soft skills. So we feel seriously at TU Darmstadt. we are currently in a very strong position. Internationally focused educational König: Learning targets are formulated for all our courses, which each Buxmann: The Rhine-Main region boasts a great deal of highly qualified environment: at the WHU Otto and every student should have achieved upon graduation, as far as as Beisheim School of Management professionals. TU Darmstadt graduates are likewise regularly ranked near (above), all of the courses are they are able to. In particular, it is sound economic expertise and also the top in comparisons of universities based on HR managers’ opinions. offered in English. The University analytical, quantitative, empirical and normative skills that enable our For example, information systems at TU Darmstadt came first in the well- of Frankfurt (below) is notable for graduates to master the diverse and ever-changing challenges they will its free, English-language Master’s known ranking conducted by the WirtschaftsWoche publication. courses. face in practice.  Building Bridges 22

FINTECH TOUGH BUSINESS, NOT A PARTY

Frankfurt is to become a new European fintech centre. This is something that Fintech workshop: Frankfurt is i.e. enterprises that are still developing their initial business idea. They the city, the state of Hessen and the major banks there all want. The parameters competing for young entrepre- are provided with desks and a complete office infrastructure free of charge neurs. Many are drawn to its for this being achieved are ideal, and a great deal of effort is being made. The competitors, Berlin and Hamburg. for a period of nine months. “We’re confident that most of them will banking city is working hard to improve its start-up image. subsequently be able to pay rent,” says Elmar Schütz, who heads Aurelis’s project development in the central German region. A law firm assists the February 2017: The new TechQuartier in Frankfurt’s Pollux high-rise start-ups with any legal issues, and other partners are on board too. building next to the trade fair grounds is clean and spacious. The first fintech companies moved in on the second floor just a few weeks ago. Commerzbank kicked things off in 2014 with their “main incubator”, a Frankfurt’s new business centre for fledgling financial technology fintech accelerator that assists carefully selected fintech sector start-ups companies was opened by Hessen’s Minister of Finance Tarek Al-Wazir all the way from their establishment to market maturity. The wholly in November 2016 with the words “Frankfurt’s fintech dream is coming owned Commerzbank subsidiary provides start-ups with capital, expertise true”. This dream is backed by the state of Hessen and by sponsors in the and office space. The entrepreneurs, representatives from the worlds banking sector, with the Goethe University Frankfurt, TU Darmstadt and of business and academia, and investors can all exchange ideas in a the WIBank Hessen acting as shareholders. regular event series called Between the Towers. Deutsche Börse followed suit, opening its FinTech Hub in a former drug factory in the Bornheim TechQuartier currently has 1,800 square metres of space which it lets out district of Frankfurt in April 2016. It offers fintech companies a total of to young start-ups in the finance sector in the form of workspaces, confe- 60 workspaces rent-free, arranges meetings with experienced financing rence rooms and event space. According to the managing director of the and market experts, assists with the preparation of investor meetings and operating company, Sebastian Schäfer, it has its sights set on two target gives the companies feedback on their sales and marketing strategies. groups: fledgling fintechs that can’t yet afford their own office space on The Deutsche Börse Venture Network is also based there, which brings the one hand and international start-ups looking to gain a foothold in investors into contact with growth companies. Deutsche Börse hopes that the German market on the other, that need a straightforward office space this project will lead to a larger number of companies going public on solution with short tenancies. But TechQuartier has a lot more to offer the stock exchange in Germany. But more than anything else, it hopes to than just office space. “With the help of partners, we promote and bring promote the entire fintech ecosystem. Just a few months later, Deutsche together the fintech community in the Rhine-Main region with events Bank opened its Digital Factory, a development centre for digital banking and programmes,” says Schäfer, who headed Unibator, the new business products. Some 400 employees from 14 different countries draft and centre at the Goethe University Frankfurt, for many years. programme products here using cutting-edge methods. There are also 50 workspaces there for fintechs. Demand was high right from the start, and the centre is therefore to expand into another floor in May. There were 63 fintechs in Frankfurt in In short, Germany’s city of finance has entered the arena to compete March 2017, and in Rhine-Main as a whole there were 90. Ten of these for young financial technology companies, with numerous incubators, were newly founded in 2016. Among other things, this growth can be accelerators and networking initiatives doing their bit. It should also accredited to the increased efforts in the past two to three years on the not be forgotten that Frankfurt boasts a number of advantages, such as part of commercial enterprises to create a positive climate for fintechs its proximity to the major banks, the European Central Bank, Germany’s in Frankfurt. Other hubs have cropped up, in addition to TechQuartier. Federal Financial Supervisory Authority (BaFin), and the regulators and The real estate company Aurelis recently opened shared office space rating agencies. Nonetheless, young people are still primarily drawn to called VABN (which sounds like the German word for “honeycombs” or the meccas of creativity, Hamburg and Berlin. “Berlin has something of a “cubicles”) in the Bockenheim part of town for eight early start-ups, coolness factor,” explains Oliver Naegele, founder of FinTech Headquarter, Building Bridges 24 Financial Centre Report 2017 25

In early 2017, the real estate company Aurelis opened up an office suite for entrepreneurs who are just getting started. Students at the University of Applied Sciences, 3 QUESTIONS 3 ANSWERS Mainz, designed the space.

a Frankfurt-based community network for the fintech and banking scenes in Germany and further afield. Frankfurt has a reputation for being a cold city of banking, so it still has to work on its image. Naegele, who currently “MAKE INCENTIVES A PRIORITY” has a start-up called Blockchain HELIX in addition to running FinTech Headquarter, is pragmatic about this: “Fintechs aren’t about partying – they’re a tough business.” Mr Lukic, you have been on the Main region do still need to make this Andreas Lukic, Board of Business Angels Frank- a priority. If they don’t, it will continue Honorary Chair- Tough business – yes, that certainly sounds like Frankfurt. There have furtRheinMain for eleven years. to be only mediocre as a financial hub. man of Business been some initial successes here in recent years with fintechs such as How do you rate Frankfurt as a So what could be more important than Angels Frankfurt Genome, vaamo, creditshelf and Fintura. “We feel very much at home location for start-ups? developing new growth companies RheinMain e.V. in Frankfurt,” says Tim Thabe, who founded creditshelf together with Frankfurt and the Rhine-Main region and entire new industries? The State and Managing Christoph Maichel and Daniel Bartsch in 2014 as an online marketplace essentially have a great deal of poten- Premier should form a committee of Director of for SME loans. The fintech helps SMEs finance their current assets tial. There are a number of industry experienced investors, business repre- ValueNet Capital affordably without having to provide collateral. The company took clusters that have evolved here, such sentatives, entrepreneurs and consul- Partners GmbH, second place in the 2016 Frankfurt Startup Award. as in the areas of banking, the phar- tants. This committee then needs a Frankfurt maceutical and chemical industries, sizeable budget and resources that Thabe is a seasoned expert with a great deal of experience in the field of and media/publishing, which means are tied to stipulated targets, such as credit risk management. He has had six-year stints working at both there are perfect cooperative or even the organisation of regular, top-calibre Goldman Sachs in London and UBS in Zurich. When he and his partners exit partners. Frankfurt is also heavily events attended by investors and in Frankfurt since 2015. To what had to choose a base, they opted for Frankfurt. “We work closely with international, with numerous inter- entrepreneurs from all over Europe, extent does this set an example? banks and investors,” explains Thabe. “And Frankfurt offers the best national events being held here, and and regular private financing of prom­ The award jury comprises real inves- parameters in the area of B2B finance.” Other factors that won Thabe it also boasts a strong infrastructure ising start-ups. Because entrepreneurs tors and entrepreneurs who have all over were Frankfurt’s good logistics connections within Germany and the and good universities and educational and investors are highly mobile, you been responsible for investments and large number of universities here. “We have recruited a lot of employees institutions. Even so, in comparison to know – they go wherever there is mo- value enhancement in the past and from the universities in Frankfurt and Mannheim, but also receive specu- other places, it still lacks incentives to mentum, where they think they will therefore know what they are judging. lative applications from bankers looking to strike out in a new direction.” attract entrepreneurs and investors to find expertise and, in particular, where We examine a three-figure number of engage in business here. they will be financed. fintechs highly critically in terms of Fintura, which operates a comparison platform for corporate finance, how well they are financed, whether has its office at Deutsche Börse’s FinTech Hub. Although the company’s What incentives need to be created? Business Angels, Frankfurt Main their business is scalable and what the founder and Chief Executive Officer Gernot Overbeck lives with his There have already been a great many Finance and the WM Group (Bör- prospects of an IPO or sale are. To do family in Basel, he and his business partners chose the city on the Main positive developments in recent years, sen-Zeitung) have been bestowing this, you need experience in this line as the location for their new business in 2014. He too sees proximity to but the state of Hessen and the Rhine- the FinTechGermany Award here of business. the banks as a strong argument in favour of Frankfurt as the location of the company headquarters. “We can meet our bank contacts over lunch Building Bridges 26 Financial Centre Report 2017 27

HISTORY THE SPIRIT OF THE FREE CITY The Deutsche Börse fintech hub supports four founding companies with networking and rent-free office space.

here to discuss how to proceed with our joint projects. I have the mobile number of the director of WIBank, so I can even call him at the weekend if need be.” The universities are becoming increasingly active too and are committed to the start-up scene, says Overbeck. “If Frankfurt maintains its current pace, it will soon overtake Berlin and London,” he says very optimistically.

Both around the age of 40, Thabe and Overbeck are good examples of Frankfurt’s start-up scene – no longer quite as young and hip, but, on the flip side of the coin, with years of industry experience and clear ideas about business. But according to Schäfer of TechQuartier, a proper, functioning fintech ecosystem still needs to be developed in Frankfurt. “Frankfurt has a talent problem,” he says, adding that there were still It all began with getting across the Main River. “Were we to take a stroll far too few young and smart individuals who were interested in setting through the history of this financial hub, we would start there,” says up their own companies. There is also a lack of investors, as these are historian Berenike Seib, pointing out of the window and upstream. primarily focused on London and Berlin, says Schäfer. “Frankfurt and the state of Hessen need to rethink their position if we are to attract these What she is pointing at is the Alte Brücke bridge a kilome- kind of people to the region.” Schäfer just recently travelled to Israel with tre from where she works at the head office of Metzler a delegation in order to promote Rhine-Main as a fintech location. Bank on the banks of the Lower Main (Untermainkai). “A great deal of interest was shown.” First officially recorded at the beginning of the 13th century, the bridge has been destroyed and then The ball is now rolling, and Frankfurt and the region are making good rebuilt at least 18 times. It rapidly became a source of ground. The diverse activities of the finance centre’s initiative Frankfurt income for the city on the one hand and a testament to Main Finance also contribute to this upward trend. For example, the its character as an important hub of European trade on initiative has started and supervised several international collaborations the other. Several major roads intersected here. “There – with South Korea, Hong Kong, the Netherlands, Norway and Israel. was already the ‘Frankfurter Kreuz’ junction back then,” There is a vibrant community that takes part in all the various network says Seib. events regularly organised by the hubs. According to a study conducted by Ernst & Young, the representatives of fintech initiatives give develop- The city’s name itself explains how this all came about: hundreds ment of the Frankfurt/Rhine-Main region as a fintech hub a rating of 3.7 of years before the bridge was first mentioned, at the time of Charle- on a scale of 1 to 5. And there are, of course, young, talented individuals magne, Franconofurd was already an important place. The Frankish king here, too, and that indicates that Frankfurt has a promising future. For chose this spot as a rallying point for his troops in his campaigns against example, 25-year-old Jannik Olusoga began to develop an app with the Saxons because the ford (Furt) in the city’s name meant the Main was friends, while sitting round the kitchen table, that gives people with ab- shallow enough here for it to be crossed in a cart. And the fact that there solutely no investment experience easy access to the capital market. The Where it all began: were good opportunities for hunting in the local forests may well have app allows card payments to automatically be rounded up to the nearest the Alte Brücke bridge over swayed Charlemagne’s decision too. This is, at least, the theory posited euro. The aggregate rounding differences are then invested in portfolios the Main. The 1889 painting by the historian Carl-Ludwig Holtfrerich in the standard reference work consisting of ETFs. The first round of financing is in the planning stages, by landscapist Peter Becker Frankfurt as a Financial Centre published in 1999 on the initiative of and and the company called Berries, which has since been given office space depicts the bridge in the with the support of Metzler Bank on the occasion of the private bank’s at VABN, hopes to enter the market before the year is out.  17th century. 325th anniversary. Building Bridges 28 Financial Centre Report 2017 29

3

4

Favoured by nature – and kings

Unsurprisingly, Frankfurt benefited not only from its advantageous geo- graphical conditions over the subsequent decades and centuries but also 5 from the patronage of those in power. In 820, Charlemagne’s son Louis the Pious turned Frankfurt into the seat of his palatinate, and, according to Holtfrerich, the German monarchs stayed in the city 75 times between 794 and 912. The German king was elected here no less than six times between 1140 and 1250 – compared with eight times in total in all the other cities within the kingdom. It was only logical that Frankfurt also be officially named the residence of the German kings in the famous Golden Bull decree of 1356.

The city’s political significance brought with it econo- mic privileges: the German kings fostered Frankfurt’s development by waiving customs for merchants from outside of town, thus boosting trade with the city by making the city a venue of fairs and by eventually also granting it the right to mint its own coins. This was a not entirely unselfish move, as they hoped the city’s economic 2 upswing and the resultant influx of more and more wealthy individuals would help fill the state coffers. In particular, the Frankfurt fair served as a cornerstone of the region’s economic development. Taking place up to twice a year, the fair is first recorded in writing in the mid-twelfth century. “Frankfurt had a population of no more than 10,000 in 1400 but had up to 5,000 visitors when the fair was on,” explains the historian Seib. “The royal coronations were a grand affair too, and you can imagine the kind of money something like that brought to the region.”

The name of one of the city’s landmarks – the Römer (Roman) building A symbol of the town’s – tells us that trade made Frankfurt a highly international city very early political importance: this on: it is said that Roman traders stored their wares in this building, which 18th century copperplate 1 is part of Frankfurt’s historical city hall ensemble. “This fits in neatly engraving depicts the with the history of the city as a financial hub,” explains Seib. “People citizens of Frankfurt paying could buy pretty much anything here, be it horses, books, wine or fabric. homage to Franz I. on the In keeping with its international nature, the city is reported to have seen occasion of his election as its first elephant and ostrich as early as in the 15th century.” Roman Emperor. Building Bridges 30 Financial Centre Report 2017 31

This brisk trade brought not only exotic goods and animals to Frankfurt Frankfurt’s stock exchange was founded that same year, with immigrants – it also introduced another and perhaps more important asset in terms from Antwerp playing a not insignificant part in its establishment. Its of the city’s future development, namely knowledge. “Just 300 years ago, creation was triggered by a petition lodged by 82 merchants. According you only had to travel a few kilometres to find yourself in a place with to Holtfrerich, only 13 of these were Frankfurt merchants – and twelve a different currency and entirely different units of measure,” explains of these 13 had previously immigrated from the Netherlands. Of the 48 Seib. “This was a huge obstacle to trade – but it did mean long-distance stockbrokers in Frankfurt in 1589, only six were locals – although this traders had a great deal of expert knowledge.” And, like the considerable figure did go on to swell considerably over the following decades. wealth accumulated by these traders, this expertise could be put to use not only for trading in material goods but also for financial transactions. For Berenike Seib, this striking moment in Frankfurt’s history is a prime Seib’s employer, Metzler Bank, started out as a business in the cloth example of what characterises the city to this day: “Even back in those trade, but, like other families, the Metzlers soon saw that banking was days, the people of Frankfurt welcomed strangers with open arms – and an attractive profession. that’s essentially true to this day. Anyone wishing to settle here will readily be integrated,” she says. “These immigrants always brought a Beneficiary of political openness great many ideas with them, lots of new things, insights and a good network. And the city benefits from this openness to this day.” While Frankfurt certainly enjoyed some favourable conditions in its early days, its rise to become a financial centre of European import was Decades marked by change anything but linear and uninterrupted. In the course of the centuries, it found itself in the shadows of other cities on the continent again and It is apt that one of the most important symbols of German democracy again – and time and again, it benefited from its characteristic political – St Paul’s Church, which still features in Frankfurt’s skyline – and what openness when it came to stepping out from the shadows. “A few excep- was possibly the most traditional symbol of Frankfurt’s financial world tions aside, Frankfurt always went its own way as a free imperial city,” – the Alte Börse (Old Stock Exchange), which no longer exists – stood says Seib. “There were never any religious or secular leaders here who just metres from one another as the two most important buildings on meddled heavily in Frankfurt’s development. This also means the citizens Paulsplatz in the heart of the city. of Frankfurt have always had to fend for themselves – if they wanted to achieve or obtain anything, they had to go for it themselves.” The church, which was completed in 1833, and the Old Stock Exchange – and subsequently its larger successor built on Börsenplatz in Both of these circumstances would prove to be a blessing for Frankfurt 1879 – lived through decades of historic change side by side: on more than one occasion in its history. For example, fairs in the industrialisation; the city’s annexation by Prussia, the Champagne region of France were far more important as trade centres resultant loss of importance of Frankfurt as a centre of than Frankfurt in the late Middle Ages – in particular for wool items, finance and the loss of its diverse private bank scene; which was the primary commodity traded in Europe at that time. But the First World War; the period of National Socialism according to Carl-Ludwig Holtfrerich, these fairs rapidly forfeited their and the destruction of St Paul’s Church in a fire significance starting in the second half of the 13th century, all because following an air raid in 1944. the rulers in France adopted a protectionist policy to protect French manufacturers of wool items from increasing competition The darkest chapter in the history of Germany also in Italy. This triggered the affluent Italian cities to begin marked a serious rupture for Frankfurt’s banking sourcing their wool from England instead – and trade industry, which had been heavily influenced by the Jewish between these two countries was primarily conducted community right from the start. “There were a lot of private via Germany. That’s how Frankfurt then became the bankers who were Jewish in Frankfurt,” relates Berenike Seib. successor to the Champagne fairs. Holtfrerich suggests “Albert von Metzler, who ran our company from 1923 until 1977, that this development was further facilitated by the counted Jewish bankers among his friends and regularly discussed fact that, while France was pursuing its protectionist the political developments with them. He realised early on that there policy, internal customs duties were being abolished on was no future for Jews in Germany, and he later helped two of his Jewish the Rhine River. friends emigrate.”

Frankfurt’s openness and the fact that it was somewhat Von Metzler himself became a prisoner of war under the Soviets in 1945, detached from world affairs very much worked in the city’s A symbol of freedom and but returned to Frankfurt in 1950 and gradually rebuilt Metzler Bank favour on another occasion a little later in its history. In the tolerance: today Frankfurt together with his cousin Dr Gustav von Metzler. He was fortunate enough 16th century, Antwerp, which was a key European trading point still inspires those who see to see the city flourish again in the decades up to his death in 1989, and stock exchange at the time, became embroiled in politics – firstly the Paulskirche (St Paul’s experiencing it as a centre of finance after the Allies decided to found the with the Netherlands’ struggle for independence from the Spanish crown Church) as the birth place Bank of the German States there and also as an open-minded city in and secondly with the Counter-Reformation. Rioting Spanish soldiers of the National Assembly in the heart of Europe. “I hope we Frankfurters can hold on to this open- The start of something big: looted the city in 1576, and many of its inhabitants, in particular its 1848. The watercolour by ness,” says Berenike Seib. “After all, it’s what the city thrives on. Which the Alte Börse (Old Stock merchants, fled. When the Spanish governor Alessandro Farnese retook Jean Nicolas Ventadour de- is why I would like to wrap up our walk through Frankfurt’s financial Exchange) – depicted here Antwerp in 1585, all of the city’s Protestant inhabitants were banished. picts the church in this year history with the euro symbol outside the ECB – it absolutely stands for in an 1845 lithograph – Known for its – certainly for the times – tolerant and open attitude, of democratic reform. this openness.”  became too small after only Frankfurt welcomed the Protestants who had left Antwerp, together a few decades. with refugees from other regions in Europe. Financial Centre Report 2017 33

AN EXPAT’S VIEW “WE LOVE THE MENTALITY HERE”

The US banker Christopher Porter has been living in Germany for 17 years. In the interview, he in particular praises Frankfurt’s international flair and openness.

It’s 4 p.m. on a Wednesday afternoon, and we’re in the traditional Frank- furt pub “Das gemalte Haus” (the painted house) in the Sachsenhausen part of town. The first rays of springtime sun are shining through brightly coloured frescoes; antlers mounted on the walls stand as a testament to past hunting successes, and Hessen’s regional drink, apple wine, which is still made right here, effervesces in stone jugs. Christopher Porter has suggested a very traditional place as the venue for this interview. As soon as the American enters the establishment, which is gradually getting busier, it becomes clear that it’s not by chance that he chose this place. “Hey, Chris, how are things? How’s the family?” asks the owner, Andreas Rupf, while shaking his hand and patting him on the shoulder. The two of them are soon engaged in a conversation about his nearest and dearest. But Porter doesn’t leave the interviewer and photographer waiting for too long. After all, he still has to fly to London himself this evening. As head of the Frankfurt branch of the US bank BNY Mellon, he has been invited to attend a consultation there on the topic of Brexit.

Mr Porter, going by the welcome you just received, we can save our- selves the question as to whether you feel at home in Frankfurt… You could say we were a prime example Definitely! My wife, my three kids and I absolutely love it here – in fact, I’ve now been here for 17 years. We love the mentality here and the city’s “of successful integration. cosmopolitanism and international flair. I know Andreas from our rugby club, SC Frankfurt 1880, for example. Our kids play there, together with Christopher Porter other children from all over the world. You could say we were a prime example of successful integration.

Rugby isn’t exactly a traditional German sport… … nor is it a typically American national sport. Rugby certainly has a long tradition in Frankfurt. SC Frankfurt 1880 was originally founded as Building Bridges 34 Financial Centre Report 2017 35

a rugby club, which means they have been playing rugby here since 1880. What's more, an international sport such as rugby is typical for Frankfurt. It’s important that Frankfurt The fact that so many people come together and interact here is really “serves as a bridge. The financial what makes this city stand out. Perhaps it’s the fact that the airport is just around the corner. Or it’s ultimately a question of the mentality of centres can only be successful the people here, even though very few of them were actually born and raised here. together.

Thinking back to your early days here in Germany, how did the Christopher Porter process of transition go for you? It was very easy. I come from Pennsylvania, which was heavily influenced by German immigration. So perhaps I had already been socialised in the USA. I like the German mentality, and by that I mean the typical virtues of reliability and punctuality. This gives you a sense of security – something that is especially important in the finance sector. I had already learned German at school and also studied in Marburg for a year. So I didn’t hesitate when I was given the opportunity to move to Germany to work for BNY Mellon in 2000. For me, it was a case of love at first sight.

Was your wife equally enthusiastic? There was a degree of persuasion involved initially because she felt very at home in New York. But now it would be very difficult to get her to leave again. What matters is that we have made Frankfurt our home in every way: we belong to Frankfurt’s Jewish community. With 7,000 members, it’s a very vibrant community, and we have just got our second chief rabbi. Our elementary school and high school are well attended. And we very much appreciate the support that the city gives us in general. Frank- furt is a very open city. Christopher F. Porter What arguments do you use to convince foreign co-workers to come (45) is Managing Director, to Frankfurt? Global Client Management, at I always tell them they’ll be pleasantly surprised. Frankfurt is more BNY Mellon. Born in the USA, accessible, is easier to get to and has greenery closer by than most other he has been living in Frank- financial hubs. And it is nevertheless a big city, with all the benefits that furt since 2000. Prior to this, brings with it. With Frankfurt, more than anything else it’s an image he studied in Marburg for a thing – Frankfurt doesn’t initially seem as shiny as other big cities, but year. He is married and has the region offers very good work conditions and quality of life. three children, all of whom were born in Germany. Let’s turn to Germany as a place of finance. In your opinion, what Brightly coloured frescoes effect will Brexit have on Frankfurt and the region? and typical dishes in the A Brexit not based on cooperation would be a lose-lose situation – both traditional Frankfurt pub "Das gemalte Haus" the UK and the rest of Europe would be weaker as single players than if they played together. It’s therefore important that Frankfurt serves as a language here. Frankfurt really is very important, among other things as bridge. The financial centres can only be successful together. a regional hub for central Europe and Israel.

Many experts expect to see Frankfurt’s position strengthened. What would you say were the most convincing factors in favour of Some of the major banks will obviously relocate functions and entities to Frankfurt as a location? Frankfurt. I firmly believe that Frankfurt will increase in importance. But The transportation infrastructure, the labour market and higher educa- it certainly won’t oust London as the main financial hub, at least initially tion – it’s all really excellent. Being able to attract new talent is very im- – London simply has too much of the critical mass, including infrastruc- portant to us. Innovation is another key topic for us. The finance sector is ture and liquidity. Also, the regulatory bodies would have to be built up going through a period of immense technological change. As a company, to the same magnitude in Frankfurt in some cases, for example, in the we therefore actively seek out an innovative environment that enhances area of derivatives. But Frankfurt will most definitely benefit from the our creativity. We want to develop our digital transformation strategy constructive outreach of the politicians, associations and regulators. further, while exploring new technology opportunities, for example, in the area of blockchain. There are highly creative ecosystems for this in How important is Germany to you as a place of finance? London, in Silicon Valley and in Israel. A similar ecosystem is currently Germany is an extremely important market for us. So it absolutely makes also emerging in Frankfurt, but it still has some way to go. sense that we have representation here. We have 400 employees here from 30 different countries. Incidentally, we use German as our corporate Mr Porter, thank you for talking to us.  Building Bridges 36 Financial Centre Report 2017 37

FOCUS ON EUROPEAN FINANCIAL F . A R M M A . M LU G CENTRES STERDA NKFURT a DUBLIN XEMBUR PARIS

#1 QUALITY OF LIFE 12 7 34 21 38 POSITION IN MERCER’S QUALITY OF LIVING RANKING

#2 INTERNATIONALITY 11.7 21.2 18.4 63.8 14.8 NON-NATIONALS POPULATION / IN %

#3 TRAIN JOURNEY 20 20 37 20 60 FROM AIRPORT TO FINANCIAL HUB / IN MIN

#4 EMPLOYEES 44.000 75.000 23.000 45.000 147.000 IN THE FINANCIAL SECTOR

#5 STOCK EXCHANGE 475 1.096 89 1 1.026 TURNOVER ‹ SHARES / IN BILLIONS OF EUROS

#6 PRIME RENTS 2 390 474 673 552 810 OFFICE SPACE M / YEAR IN EUROS

Sources: Deutsche Börse, CBRE, Euronext, Eurostat, Google Maps, Irish Stock Exchange, Luxembourg Stock Exchange, Mercer. Luxembourg’s stock exchange turnover is an editorial team estimate based on the published monthly turnovers of the exchange’s highest-grossing shares. Data dates: 2009–2017, online sources accessed in March 2017. Insights 38 Financial Centre Report 2017 39

GERMANY AS A FINANCIAL CENTRE: INSIGHTS FACTS, FIGURES AND ANALYSIS Insights 40 Financial Centre Report 2017 41

OUTLOOK “FRANKFURT NEEDS TO BE MORE CONFIDENT”

INTERVIEW WITH Dr Gertrud Traud, chief economist and head of research at Landesbank Hessen-Thüringen (Helaba)

It is fair to say that no other bank conducts quite as much research into the financial hub Frankfurt as Helaba Landesbank Hessen-Thüringen. Helaba’s chief economist Dr Gertrud Traud provides an independent analytical view of the city like no other. In an interview with Frankfurt Main Finance, she talks about where Frankfurt currently ranks in Europe – and about the areas in which the city still has some work to do.

Dr Traud, Helaba has been conducting in-depth analyses of the financial centre that is Frankfurt for years. Why do you think this is so important? Comparative analyses of this German hub of finance have always been important in order to highlight and also boost its position in the inter- national competitive arena. The global financial crisis and the changes it triggered further increased the significance of financial hub studies. For some time now, playing an active part in developing Germany’s centre of finance and reinforcing this with regular publications has been a key concern of Landesbank Hessen-Thüringen as a universal bank based in Frankfurt with a strong regional focus.

How long have you been focusing on the financial hub Frankfurt and what are the key areas you are looking at? We at Helaba have been engaged in research on the financial hub Frankfurt for eleven years, focusing on a variety of issues. It all began in 2006 with a study entitled “Frankfurt: The Financial Centre – A City on the Move”. Since then, there have been a number of publications on Frankfurt’s foreign banks (including surveys) and publications that provide forecasts for employment at the banks here. We also produced a new ranking of the major banks in Frankfurt based on employee numbers. The issues of taxation and regulation, which are important to Frankfurt as a location, have likewise been analysed. Last year, we published an anniversary study, exactly ten years after our first major publication. Things really then began to get interesting for the Frankfurt financial hub when the UK voted to leave the European Union in June 2016. We have performed extensive analyses of this issue too.

What kind of approach do you take in your studies? In our first study eleven years ago, we benchmarked the three biggest financial centres in Europe. The fundamental question posed in this com- Insights 42 Financial Centre Report 2017 43

the city on the Main – that’s 80 percent of all the banks with headquar- Overview of Helaba financial hub studies ters here. There are also many representative offices. A vast number of other finance-related service providers from Germany and elsewhere Publications: Financial Centre of Frankfurt breathe life into Germany’s financial centre community too, making 2006 2008 2009 2010 2011 2012 2013 2014 2015 2016 Frankfurt a vibrant hub of activity.

AssesmentsAsia of (survey) European Bank employmentForeign banks Taxation(survey) Bank employmentSupervision & ranking &China (survey) Brexit loacations in Europe comparison bank employment Anniversary study, S-financial sector What makes Frankfurt especially attractive, including in view of the impending Brexit? Frankfurt’s outstanding position within Europe’s network of financial 230 hubs makes it highly attractive to industry players from Germany and 220 abroad. The city on the Main boasts the following assets that will play 210 Headquarters in Frankfurt a role in the current debate concerning businesses leaving the City of 200 London: the stability and strength of the German economy, the ECB 190 being based here in its dual capacity as a central bank and regulatory 180 Foreign banks in Frankfurt* authority, a globally competitive stock exchange, Frankfurt being a 170 transport hub with a good infrastructure, relatively affordable office 2006 2007 2008 2009 2010 2011 2012 2013** 2014 2015 2016 rental prices and good quality of life with plenty of leisure opportuni-

* Head and representative offices, ** Statistical break ties in the city and in the surrounding countryside. Sources: Deutsche Bundesbank, Helaba Economics/Research Unparalleled high quality of life in Frankfurt parative analysis of the financial hubs Frankfurt, London and Paris was Ranking of liveable cities this: what are the characteristic features of a financial hub? We identified five characteristics which are crucial to a place positioning itself suc- 0 6 cessfully in the international competitive arena. These key criteria are as 10 EIU: Europe follows: banks, stock exchanges, finance-related education and research, 10 7 13 financial sector trends, and location-specific qualities. Frankfurt, London 17 12 and Paris were then evaluated on the basis of numerous indicators. We 20 20 came to the conclusion that London enjoyed an undisputed position as 26 Europe’s leading financial hub, while Frankfurt and Paris both vied for 21 the leadership position in Continental Europe. 30 Mercer: global 34 Has it not all changed since the financial crisis? 40 38 The banking scene has undergone some drastic changes over the last 40 ten years or so. The steady decline in the number of banks in Europe 50 is indicative of the process of consolidation within the industry, which Frankfurt Amsterdam Luxembourg Dublin Paris London is facing some major challenges. Very low interest rates and the high costs incurred due to tighter regulatory and supervision requirements Sources: Mercer, EIU, Helaba Economics/Research continue to weigh heavily on financial performance. These costs include not only direct costs in relation to establishing and modifying processes, detailed reporting and higher levies, but also indirect costs, in particular Are there data that reflect the individual cities’ quality of life? the reduced profitability of business activities as a result of the increased It is common knowledge that office space is more affordable and also util­isation of equity. And to top it all, the banks’ business models are easier to find in Frankfurt than it is in London or Paris, and this is an really being put to the test by the rapid pace of digitisation. undisputed fact among London-based bankers. And in terms of quality of life, Germany’s centre of finance is actually far better than its reputa- And how is Frankfurt faring internationally as a financial hub? tion – something that anyone who is open to living here will discover for Overall, the financial hub Frankfurt has stayed strong in these difficult themselves. In rankings of liveable cities, Frankfurt is comfortably ahead times for the financial sector. We were predicting as early as 2006 that it of its financial hub rivals, according to both the global recruitment con- had a good chance of assuming the leadership position in Continental sultancy Mercer and the UK’s Economist Intelligence Unit (EIU). London Europe in the medium term. Germany’s centre of finance has developed ranks below Frankfurt in these quality of life appraisals – by quite a in many ways since then and has gained ground on Paris in particular. margin. The significance of Europe’s three largest financial hubs in relation to one another is therefore now a clear-cut thing: London first, then Frank- Frankfurt is a relatively small city, and it therefore has a different furt and then Paris. character to the centres of finance based in much larger cities. Is that more of an advantage or a disadvantage? Frankfurt is clearly Germany’s leading centre of finance. But is it Frankfurt is seen as more settled and simply has a different flair to the firmly positioned in the international arena too? happening City of London. This means Frankfurt tends to appeal to a Germany’s centre of finance is highly attractive to international industry different target group of bankers. While London pulls in large numbers players. A great many banks from all over the world are based in Frank- of young professionals thanks to its vibrant night life, Frankfurt has furt. At the end of 2016, close to 160 foreign banks were operating out of more to offer experienced bankers who are looking to get out of the fast Insights 44 Financial Centre Report 2017 45

lane to settle down into family life and who want to apply all their exper- Potential post-Brexit relocations tise. This is a factor which is not to be underestimated in the wake of the financial crisis. And Frankfurt has more than enough bars, restaurants and night clubs, not to mention a diverse cultural scene. What’s more, Frankfurt has changed immensely over the years and now boasts its own array of “in” locations. Its broad spectrum of cultural venues includes the renowned English Theatre Frankfurt located in the heart of the banking district, which is the largest theatre of its kind in Continental Europe. Amsterdam After all, English is now widely spoken throughout the city. Incidentally, Dublin London another factor in favour of Frankfurt which should not be overlooked is Frankfurt its relatively inexpensive childcare and education in comparison to Lon- don. More and more playgroups and schools with an international focus Paris Luxembourg are popping up throughout the region. And last, but not least, living expenses in Frankfurt are low on the whole.

Is Frankfurt perhaps a “hidden champion” among the financial hubs? There is something that outsiders often deride as provincialism, but that proves to be a clear advantage for the Frankfurt community: it’s a Sources: Helaba Economics/Research city with short distances and an excellent transport infrastructure, so the journey to work is manageable, including for the many people who commute in from elsewhere in the region. A great many lunch meetings centre, with both of these places likewise offering tax incentives. Accord- are held simply and quickly in or around the Fressgass pedestrian zone, ing to a World Bank ranking, Ireland’s total tax rate is lower than that of with the proximity of the various financial hub players to one another the UK, which is followed by Luxembourg and the Netherlands. There is contributing greatly to their business success. then quite a leap to Germany, while France brings up the rear.

Both state and national politicians have called for the European Are the banks’ business policies not the more important deciding Banking Authority (EBA) to be relocated to Frankfurt as a result of factor when it comes to relocations? Brexit. Do you think this would be wise? Various location-specific factors undoubtedly play a part in the London In its capacity as a city of regulatory bodies, Frankfurt is predestined banks’ decisions, so targeted marketing to emphasise a financial hub’s as the location of the EBA, which will be unable to remain in London qualities is important. Ultimately, though, these decisions will come post-Brexit. Increasing the concentration of Europe’s regulators in a down to compatibility with a bank’s business focus and its specific branch single place such as Frankfurt could result in considerable improvements structure. There could also be something of a pull effect were a number in efficiency. This would strengthen the status of Germany’s centre of of banks to all relocate large numbers of jobs to the same financial hub finance, which is already home to a number of regulatory bodies, as the at roughly the same time. In this respect, Frankfurt would be the obvious capital of European regulation. choice, as it comfortably occupies second place within Europe’s network of financial hubs, behind London. Do you expect to see Frankfurt benefiting from the UK’s decision to leave the EU? In which area does Frankfurt need to do more in order to become There are a lot of factors that point to Frankfurt being the main bene- the top preference for Brexit-related relocations? ficiary of Brexit. But even with the many advantages of Frankfurt as a Germany’s centre of finance is in a strong position compared with its location, it cannot be taken for granted that this will be the case. After European rivals. Brexit offers Frankfurt a real opportunity to improve its all, Frankfurt has a number of serious contenders who would equally position and reduce the gap to London. What is clearly needed in order like to see an influx of workers relocating from London, these being in for Frankfurt to be the main beneficiary of the Brexit process is for it to particular Paris, Dublin, Luxembourg or Amsterdam. Low-wage cities be more confident. After all, the bare facts that work in Frankfurt’s favour in eastern Europe such as Warsaw or lesser ranked European financial will not cut it on their own if they are not firmly embedded in the minds hubs like Madrid or Milan could equally claim a piece of the pie – albeit a of the London-based industry players. If Frankfurt doesn’t promote itself much smaller one. And then there may be institutions that relocate even confidently as a financial hub, nobody will. It finally needs to hold its further afield as part of their corporate strategy, moving to global financial head high and shake off its unjustified and persistent image of being a hubs such as New York or Hong Kong. So the list of potential Brexit boring provincial city. After all, Frankfurt has a great deal to offer that winners seemingly goes on and on. makes it attractive above all in the world of finance. In view of recent events, the success of its location marketing would first and foremost What is the appeal of Frankfurt’s biggest rivals? be boosted by the emphasis being placed on how Frankfurt’s character Paris is Europe’s third most important financial hub after London and differs to that of London – coupled with its high quality of life. Frankfurt. It is also a global city with plenty of cultural attractions. The other three cities being looked at are considerably smaller, but they each Looking at the Frankfurt skyline tells you that finance has an have their own advantages. For example, Dublin has a similar culture important role to play here. But it all looks small in comparison to to that of London, and scores points with its linguistic advantage and London. low taxes. Luxembourg positions itself as a city of funds and various EU Based on employee numbers, the City of London is Europe’s undisputed institutions, while Amsterdam is a traditional but cosmopolitan trading top financial hub, although differences in the definitions of the sectoral Insights 46 Financial Centre Report 2017 47

London’s financial sector the largest by a large margin possibility that at least half of the jobs available in the finance industry (Number of employees in 2015*) could be relocated from the Thames to the Main in the years to come. This process of relocating an estimated minimum of 8,000 jobs is likely to begin 400,000 some time in 2017, make itself felt in 2018 and then gather pace from then 350,000 on as details of the negotiation agreements become known. Accordingly, considerably more than 2,000 new employees may have moved to Frank- 300,000 furt by the end of 2018. This Brexit-induced labour market effect will offset 250,000 the trend of consolidation within Frankfurt’s banking sector.

200,000 Forecast for employment at banks in Frankfurt 150,000 (Number of bank employees in the metropolitan area)

100,000 66,000 4

50,000

0 2 Frankfurt Paris Dublin Luxembourg Amsterdam London 64,000

 Banks  Financial sector 0 * Paris 2014 Sources: Federal Employment Agency (BA), Deutsche Bundesbank, Insee, ONS, The Stationery, Statec, Helaba Economics/Research 62,000 Helaba – 2 and geographical boundaries do need to be taken into account. There forecast: were just under 400,000 employees in London’s finance industry in bank employees 2015, with approximately 144,000 of these estimated to have been in the 60,000 – 4 banking sector. This compares with around 147,000 people working in 2007 2008 2009 2010 2011 2012 2013 2014* 2015 2016 2017 2018 the finance sector in Paris and almost 75,000 in Frankfurt. Other places Year on year (right scale) In comparison to the previous year (right scale) in Continental Europe follow, but on a much smaller scale – the finance  Bank employees (left scale) sectors in Luxembourg and Amsterdam had approximately 45,000 and * Statistic break 44,000 employees respectively, with Dublin having a headcount of around Sources: Federal Employment Agency (BA), Helaba Economics/Research 23,000. These differences in size alone indicate that even a moderate loss of jobs in London could result in considerable percentage increases in How would this affect employment at banks in Frankfurt in abso- employment in the smaller financial hubs. lute terms? These two effects are likely to more or less cancel each other out during How many jobs do you expect to see being relocated from London? our forecast horizon up to the end of 2018. Employment at banks in As there is still a great deal of uncertainty regarding the outcome of Germany’s centre of finance is then likely to total a good 62,000 jobs. the Brexit negotiations between the UK and the EU, the majority of However, the proportion of job relocations could be considerably higher London-based banks remain cautious about making explicit statements if, as predicted by a number of renowned institutes, there were a pull about their relocation plans. It is therefore generally difficult to predict effect away from London to Frankfurt or if there were indications of a the degree of job relocations and the pace at which these might happen. great deal of conflict between the UK and the EU in the negotiations. Nonetheless, drawing on cautious assumptions, this multi-year restruc- There could then be significantly more than twice the amount of job re- turing process within Europe’s network of financial hubs can be outlined locations to Germany’s centre of finance up to the end of 2018 compared as follows: if there were a moderate five percent loss of jobs in London’s with the minimum 2,000 jobs estimated in the cautious baseline scenario. finance industry, this would affect some 20,000 of the approximately This “quantum leap” in bank-based employment in Frankfurt would 400,000 people employed in the industry. With the banking environment present the city with some considerable challenges, in particular in the remaining challenging, some of these jobs – potentially around 20 per- residential real estate market. Even in the baseline scenario, the effects cent of them – may cease to exist. With this basic forecast involving will clearly be felt in this market. Nonetheless, Frankfurt should seize the a compromise between the EU and the UK, at least 16,000 employees opportunities offered by Brexit within Europe’s network of financial hubs. would relocate from the City of London in the next few years. However, if the negotiations prove to be fraught, there could be considerably more What studies do you have lined up for the future? than twice this number of job relocations – not taking into account possi- We will continue to conduct financial hub research on issues that are ble backsourcing as a result of regulatory arbitrage. In addition, with the relevant to the market. Forecasts for Frankfurt’s bank-based employment parameters in the UK remaining unclear for years, new industry players and also surveys conducted locally remain important. We will, of course, may prefer to open offices in European financial hubs other than in Lon- also take a closer look at the changes once Brexit has actually happened. don. There are already signs that some companies will take this course. It remains to be seen which financial hubs will be affected to what extent by Brexit – all we can do for now is offer forecasts. But in a few years, we Based on your calculations, how many of those fleeing Brexit might will need to perform another concrete comparison – both of changes over end up in Frankfurt? time and changes relative to the other European financial hubs. There is Considering Frankfurt’s excellent position within Europe’s network of fi- plenty for us to be getting on with. nancial hubs, if it succeeds in marketing its location qualities with enough confidence and ticks everything else off its to-do list, there is the strong Thank you for the interview, Dr Traud.  Insights 48 Financial Centre Report 2017 49

THE GERMAN ECONOMY AND BREXIT Growth in gross domestic product since 2005 EU current accounts in 2015 (In real terms, 2005 = 100) (as % of GDP) 8.7 8.3 120 DE STILL STRONG, DESPITE 115 UK 110 NL 4.7 EU 28 105 FR 100 ES 1.6 1.4 1.1 0.4 ALL CHALLENGES 95 IT 90 -0.2 -0.6 85 80 -4.3 2005 2007 2009 2011 2013 2015 AUTHORS NL DE SWE IT ES EU 28 BEL FR POL UK Stefan Bielmeier, head of research and economics and chief economist, DZ BANK AG Dr Michael Holstein, head of the economics department, DZ BANK AG Source: European Commission, AMECO database Source: European Commission, AMECO database

The strength of German exports is also one of whole, there is an unemployment rate of more the main reasons why the country’s current ac- than 8 percent, which is still far too high. count surplus is so high – German exports have increased much more quickly than imports in An extended period of extremely low inflation recent years, pushing the country’s balance of rates throughout Europe have come to an trade up and up. In comparison, the UK had end in the past few months. Consumer prices by far the largest deficit within the European have again risen significantly in all the EU The UK’s EU exit will have an impact on Germany economy has also experienced the strongest Union in 2015, with its balance of trade coming countries since autumn 2016. This is due to too. A “hard” exit of this important trading partner growth in recent years, at least among the in at – 4.3 percent of economic output. a recent firming of the price of oil, which had would hit the German economy in particular. But biggest EU countries. Germany’s economic fallen to a low not seen in many years before compared with elsewhere in Europe, Germany is output has increased by a good 17 percent in the turn of the year. still in a strong position. real terms since 2005, compared with a growth Export growth since 2005 figure for the EU as a whole of just 12 percent. (In real terms, 2005 = 100) There are no significant differences in the The UK comes in slightly above the EU average, inflation developments in the eurozone and There is plenty at stake for the German with growth of just under 13 percent. There has 170 in non-euro countries. Consumer prices in economy when it comes to Brexit. After all, been markedly stronger growth in particular in 160 the UK were 1.8 percent higher year on year the UK is one of Germany’s most important some of the eastern European countries such 150 DE in January 2017, while the rate of infla- EU 28 trading partners, with German exports to the as Poland, Slovakia and Romania. 140 NL tion for the eurozone as a whole remained ES UK having increased by a good 67 percent 130 FR unchanged over the same period. Germany’s between the crisis year 2009 and the year 2015 Germany is also ahead of the other major EU 120 UK rate of inflation was only fractionally higher IT – that’s almost twice as strong as German countries in terms of developments in exports 110 year on year, at 1.9 percent (all harmonised exports to EU countries in general. While since 2005. German exports have increased 100 EU rates). Germany’s volume of exports to the UK wasn’t by more than 56 percent in real terms since 90 quite as strong in 2016 as it was in the record then, compared with an EU average of a good 80 year of 2015, falling by 3.3 percent to a good 46 percent. In this respect, with an increase of 2005 2007 2009 2011 2013 2015 Unemployment rates in the EU in December 2016 EUR 86 billion, this island country remains the around 27 percent, the UK falls well short of (As % of the active population) 18.4 third most important export destination for the EU average, as do France and Italy too. Source: European Commission, AMECO database German products. 12.0 Well positioned in European terms Shares of economic output in the European Union in 2016 Together with a number of necessary re- 9.6 forms implemented between 2003 and 2005, 8.2 6.9 7.6 Nonetheless, Germany can look ahead to the the strong development of the economy has 5.9 Other EU countries 16 DE 21 4.7 5.4 UK’s exit negotiations with a degree of indif- resulted in Germany’s labour market being one 3.9 ference because the German economy is in an BEL 3 of the most stable labour markets in the whole extremely good shape, as demonstrated by a POL 3 of the EU. At the end of 2016, Germany had an comparison of some key economic performance SWE 3 unemployment rate (according to harmonised DE UK NL POL SWE BEL EU 28 FR IT ES indicators. % EU calculations) of just 3.9 percent – one of NL 5 UK 16 the lowest figures for a major EU country. This Source: Eurostat Not only is Germany the largest economy in figure is only outdone by the Czech Republic, ES 8 the European Union, accounting for some which boasted an unemployment rate of just The generally very good health of the German 21 percent of the EU’s total gross domestic IT 11 FR 15 3.5 percent. At 4.7 percent (November 2016), economy and the country’s leading posi- product of around EUR 14.9 trillion (2016 data; the unemployment rate in the UK is likewise tion in the EU do not, of course, prevent a source: European Commission). The German Source: European Commission, AMECO database one of the lowest in Europe. Taking the EU as a “hard” Brexit – one that could be passed Insights 50 Financial Centre Report 2017 51

and implemented with only a brief period of While few people in the UK have any res- It is an undisputed fact that the UK is an What can we expect? preparation – from potentially inflicting some ervations regarding the first three points, important trading partner for each of the major economic and political damage. But this acceptance of the fourth and final aspect has other EU member states. In its neighbouring This hard Brexit is not actually our primary doesn’t have to be the case. increasingly become a problem there in recent country Ireland, for example, the UK is ranked scenario, because the possible economic years: for some time now, large portions of the number one, with just under 14 percent of all consequences of a hard Brexit will undoubt- Brexit casting a long shadow population have felt that there is too much Irish exports going to the UK. The UK is also edly be taken into account on both sides of immigration. There appears to be increasing the third largest sales market for the German the table. Although there is currently no way Ahead of the talks between the delegations resistance in particular to the large numbers economy after the USA and France, most of knowing what the outcome of the nego- representing the UK and Brussels which are of eastern European EU citizens moving to the recently accounting for more than 7 percent tiations might be, we believe that a more set to begin shortly, both parties are current- UK, with those who argued in favour of Brexit of Germany’s exports. However, the rest of conciliatory position will be adopted as the ly establishing their respective bargaining repeatedly claiming that the ability to limit the EU is far more significant to the UK as negotiations proceed. On the British side, positions. While these are by no means set in immigration from the countries in the east a sales market for its exports as just under a key argument will be ensuring that the stone, it would appear that a hard Brexit is the of the EU was one of the major advantages of half of the UK’s goods and service exports banks in London maintain their access to more likely scenario. To some extent, this may a Brexit – a claim that evidently proved suc- went to other EU countries last year. This is the EU market – at least during a multi-year be attributable to negotiation tactics. But it cessful. However, the voters were also given equivalent to almost 12 percent of the UK’s transitional phase in which the finer details could also be a sign that both sides want the the impression that the UK would continue economic output. In contrast, the proportion of the separation can be worked out. After all, same negotiation outcome. to have access to the single market even if of Germany’s gross domestic product (GDP) it seems highly unlikely that the negotiations significant limitations could be imposed on accounted for by exports to the UK was just will really be concluded by the end of the immigration and that the economic repercus- around 3 percent, and the situation is similar stipulated two-year negotiation period, giving Rates of inflation in Europe in 2016 sions of a Brexit were therefore not an issue. on average throughout the EU countries. In us an outcome in spring 2019. (Year-on-year comparison of consumer prices (HICP)) This is an opinion still posited by some of the event of a hard Brexit, the EU countries’ those in government in the UK to this day. trade with an important trading partner 3.0 would be put under considerable strain – but Proportion of German exports in 2016 ES 2.5 However, things look very different from the for the UK, an entire group of important sales (in %) 2.0 DE EU perspective: according to the president of markets would be at risk. UK 9.5 8.6 1.5 the European Council Donald Tusk, it is out EU 28 7.5 6.6 1.0 FR of the question that the UK might be allowed 6.0 IT 4.9 4.9 4.4 0.5 to maintain access to the single market while Exports of goods and services in 2015 4.1 3.5 0 rejecting the free movement of people. Quite – 0.5 rightly, this is seen as cherry picking or an “à 291.0 – 1.0 la carte EU” – the advantages of being part – 1.5 of the community are readily accepted, but 222.4 USA FR UK NL CHN IT AUT POL SUI BEL 2016 2016 2016 2016 the obligations that go with this are rejected. Feb May Aug Nov 11.9 Source: Federal Statistical Office The EU administration believes that bowing Source: Eurostat to the UK’s wishes might encourage other 3.3 member states to likewise demand special If it looks like the two parties are converging arrangements and put pressure on Brussels. GBP billion As % of GDP over the course of the negotiations, this will The choice between a hard and a soft Brexit This could pose a serious threat to cohesion  UK: exports to the EU  EU: exports to the UK limit the economic damage caused on both comes down to the four fundamental freedoms within the confederation of states. This is Source: ONS, DZ BANK AG sides. But if trade barriers really are put up, of the European single market, the parallel va- reason enough for Tusk not to even entertain possibly after a transitional phase, this will lidity of which is the basis of the single market the possibility of allowing a soft Brexit of any not leave the German and the EU economy concept. These are: kind. This is also why the EU has not been Nonetheless, a hard Brexit would also hit unscathed. willing to engage in negotiations with London Germany strongly, the UK being one of its ƒƒ the free movement of goods, i.e. trading yet, in order to quash any speculation that primary trading partners. Should it become As the Brexit referendum becomes more and without any customs, levies or any other concessions might be made to the UK before apparent in the course of 2017 that there more of a distant memory, the UK may well be import and export restrictions, or even in place of an official EU exit. really will be a hard Brexit, Germany is likely willing to back down from more and more of ƒƒ the freedom to provide services, i.e. to feel the economic effects of this as early the pledges made during the campaign. It is a company based in an EU member state Possible consequences of a hard Brexit as next year. In this scenario, we believe that also not out of the question that the European may offer its services throughout the EU, the economic recovery currently expected Commission will be willing to meet the UK ƒƒ the free movement of capital, with no A hard break with the EU would undoubt- in 2018 would not materialise in the wake halfway, with Donald Tusk’s above stance restrictions placed on the transfer of funds edly above all be very costly for the British of Brexit. Growth in Germany would then merely having been put forward in the heat of and securities across member state borders economy. Should it become apparent that a remain at the slightly weaker level seen in the moment. After all, not least in the Greece and hard Brexit is the most likely outcome of the the current year and the unemployment rate crisis, we have seen just how creative the EU ƒƒ the free movement of people, above all negotiations, the UK economy would likely would likely spike. And were the Brexit ne- can be when it’s a question of overcoming in the form of freedom of movement for grind to a halt and soon slip into recession. gotiations to trigger an even greater political conflicts of interest if this serves a higher workers and freedom of establishment, We cannot concur with the British position on crisis in Europe that called into question the purpose. granting all EU citizens the right to take up this that there would be as much at stake for continued existence of the EU, this would employment or self-employed work in other the EU economically speaking as there would have an even greater impact on the German However, this willingness on the part of Brus- EU member states. be for the UK. economy. sels to compromise will indeed be necessary if Insights 52 Financial Centre Report 2017 53

a hard Brexit is to be avoided and a successful REGULATION AND SUPERVISION soft negotiation outcome is to be achieved. None of the existing models affording single market access to non-EU members such as Switzerland, Norway and Turkey can be THE PROXIMITY PRINCIPLE applied to the UK as they are without the country having to back down from many of its demands. It is also a stretch to envisage the second-largest economy in the EU allowing AUTHOR itself to have the model for a relatively small Dr Stephan Bredt, Director, General Economic Sector, Financial Services, Exchanges country such as Norway or Switzerland im- Ministry of Economics, Energy, Transport and Regional Development, State of Hessen posed on it. The UK is far too important as a big player within Europe for that.

Wanted: a UK model

A soft Brexit will therefore inevitably result in a UK model, with the existing models merely serving as a guide. At the same time, however, the time restrictions in place mean it will not be possible to move too far away from the existing models and develop an entirely new architecture.

There is also a serious danger that the UK may Over the past few decades, Frankfurt has evolved The European Central Bank (ECB) has been exit the EU without any withdrawal deal, for into the most important financial centre in Conti- based in Frankfurt since 1999. The ECB’s example, if no agreement can be reached in nental Europe. Just recently, there was an addition being based in Frankfurt has already consid- the time frame set or if the process of ratifi- to the Frankfurt skyline in the form of the new erably boosted its status as a financial hub cation is not completed. The result could be European Central Bank (ECB) building – a visible and has played a significant part in the city’s an unwanted, and presumably also unpre- sign that the city is also a centre of European internationalisation. The ECB inaugurated pared, hard Brexit – something which would supervision and regulation. The financial crisis its new headquarters in the Frankfurt district certainly exacerbate the negative economic of 2007 and 2008 failed to curb this development. of Ostend on 15 March 2015. The ECB had repercussions. This is especially true if the The financial hub nonetheless is facing some already assumed responsibility for direct UK’s WTO membership status cannot be fully major challenges: a period of low interest rates, supervision of the eurozone’s most important clarified, thus also depriving the country of new regulatory requirements in the wake of the banks on 4 November 2014 on the basis of the this safety net. financial crisis, digitisation and the UK’s decision Single Supervisory Mechanism for Europe. to leave the European Union (EU). While there are And last, but not least, complications could risks inherent to all of these, they also repre- The European Insurance and Occupation- arise were an existing model to be used as a sent considerable opportunities for sustainably al Pensions Authority (EIOPA) has been blueprint, but with major concessions being strengthening and further developing Frankfurt as based in Frankfurt am Main since early 2011. made to the UK, such as a “Norway light” a financial centre. It is responsible for ensuring the stability model that omits complete freedom of move- of the insurance markets and for protecting ment of people or a “Turkey plus” model in policyholders, pension scheme members and which the customs agreement is extended to Regulator proximity is important to the financial beneficiaries. include the service industry. This could lead sector to problems with those countries that might The Deutsche Bundesbank, Germany’s likewise demand greater concessions. Both Frankfurt has continued to increase in im- Federal Financial Supervisory Authority Brussels and London are undoubtedly facing a portance as a financial centre in recent years, (BaFin) and the Federal Agency for Finan- difficult balancing act in the Brexit negotia- not only nationally speaking, but also at the cial Market Stabilisation (FMSA) likewise tions.  European and international levels. In the pro- have representation in the Frankfurt financial cess, Frankfurt has become the most important hub. The state of Hessen’s stock exchange centre of regulation in Europe, serving as home regulatory body is also located right by the to key European and national regulatory au- financial centre. thorities. This is undoubtedly a major factor in Frankfurt’s favour – proximity to the regulators Frankfurt pipped other well-known interna- makes Frankfurt even more attractive as a tional financial hubs to the post in becom- financial centre not only to the European but ing the location of the global operational also to the international financial sector. Let’s headquarters of the G20 project Global Legal take a brief look at the various institutions: Entity Identifier System. Insights 54 Financial Centre Report 2017 55

Overview of regulatory authorities in Frankfurt leave the EU, including where the European the state has launched as part of its LOEWE Banking Authority (EBA) is to have its head- project to promote excellence in research. It is quarters in the future. The EBA will undoubt- a cooperation between the Center for Finan- BaFin edly have to relocate to another EU member cial Studies and the Goethe University Frank- state as a result of the Brexit decision. Frank­- furt, and is being run in collaboration with the furt seems predestined to be the seat of the House of Finance. Support is also given to the EBA and has some major advantages over Frankfurt Institute for Risk Management and other locations that might be considered. Regulation (FIRM), which promotes research Frankfurt being where the ECB and other im- and teaching in the area of risk management German portant European regulatory authorities are and engages with regulators such as the ECB. Federal Bank headquartered, it is Europe’s primary regula- With its concentration of regulatory bodies tory centre and is the obvious choice for the and leading research institutes, the Frankfurt location of the EBA. All the EU’s regulatory financial hub has become a place where the authorities could then be brought together in principles of effective and stability-oriented Frankfurt. Moving the EBA to Frankfurt could financial market regulation are devised and result in major improvements in efficiency implemented. and could tap into immense synergy effects. GLEIF It is worth considering whether the body More regulatory authorities are welcome responsible for regulating the banks that are too big to fail, which is currently part of the Frankfurt also has great appeal to European FMSA ECB, should be merged with the EBA in the and international financial market players as long term. a financial centre due to the institutions with ECB/ESRB deep roots here. Frankfurt offers the right Frankfurt provides other advantages as a parameters to permanently establish itself as location too. For example, there are Frank- Europe’s centre of regulation and supervision. EIOPA furt’s other international links as a financial As the location of the ECB, the European Sys- hub and its becoming the first RMB offshore temic Risk Board (ESRB), the EIOPA and other clearing centre outside of Asia in 2014. The institutions, and with its excellent finance same goes for Frankfurt becoming the loca- infrastructure, the financial hub Frankfurt tion of the headquarters of the Global Legal offers the perfect conditions for playing its Entity Identifier Foundation in April 2015. part in sustainably developing regulation and Research and teaching likewise contribute supervision. The state government will there- greatly to the ongoing development of Frank­ fore continue to encourage other institutions Locating and concentrating these important structure operator. Among others, it operates furt as a financial hub. Hessen therefore and regulatory and supervisory authorities authorities in the Frankfurt financial hub was the globally important derivatives exchange, promotes university research that examines to move to Frankfurt. And Frankfurt would logical and correct. Back in 2002, Frankfurt Eurex, and Germany’s largest stock exchange, financial market correlations more closely. A undoubtedly be boosted greatly as a financial was stilled ranked behind New York, Tokyo the Frankfurt Stock Exchange. 90 percent of central project is the Sustainable Architecture hub were the EBA to likewise move there.  and London as an international centre of Germany’s total stock exchange turnover is for Finance in Europe (SAFE) centre, which finance and was on the “second tier of the generated in the Frankfurt financial centre. hierarchy”. This has since changed signifi­ cantly in Frankfurt’s favour – looking at The outlook: further expansion of Frankfurt’s role Euro area 1999 – 2015 Frankfurt today, we see a financial centre of as a leading financial centre international renown. Currently, there are close to 200 banks based in Frankfurt. They The structure and competitiveness of Frankfurt vary greatly, with international high-street as a financial hub now need to be championed banks, banks belonging to the German Spar- further. It needs to have more international kasse-FinanzGruppe savings banks group visibility that is clearly tied to the advantages it and the Genossenschaftliche FinanzGruppe offers. This includes further consolidating and cooperative banking group, private bankers expanding Frankfurt’s position as a centre of EU member using the euro EU member not using and branches of most major foreign banks regulation and supervision. The industry play- the euro all represented here. The total assets of all ers already based there need to be kept there, Non-EU country the banks in Frankfurt is approximately EUR and other institutions need to be encouraged Frankfurt 3,450 billion. Approximately 137,000 people to move to Frankfurt. The aim must be to last- are currently employed in the finance sector ingly establish Frankfurt as Europe’s centre of in the Frankfurt/Rhine-Main metropolitan regulation and supervision. The parameters for region, of which some 63,000 work in banks achieving this are very good. alone. Frankfurt is also a stock exchange centre. Deutsche Börse AG is Europe’s leading A number of difficult questions need to be stock exchange and financial market infra- addressed in the wake of the UK’s decision to Source: European Central Bank Insights 56 Financial Centre Report 2017 57

PROPERTY MARKETS British economy: robust despite currency period. Property prices fell across the country depreciation before the referendum, but have remained more or less unchanged since. Only London The frequently repeated statement that has seen a slight decline in recent months. FRANKFURT WILL BENEFIT “Brexit means Brexit” and demands posited However, house prices both in London and by Theresa May are mostly interpreted as an nationwide are substantially higher than last indication of a “hard Brexit”. Although these year. Nevertheless, we continue to expect that assessments led to a huge depreciation of burdens on the economy will gradually begin FROM BREXIT – BUT HOW around 20 percent in the value of the pound to be felt. Once the first signs of a slowdown on the foreign exchange markets, the British are registered, hiring freezes and investment economy has nevertheless performed surpris- cuts could quickly trigger a domino effect. MUCH? ingly well over the past few months. Leading indicators dropped only temporarily. In the In this negative scenario, the UK’s and, in par- third quarter, gross domestic product (GDP) ticular, London’s international character could expanded by 0.5 percent on the preceding rapidly have a boomerang effect, especially AUTHORS quarter. as many expats already have to endure major Jochen Möbert, macro and real estate economist, Deutsche Bank Research losses in purchasing power due to the depreci- Matthias Naumann, Martin Lippmann, Deutsche Asset Management Research & Strategy Europe – ation of the pound. What is more, a number of Alternatives RREEF Investment GmbH Pound sterling performance (2016) recent press reports indicate a deterioration in Left y-axis: EUR/GBP; right y-axis: GBP/USD social attitudes towards non-British citizens. If this continues, highly qualified Europeans 1.20 1.50 are especially likely to welcome a change.

More than 400,000 EU residents of employ- 1.10 1.40 ment age and over 50,000 Germans were liv-

1.00 1.30 ing in London in 2015. After the referendum, Frankfurt welcomed potential new residents In view of the high level of political uncertainty Results of Brexit remain uncertain 0.90 1.20 with a website (www.welcometofrm.com), set surrounding the United Kingdom’s decision up to provide expats with information about to leave the European Union, it will be some For the foreseeable future, the question as 0.80 1.10 living and working in the city. years until the size of the Brexit pie, that is the to what will happen in the wake of Brexit relocation of companies and employees, can be cannot be answered with any degree of reli- 0.70 1.00 Number of expats living in London Jan Mar May Jul Sep Nov determined fully. Regardless of the final outcome ability. Possible scenarios range from a con- of the negotiations between the UK and the EU, tentious separation to a second, “Bremain” EUR/GBP GBP/USD (right) How expats react will, in effect, be a seismo- the city of Frankfurt is likely to benefit. referendum. Negotiations with the UK are Source: Bloomberg Finance LP, Deutsche Bank Research graph for UK politicians, measuring both the wide-ranging because all areas of the Single intensity and the after-effects of the Brexit Market are being re-regulated. The UK’s top shock. The harder Brexit is, the more immi- Frankfurt is already continental Europe’s main priority is likely to be limiting freedom of Real GDP of the United Kingdom (2012 – 2016) grants and employees will leave the island, a financial hub, and compared to other European movement given that so many people voted UK: Real GDP (in %) number of whom will come to Frankfurt. This

cities, it can boast a range of additional advan- to leave the EU because of migration. The 4.00 1.50 would be a further factor driving up prices in tages such as low rents and residential property issue of passporting – the right to continue to the Frankfurt property market, already beset prices, good infrastructure and a highly dynamic provide financial services in the EU from the by several existing bottlenecks. However, 3.00 1.00 economy. However, considering the strengths UK – is also likely to be important. Anything before we address details concerning the com- of its European and also non-European com- else means the British financial industry mercial and residential property market, we petitors, Frankfurt will likely end up with only would risk substantial losses if it no longer 2.00 0.50 will analyse the foreseeable consequences of a piece of the Brexit pie. had access to the EU market. For this reason, Brexit and compare Frankfurt’s chances with complex and protracted negotiations could 1.00 0.00 Frankfurt’s property market would gain con- also extend beyond June 2019. In this case, siderable momentum even if only a relatively it would also need to be clarified whether 2015 London’s expats 0.00 – 0.5 (in thousands) small number of British companies and em- and under what conditions British Members 2012 2013 2014 2015 2016 ployees moved here. Growth in employment in the European Parliament could stand for  Quarterly comparison Yearly comparison in the wake of Brexit should stimulate demand elections to the European Parliament in 2019. 438 Source: ONS, Deutsche Bank Research for office space, thus contributing to a reduc- The negotiations or a provisional agreement tion in vacancies and rising rents in the office could be a key topic of the next UK general market close to the city centre. Following election in 2020, whereby feedback effects The number of job vacancies remained high, Definition of Western Europe: AT, BE, DK, FI, the referendum on Brexit, we have raised our on the outcome of the negotiations are to although it fell in particularly Brexit-sensitive 57 FK, DE, GR, IT, LU, NL, PT, average rent increase expectations in the top be expected. It will be several years before sectors. The unemployment rate has remained IE, ES, SE segment to over two percent per year by 2020 we know what direction things are taking. consistently low and, according to the latest Western Europeans German citizens aged 16-64 (double what had previously been anticipated Until then, political uncertainty will remain figures, the rate of employment even managed for the 2018-2020 period). particularly high. to grow slightly in the June to September Source: ONS Insights 58 Financial Centre Report 2017 59

those of other European cities in competition Central Bank, all major global universal and from London has increased the probability of Employees in the financial industry in Frankfurt for a slice of the Brexit pie. investment banks have a relatively strong a “hard Brexit” with the result that access to (in thousands) presence in the city. Secondly, Frankfurt is the EU Single Market could be lost. According 80 New home needed for European institutions located close to the many internationally suc- to Oliver Wyman, this puts up to 75,000 jobs cessful German companies and consequently at risk. If there is an orderly withdrawal from Despite the extent of the uncertainty sur- to a client base for global financial solutions. the EU and access to the Single Market is re- 60 rounding the UK’s final status, it seems quite Just days after the Brexit referendum, media tained, migration is likely to be comparatively likely that the European institutions head- reports stated that a Swiss bank intended to low. In this case, Oliver Wyman predicts a loss 40 quartered in London will move. These include bundle essential parts of its European wealth of only 4,000 jobs in the financial sector, in- major institutions such as the European Bank management operations in Frankfurt. This cluding downstream services. We consider the 20 for Reconstruction and Development (EBRD) decision was possibly taken in the light of latter scenario to be overly optimistic even if with 1,400 staff members and the European falling British share prices directly after the London is likely to remain a global financial 0 Medicines Agency (EMA) with 890 employees. referendum and therefore does not reflect hub. After all, the British financial industry 2009 2010 2011 2012 2013 2014 2015 The EBRD could possibly relocate to join Frankfurt’s structural advantages as a location. employs more than one million people, of  Credit institutions  Insurance one of its stakeholders in Luxembourg – the Alternative locations are said to have been whom more than 350,000 are particularly  Regulators European Investment Bank (EIB). Both banks London and Luxembourg. This is interesting flexible and over 150,000 work in the City. Source: Bundesbank, Deutsche Bank Research have similar tasks and employees with similar because Luxembourg, in a similar way to Am- training profiles. However, owing to the sterdam and Dublin, has regulatory and/or tax its working population to increase by 5,000. In regular balancing of political and economic advantages over Frankfurt. In addition to tax London vs. Frankfurt: Employees in the financial industry line with these considerations, we expect the interests between the EU member states, the concessions, Dublin has the added advantage (in thousands) number of office workers to increase by 5,000, EBRD and the EMA may have to move their of an English-speaking workforce and a flexi- together with an additional housing require- headquarters to southern or eastern Europe. ble labour market. 1,200 ment of 5,000 homes in Frankfurt by 2020. Given current political divergences, the chances that Warsaw and Budapest could be The relocation of clearing houses could have 900 Frankfurt’s economic strength is the basis for selected as locations appear slight, however. a direct impact on current property market property demand developments. The ECB planned for these to 600 Another European institution on the look-out be located in the eurozone as early as 2011, Frankfurt is not only a European financial for new headquarters is the European Banking and to this end, amended regulatory require- 300 hub, it is also one of the most well-known Authority (EBA) with 150 employees. Together ments. The British government appealed to exhibition cities. The Frankfurt Book Fair and with the ECB, and consequently also the the European General Court of Justice, which 0 the International Automobile Fair (IAA), the European Systemic Risk Board (ESRB) and ruled against the ECB’s policy in 2015, thus 2009 2010 2011 2012 2013 2014 2015 world's largest automobile exhibition, gener- the European Insurance and Occupational preventing the relocation of the clearing  Great Britain ex London  Greater London ex City ate a lot of attention. In addition, the Frank- Pensions Authority (EIOPA), Frankfurt is houses to the eurozone. Following Brexit, the  City of London Frankfurt furt metropolitan area – “Greater Frankfurt” already home to some of Europe’s key finan- ECB is likely to take steps to achieve its goal Source: ONS, BRES, Bundesbank, Deutsche Bank Research as some like to call it since the Brexit decision cial regulatory entities. Combining Europe’s again. As a result of the application of other – is one of Germany’s most dynamic economic supervisory structure in Frankfurt would make regulatory requirements, additional areas may regions. With a population of 5.6 million, the sense both from an economic and a political also be forced to relocate to the eurozone, for In addition, a hitherto well-functioning Frankfurt metropolitan area comes closest to viewpoint. However, the bulk of potential job example, back office, sales and trading posi- British business model has had the effect of the 8.7 million inhabitants of Greater London. relocations is not likely to take place in the tions. Ultimately, it would be possible to break increasing the number of employees in the public but rather in the private sector, chiefly up large sections of the investment banking City, and in the greater London area, by more in the financial industry. value chain. However, this threatening scenario than 10 percent since 2009. By contrast, the Greater London vs. Metropolitan area Frankfurt for the City appears to be relatively unlikely number of people employed in Frankfurt’s (Population in m) Frankfurt is continental Europe’s main financial because both the stability of the financial sys- financial industry has been stagnating around 8.7 hub tem and geopolitical considerations are likely the 80,000 mark in recent years. A slight drop to exclude such a drastic step. in the number of employees in banking has 5.6 Frankfurt has a good hand compared to its been counterbalanced by increases in the competitors in Europe – Amsterdam, Dublin, London’s crumbs – Frankfurt’s pie? insurance sector and at financial regulators. Luxembourg and Paris1 are mostly mentioned The difference in size between the two cities in this context, sometimes Warsaw as well. While Frankfurt has a range of advantages is such that even minor outflows from London Firstly, Frankfurt is already Continental over its European competitors, a number of could be of major importance for Frankfurt. Greater Metropolitan area London Frankfurt Europe’s main financial hub. In addition to na- other cities in Europe are set to benefit from tional (Federal Financal Supervisory Authority jobs relocating away from London. How sub- Based on these considerations, we have pro- Source: ONS, Statistisches Bundesamt Hessen, Deutsche Bank Research – BaFin) and European financial regulators, stantial this migration will actually be in the duced the following, rather cautious baseline the Deutsche Bundesbank and the European coming years remains unknown. The analysis scenario: if Frankfurt succeeds in attracting by Oliver Wyman commissioned by the lobby one percent or 3,500 of London’s financial However, it extends across an area almost ten group TheCityUK2 concludes that the extent sector employees, plus potentially 150 EBA times that of Greater London. Compared to 1 http://www.ey.com/DE/de/Newsroom/News-releases/EY- 20160711-Brexit, http://www.bcg.de/media/PressRelease- of the migration flows from London will vary employees, one or more other companies out- London, low housing density in and around Details.aspx?id=tcm:89-211080 depending on the outcome of the Brexit ne- side of the financial industry and a number of Frankfurt is reflected in much lower property 2 Oliver Wyman, “The impact of the UK’s exit”, October 2016. gotiations. The recent sharper tone emerging expats from London to Frankfurt, it can expect prices. Although they are rising, Frankfurt Insights 60 Financial Centre Report 2017 61

house prices are still low in comparison to in Frankfurt currently amounts to approxi- Vacancy rates in German office markets on Frankfurt’s banking district and leaving out other cities in Europe, and give it a potential mately 258,000 people. In our Brexit baseline as of July 2016 (in %) possible side-effects such as relocations with- geographical advantage. The same can be said scenario outlined above, a relocation of 5,000 in the existing stock, expansions or a division 20 of Frankfurt’s highly developed infrastructure. employees corresponds to a two percent in- of take-up over several years, the current va- In addition to the nearby international air- crease in office jobs. Demand for office space cancy rate in the sub-market would be halved port, rail connections to Amsterdam, Berlin, would increase accordingly. At the moment, 15 to under six percent. However, for logistical Luxembourg, Munich, Paris and Zurich take the average office space per capita is around reasons alone, large job relocations from Lon- less than five hours. 30 m². However, this statistic may be distorted 10 don to Frankfurt are likely to be carried out by older, inefficient buildings and the average in stages, especially since certain shortages The resulting high quality of life in Frankfurt space per capita in the open-plan offices that 5 already exist, depending on location, size and has led to a continual rise in the number of are customary in Frankfurt’s financial industry quality. Accordingly, it is expected that not all residents in recent years. At the end of 2015, is more likely to be between 20-25 m². The 0 companies’ requests for office space queries 724,500 people had registered Frankfurt as relocation of 5,000 jobs could generate addi- Berlin Frankfurt Hamburg Munich can be met in the short term. Consequently, their main place of residence, an increase tional demand for office space of 100,000 to  Q3 2010  Q2 2016  2020 Forecast some market participants may be required to of 76,000 (twelve percent) on a decade earlier. 125,000 m², which is equivalent to the space sign pre-letting agreements with developers. A further 30,000 people had registered Frank- available in two to three office towers in the Source: PMA, Deutsche AM Research A major Brexit effect involving job reloca- furt as their secondary residence. The increase financial district. tions to Frankfurt, for example, of more than in the number of residents means the number 10,000 office employees would increase rents of households in Frankfurt has also risen to Lowest vacancy rate despite moderate demand of the country. However, overcapacities are substantially, while also reducing vacancies over 400,000, slightly over half of which are not anticipated in the short term. Increasing considerably. However, a development like single-person households. The number of Frankfurt currently has slightly more than numbers of completions can be expected this would also stimulate growth in new residents and households is likely to rise fur- 10 million m² of office space, almost half of in 2018/19 at the earliest. On the whole, construction. ther in the coming years. At present, the City which is located in the city centre and periph- Frankfurt’s stock of office space is expected to of Frankfurt’s official population projections eral areas (for example the area surrounding grow significantly by more than one percent At the turn of the millennium imagination for the period until 2020 expect the number the exhibition centre known as Messe). Con- per year, of which approximately 100,000 m² running wild about growth resulting from of residents to increase by 40,000 to 764,000 sequently, Frankfurt’s inner city office market will be built on a speculative basis. However, the dot.com boom initially led to an extreme – with current projections of a long-term is equivalent to just 30-35 percent of office in light of potential job relocations, the avail- shortage in office space, which then triggered increase to as much as 830,000 by 2040. space in central London. However, the office ability of high-quality office space could be a huge overreaction in building activity. More stock is comparatively large relative to the another geographical advantage for Frankfurt. than one million m² came on to the market number of city centre inhabitants, which is re- in a short space of time. The after-effects can Population in Frankfurt flected in the elevated number of commuters. Reduced vacancies and increased office rents still be felt today in prime locations. Rents, (in m) having risen to up to EUR 50 per m² in 2001, In the past 15 years, the market featured We expect a slight overall increase in office were corrected downwards by almost 40 per­ 0.83 large overcapacities, which came about as a employment and demand for space by 2020. cent in the years that followed. Even today, 0.72 0.76 result of a substantial rise in the number of In our current rather conservative projections top rents of EUR 38 per m² are still below speculative development projects in the late for rental growth, which have already factored the 1990s’ average. Therefore, one of the 1990s and early 2000s. However, these over- in a Brexit, we expect average rental growth of medium-term Brexit effects could be a rise in capacities have been reduced since 2010. This two percent for prime office space per year up volatility in rent levels and available space. only in part resulted from tenant demand, to 2020. However, compared to our previous with take-up more subdued between 2012 and projections, rents for the period 2018-2020 What are the reasons for Frankfurt’s housing City of Forecast Forecast Frankfurt 2020 2040 2015. Rather, it is more likely to be the result are still growing by twice as much. As a result shortage?

Source: ONS, Statistisches Bundesamt Hessen, Deutsche Bank Research of a positive trend in special effects related to of qualitative requirements, but also because conversion – that is a change of use from of- of Frankfurt’s relatively low rental level in an The growth in population and employment fice to residential or hotel – and to compara­ international comparison – which is signifi- described above has also meant a rise in the tively weak construction activity following cantly lower than in Paris, Luxembourg and demand for housing. Demand was already Together with the growing number of resi- the financial crisis. At present, Frankfurt’s even Dublin – high-quality properties close fuelled by low interest rates, positive income dents and a dynamic economic environment, vacancy rate of more than eleven percent to the city centre especially should benefit developments and, at least at the beginning of the number of people working in Frankfurt (almost 20 percent in 2005) is still the highest from relocations to Frankfurt. However, both the current cycle, relatively cheap prices per has also risen by almost twelve percent since of the German top seven office markets; demand and new construction activities are square metre. Accordingly, annual building 2009. In 2014 almost 600,000 people were simultaneously, however, it is at its lowest expected to focus on sub-markets close to permits have almost doubled in the period employed in Frankfurt, more than half of level since 2002, and the trend is on the de- the city centre, such as the financial district, since 2009 to 5,000 homes in 2013 and to whom were commuters. Almost 90 percent cline. At 40 percent, the share of high-quality downtown, Westend or Messe/Europaviertel. around 4,600 in 2014. However, completions are employed in the services sector, of which space in the total number of vacant properties are growing at a much slower pace and in more than ten percent in the financial sector is comparatively high. Ultimately, the differences between the indi- recent years, have never amounted to more and just under ten percent in manufacturing. vidual sub-markets should intensify as a re- than 3,000 homes (substantially less than one However, as a result of a number of devel- sult and locations close to the city centre will percent of the existing housing stock). Fur- The share of office employment in overall opment projects, particularly in central register higher rental and occupancy levels thermore, in recent years, many thousands of employment is relatively constant at around Frankfurt, the city now has an above-average than those of non-central locations. Assuming homes have been created from the conversion 40 percent. The number of office employees project development rate compared to the rest that the demand for office space focuses solely of public sector and commercial properties. Insights 62 Financial Centre Report 2017 63

New urban districts have also been created, International housing prices 5,000 homes. Therefore, the price potential the Frankfurt residential property market for example, the Europaviertel, which will EUR per sqm (as of 6 October 2016) of the Brexit effect on the overall property from a potential relocation of employees. accommodate up to 10,000 people. Although cycle could be much more pronounced. Price Price growth and the shortage of housing will 20,000 all of these efforts are keeping the housing developments are likely to be quite progres- remain elevated for the foreseeable future. An shortage in check, they will not remedy it. sive should 10,000 or even 20,000 additional additional 5,000 homes and a correspondingly 15,000 employees relocate to Frankfurt. House prices elevated housing shortage would likely drive Growth in residential property prices remains could subsequently grow by significantly more prices up by more than EUR 100 per m². While high 10,000 than EUR 500 per m². purchase prices remain affordable thanks to low interest rates, they are strongly depend- The housing shortage is the main reason for 5,000 How is Frankfurt’s housing policy reacting? ent on future interest rate developments.  the increase in prices since the start of the current property cycle in 2009. House prices, 0 Rents in Frankfurt are rising as dynamically as as well as the cost of undeveloped land have London Paris Luxembourg Amsterdam Frankfurt Dublin prices and are similar to the housing shortage risen by around 25 percent in Frankfurt, while  in city centre  outside city centre in terms of elasticity. The creation of new prices in other major German cities have housing is barely keeping pace with demand undergone even more dynamic growth of 40 Source: PMA, Deutsche AM Research even today, as the trend in the housing short- to 80 percent. This is due on the one hand age demonstrates. The greater the Brexit effect, to Frankfurt prices and rents already being and the more successful Frankfurt is in attract- relatively high in comparison to the rest of furt house prices are more than 30 percent ing British companies, employees and expats, Germany at the start of the cycle. On the other below current market levels in London, Paris the less equipped traditional housing policy hand, it is also due to new challenges faced by and Luxembourg. will be to master these additional challenges. the financial industry, meaning that hiring is Following several years of planning, it took only taking place in selective areas. Given that Brexit effect: another price driver more than a decade to develop the Europavier- it accounts for ten percent of employment, the tel. Frankfurt’s politicians and decision-makers financial industry is an important economic Similar to the 5,000 additional office workers, would thus likely be well advised to come up sector for Frankfurt. Therefore, compared to we assume that the Brexit effect would create with a concept in the coming months on how other major cities, Frankfurt has also regis- the need for an additional 5,000 homes on they intend to reduce the existing housing tered correspondingly lower growth in income the residential property market. Owing to low shortage. In particular, it should show how, and employment in recent years. price elasticity and difficulties in expanding by successfully attracting companies, and the supply of housing, there is very little therefore new residents to Frankfurt, its The dynamic price growth continued in 2016. prospect of additional housing being made self-generated additional demand for housing Our price projection at the beginning of available. In this scenario, the housing short- will be addressed. the year of 7.6 percent on the previous year age consequently also increases by around appears to be happening. House prices across 5,000 homes. Price momentum could increase, Summary Germany increased by more than six percent although the effects of purchases being by the start of the autumn and list prices brought forward may already be reflected in The question regarding the consequences of in Frankfurt rose by more than ten percent the marked increase in list prices in 2016. a Brexit for the EU, the United Kingdom and (Immobilienscout24). However, in spite of this Germany is expected to remain unanswered marked increase, these prices are still quite The Frankfurt rule of thumb has applied since for some time. The political uncertainties and low when viewed in an international context. the house price cycle began: an increase in exit scenarios range from a contentious sepa­ Consequently, according to Numbeo, Frank- the housing shortage by 1,000 homes means ration to a second referendum. At present, a rise in residential property prices of EUR 25 however, we can expect that Frankfurt will be per m². This admittedly inexact rule implies one of the places to benefit most from a Brexit. House prices in Germany an increase of EUR 125 per m² in Frankfurt In light of the differences between the size of 1990 = 100 residential property prices resulting from an London and Frankfurt, London’s crumbs could additional shortage of 5,000 homes. Based become Frankfurt’s pie. The relocation of jobs 220 on current house prices, this would be an to Frankfurt is also likely to boost property increase of approximately four percent. How­ demand. The additional demand potential is ever, in light of the extensive shortage, this welcome on the Frankfurt office market be- 170 rule of thumb may well underestimate actual cause it should equalise structurally induced price developments. This is because, in the reductions in the financial sector and would

120 current property cycle, the housing shortage tend to lead to further reductions in vacancies has risen continuously and together with the and increase rents. The assumed 5,000 office length of time spent on searching for a home, workers would likely relocate to the highly 70 potential buyers may have tended to ultimately priced sub-markets close to the city centre. 1990 1995 2000 2005 2010 2015 accept even elevated list prices. The property However, as new building projects also focus

Hamburg Frankfurt cycle in Frankfurt is likely to be prolonged on these sub-markets, positive demand effects Berlin Munich significantly by low price elasticity result- would be diluted. Because of existing demand Source: BulwienGesa, Deutsche Bank Research ing from the construction of an additional overhangs, disadvantages are emerging on Insights 64 Financial Centre Report 2017 65

ASSET MANAGEMENT The German funds industry handles record assets While the institutional allocation might not Assets in billion euros be as driven by emotion, the comparatively low engagement in stocks seems to favour 3,000 2,801 asset managers offering solutions for different 2,601 LONGEVITY BRINGS 2,500 2,383 asset classes. This is a key attraction for many 2,037 2,105 foreign investment managers, particularly for 2,000 1,833 1,699 1,706 1,783 those investment managers with complemen- 1,525 1,505 1,500 tary skillsets for the needs of German pension OPPORTUNITY schemes. 1,000

500 AUTHOR 0 Pension fund asset allocation in selected countries in 2015 Volker Kurr, Head of Germany, Legal & General Investment Management 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 As a percentage of total investment Bills and Cash and Country Equities Other1 Source: BVI bonds deposits United States 44.2 37.0 1.0 17.9 Germany 5.0 53.5 3.8 37.8 com­parison, public funds only have seen an United Kingdom 20.2 34.4 2.4 43.0 increase of 26 percent in the last decade.2 Netherlands 38.2 46.5 2.8 12.5 New record highs on the German fund market Sweden 18.3 66.7 2.2 12.8

Looking at the latest data of net inflows into Denmark 17.8 63.1 0.3 18.7 the fund market, the growth fueled by institu- Source: OECD – Pension Markets in Focus 2016 tional investors is even more apparent: data 1 The “Other” category includes loans, land and buildings, unallocated insurance provided by BVI shows that German private contracts, hedge funds, private equity funds, structured products, other mutual funds (i.e. not invested in cash, bills and bonds, or equities) and other investments. investors only accounted for 6.5 percent of net cash inflows in 2016. The highest inflows into Ongoing developments in the institutional segment are in part waiting to be managed by asset the German fund market came from pension of this core European market make Germany a managers. schemes, making up for 37.5 percent of total The scale of the opportunity strategic focus for foreign investment managers. inflows, followed by insurance companies Chief among them is the fact that German This makes the German market a natural with 25.1 percent. The significant scale of the German pension institutional investors’ requirement for cautious, hunting ground for foreign asset managers scheme industry is also a key factor that long-term investment expertise is often comple- looking to expand their businesses beyond Just like German retail investors, pension attracts international players. According mentary to the skillsets gained from international their home bases, in particular companies funds seem to avoid larger engagements in to figures by the OECD, private pension experience in similar large-scale markets. from the US or UK. Given this backdrop, it is stocks. According to figures from the OECD, investments in the UK amount to $2.7 trillion, only natural that most companies looking to the average pension fund asset allocation in meanwhile Germany is at $218 billion. The enter the German market focus on institution- Germany consists of the following: five per- relatively small size is especially apparent Germany is home to investors who are tradi- al investors: an especially attractive market cent equities and 53.5 percent in fixed income. when comparing the private pensions invest- tionally relatively risk-averse. One might segment. In comparison: in the Netherlands, the pro­ ment in relation to GDP. therefore come to the conclusion that it is dif- portion of equities in the average total pension ficult to sell asset management services over Ongoing growth in the German institutional market scheme allocation is as high as 38.2 percent. In the Netherlands, private pension invest- here. To compound matters, the market has a ment makes up for 178.4 percent of GDP number of big national asset managers with Recent studies show a rise in the demand for – in Germany, this is as low as 6.6 percent. close ties with the country’s most important investment solutions from German institu- Germany is a B2B market However, this should not be taken as a coun- banking institutions. tional investors. While in 2007 – before the Who buys funds? terargument: with greater scale comes greater financial crisis – the share of funds aimed opportunity, meaning that German pension All of this is counterweighed, though, by some at institutional investors in the German Net inflow of funds in 2016, schemes can also be viewed as a strategic in billion euros 6.5 promising data: Germany is Europe’s biggest Investment Market was at 41 percent, the 7.4 market with a view for growth for those who economy by far and consequently one of the German Fund Association (BVI) states a rise can provide more specialist investment exper- 37.5 8.3 richest countries in the world, with a GDP that of this asset group to 53 percent in 2017. Private investors tise. The small amount of private pension in- 1 ranks fourth-highest globally. When com- During the same period, the total AUM of Social security agencies 102.8 9.0 vestments compared to GDP indicates further paring the average fund volume per citizen, institutional funds in Germany has doubled – Credit institutions potential for growth in the market. Churches, associations the German fund market is the fifth-largest currently amounting to EUR 1.480 billion. In 9.0 Companies, foundations in the world. Even when adding together only We expect this growth to continue, for good Companies, foundations, insurers 25.1 German insurance and pension schemes, the Pension schemes, pension funds reasons: according to FitchRatings, the combined investment portfolio of both groups longevity risk is the biggest risk to German 1 International Monetary Fund amounts to five-digit billion sums – which 2 BVI Source: F.A.Z.-Graphic Piron corporate pensions, as it is in the UK, too. The Insights 66 Financial Centre Report 2017 67

investment research house expects this factor Also, given the long-term investment horizon THE GERMAN BANKING INDUSTRY to play an even bigger role than the current of pension schemes, preparing for a turn­ low-interest rate environment. Since the early around from the low-interest environment 1980s, life expectancy in Germany has risen by seems likely. We’re already seeing first steps around 8 years.3 This highlights the need for in the US – and inflation rates in Europe have STRONG ECONOMIES NEED cautious, long-term investment solutions by been on the rise lately. Given their already institutional investors, and pension schemes high allocation to fixed income and their in particular. Foreign asset managers – espe- probably prospective ongoing preference for cially from the US or UK – may show longer- this asset class, institutional demand for ac- STRONG BANKS term experience and a potentially broader tively managed fixed income solutions seems offering of well-suited investment solutions likely to accelerate. in this environment driven by demographic AUTHOR change. We therefore believe that the growth of the Peter Buerger, Risk & More Consulting Co-Coordinator “Personal Members”, Frankfurter Institut für institutional market in Germany is sustainable Risikomanagement und Regulierung (FIRM) For example, historically speaking, liability- and expect to see further demand for actively driven investment has played a larger role in managed investment solutions with a long- these markets for a longer period. According- term horizon, including specialised solutions ly, foreign asset managers are able to show a such as liability-driven investment.  longer track record – a sound argument when competing with others for new clients. Other specialist areas such as index equity solutions and real assets such as commercial property based in the country of origin of each respec- tive foreign asset manager can offer important diversification benefits. Banks in Europe continue to face political, Number of credit institutions in the European regulatory, and market pressure. A decade after Union1 Rising life expectancy fuels need for specialized the financial crisis sent shock waves through investment solutions the industry, institutions in the European Union The long-standing trend of rationalisation are still facing major challenges: the low interest of the number of credit institutions is evident In conclusion, rising institutional demand for rate environment, mountains of bad loans, heavy in Europe. As disclosed by the European rather cautious, long-term investment solu- regulations, competition from FinTechs, disruptive Banking Federation, the number of credit tions – especially by German pension schemes innovations, damaged reputation, high cost levels, institutions in the EU declined between 2007 – makes the German market particularly and low profitability. and 2014 by more than 13 percent; however, interesting for foreign asset managers. This more than 7,000 banks in the EU today still growth is ensured by several factors, above all represents an overcapacity of institutions. by demographic change – and a rising threat The banks’ home market is difficult; confi- The declining trend has continued since 2014 by the longevity risk for German pension dence in the European Union is low, especially and will continue in the foreseeable future as schemes. driven by political/societal issues such as mi- the market environment remains difficult and gration, terrorism and fragmentation. Brexit policy­makers have recognized the need for the has dominated European economic and po- sector to shrink. Life expectancy at birth, total litical discourse for months and will continue (years) to do so. Relations between the EU and other Global systemically important banks2

90 nations have deteriorated, especially with Russia, Turkey and the United States. After In November 2016, the Financial Stability years of disappointing growth and stagnant Board (FSB), in consultation with the Basel 60 inflation, the European economy is starting Committee on Banking Supervision (BCBS) to motor on. However, the economy does not and national authorities, published its up- work for everyone, with overall unemploy- dated list of global systemically important 30 ment at 20 million, and youth unemployment banks (G-SIBs). The list comprises thirty reaching record levels. international banking organisations, thereof thirteen EU firms. Deutsche Bank remains the 0 1964 1974 1984 1994 2004 2014 The US banking market, on the other hand, only German institution in this “Champions is booming, as recent stock prices indicate. League”, while France and the United King- Germany World Across the Atlantic, there is confidence in the dom are represented by four banks each. How to read the chart: On a global basis, people born in 1960 had a total life expectancy 52 years at birth. People born in 2014 can expect to become 71 years old. overall economy and in the Trump adminis- Source: World Development Indicators, Worldbank tration’s endeavors to roll back financial regu-

lation, i.e. elements of the Dodd-Frank Act. 1 European Banking Federation (EBF), European Banking Sector Facts & Figures 2015, 14 December 2015 2 Financial Stability Board (FSB), 2016 List of Global Syste- 3 World Development Indicators, Worldbank ‘Quo vadis’ European banks? mically Important Banks (G-SIBs), 21 November 2016 Insights 68 Financial Centre Report 2017 69

G-SIBs are subject to higher capital buffer The European banking sector is well capi­ gross loans and advances – in Europe remains period of restructuring and retrenchment. requirements, total loss-absorbing capacity talised today. Figure 1 illustrates that the up to three times higher than other global Low profitability reflects a range of factors (TLAC) requirements, and resolvability 130 or so institutions under EBA supervi- jurisdictions and falls significantly short of that vary across countries and across banks, requirements. In addition, G-SIBs are also sion have increased their CET 1 ratios (fully investors’ requirements for a ‘good bank’. including the economic environment, low subject to higher supervisory expectations for phased-in) to 13.6 percent as of December net interest margins, high levels of non- risk management functions, risk data aggrega- 2016, a significant achievement which was As figure 2 shows, the NPL ratio in European performing loans, high overhead expenses, tion capabilities, risk governance and internal executed following significant de-risking and banks has decreased to 5.1 percent as of and vast expenditures to implement regulatory controls. raising equity capital. Participating banks in December 2016. Participating banks are below requirements. all EU countries are well above the EBA’s the EBA’s high eight percent ‘worst bank’ As table 1 shows, the FSB-allocated G-SIB 11 percent ‘worst bank’ threshold level but threshold level but are still significantly above As a result, some banks are significantly buffers can be broken down into five buckets are still below the EBA’s current 14 percent the EBA’s current three percent ‘best bank’ adapting their strategy and business models. ranging from 1.0 percent to 3.5 percent and ‘best bank’ threshold level. The figure also threshold level. The figure also shows that Changes are manifold and include de-risking, are determined following a yearly analysis of shows CET 1 levels in selected European NPL levels in selected European economies selling assets and even entire operational the firms’ cross-jurisdictional activity, size economies and the EU in total on average. vary significantly. NPL levels are particular- units (legacy assets, non-core business, (total exposures), interconnectedness, substi- The participating large German banks have ly high in Greece (45.9 percent), Italy (15.3 unprofitable activities, capital intensive tutability and complexity. The FSB ranks BNP a solid CET 1 ratio as of December 2016 of percent), and Spain (5.7 percent) and remain business), re-focusing on domestic and core Paribas, Deutsche Bank and HSBC as system- 14.1 percent, 0.5 percent above the EU average. one of the key obstacles to recovery in these business (commercial and consumer lending), ically more risky than other European firms economies and the EU as a whole. The German reducing capital markets business, simplifying and has placed them in bucket 3, requiring an Two of the largest banks in the EU – UniCredit banks supervised by the EBA have an NPL the bank (processes, information technology, additional G-SIB buffer of 2.0 percent. and Deutsche Bank – recently raised or ratio as of December 2016 of 2.5 percent, announced that they were raising significant significantly below the EU as a whole and even amounts of fresh capital, especially in order to well below the EBA ‘best bank’ threshold level. Return on equity (ROE) EU Banks – G-SIB Buffers November 2016 stabilise the institutions and to set them back EU banks supervised by EBA, as of 31 December 2016 to growth mode. In February 2017, UniCredit Reducing NPL or disposing means devaluing, Bucket 1 Bucket 2 Bucket 3 Bucket 4 Bucket 5 committed to raising 13 billion euros in a re- and therefore writing off losses at a capital 10% 1.0% 1.5% 2.0% 2.5% 3.5% cord capital increase. In March 2017, Deutsche level and the subsequent effect on capital 10% • BPCE • Barclays • BNP NA NA Bank, the German banking industry flagship, ratios as discussed above; so far, this has been • Crédit Agricole Paribas announced an intended capital increase of enough to lead banks to proceed with caution. 8% 6.9 6.8 • ING • Deutsche approximately eight billion euros from the 6.4 • Nordea Bank 6% issuance of new shares. Profitability3 6% • RBS • HSBC 5.7 • Santander 5.6 3 4% 5.4 • Société Générale Non-performing loans (NPLs) As a result of all of the above, the European 4.5 banking industry is in a prolonged period of • Standard Chartered 3.5 3.3 • UniCredit Despite improvements, non-performing loans low profitability unlikely to reverse any time 2% remain high among large EU banks, with soon. Profits at some of the region’s largest 2014 2015 2015 2015 2015 2016 2016 2016 2016 Source: Financial Stability Board (FSB), 2016 List of Global Systemically Important Banks Dec Mar Jun Sep Dec Mar Jun Sep Dec (G-SIBs), 21 November 2016 associated implications for the economy and lenders have been less than their cost of capi- EBA best banks’ profitability. The NPL ratio – NPL to tal since the financial crisis, forcing a lengthy EBA worst Capital levels / Loss absorbing capacity3 All banks (130)

Selected countries: SWE 12.6%, NL 8.0%, A 7.2%, FR 6.6%, ES 5.1%, EU 3.3%, G 1.3%, The financial crisis revealed that many CET 1 ratio (fully phased-in) Non-performing loans (NPL) UK 1.0%, GR – 7.7%, IT – 10.6%

financial institutions were ill-prepared for EU banks supervised by EBA, as of 31 December 2016 EU banks supervised by EBA, as of 31 December 2016 Source: European Banking Authority (EBA), risk dashboard, 3 April 2017 the crisis, i.e. they did not have the necessary levels of loss absorbing capacity to withstand 14% 8% 8% a crisis. Ever since, the question of how much 14% data, shared services, etc.) and reducing over- capital banks should be required to hold has 13.6 13.6 7% 6.5 head expenses (number of branches and staff). been at the centre of the regulatory debate. 13% 6.2 Cost-to-income ratio is a key area of concern 13.2 6% 6.0 5.9 13.0 12.9 5.7 5.6 5.5 5.4 Equity capital in the balance sheet is, of course, 12.1 5.1 for the C-suite, particularly in German banks; the residual claim on assets of an entity after 12% 12.3 5% the level (80.9 percent) is higher than in any 11.5 payment of all liabilities; its first job is to other EU country. 11.7 11% 4% absorb losses, acting as a cushion to protect 11% 3% 3% those who have entrusted the bank with their Figure 3 indicates that profitability in European money, both creditors and depositors. 10% 2% banks, i.e. return on equity (ROE), remains 2014 2015 2015 2015 2015 2016 2016 2016 2016 2014 2015 2015 2015 2015 2016 2016 2016 2016 Dec Mar Jun Sep Dec Mar Jun Sep Dec Dec Mar Jun Sep Dec Mar Jun Sep Dec low; the figure comes to 3.3 percent as of The key supervisory frameworks such as Basel December 2016, compared to 3.5 percent EBA best EBA best III, CRD IV in the EU, Dodd-Frank in the US EBA worst EBA worst as of December 2014 and 4.5 percent as of and related national implementation schemes All banks (130) All banks (130)

have significantly led to an increase of cush- Selected countries: SWE 21.1%, GR 15.9%, FR 15.0%, UK 14.8%, G 14.1%, NL 13.7%, Selected countries: SWE 1.0%, UK 1.9%, G 2.5%, NL 2.5%, FR 3.7%, EU 5.1%, A 5.3%, ions in large banking organisations, both in EU 13.6%, A 13.5%, ES 10.9%, IT 9.9% ES 5.7%, IT 15.3%, GR 45.9% 3 European Banking Authority (EBA), risk dashboard, 3 April Europe and the United States. Source: European Banking Authority (EBA), risk dashboard, 3 April 2017 Source: European Banking Authority (EBA), risk dashboard, 3 April 2017 2017, data as of Dec 2016 Insights 70 Financial Centre Report 2017 71

December 2015. Participating banks as a a buyer must pay the protection seller over Price-to-book ratio light’ business, reducing costs, and optimis- group remain significantly below the EBA’s the length of the contract. It appears that (Selected international banks5, in %, as of 31 March 2017) ing the balance sheet, it is institutions like six percent ‘worst bank’ threshold level, and the market requests a significantly higher Frankfurt Main Finance and The Frank- the regulator’s current ten percent ‘best ‘insurance premium’ (spread) for European furt Institute for Risk Management and CBK G 37.1 bank’ threshold level is far away. ROE levels over US banks. Of the institutions shown, the Regulation (FIRM), that manage initiatives DBK G 41.7 in German banks under EBA supervision (1.3 market perceives Wells Fargo (45.0 bps) as the UCG IT 48.2 that add further value to the German banking percent) are well below the EU average (3.3 least likely bank to default, while Royal Bank DB UK 65.3 industry, the financial center Frankfurt am percent). It is interesting to note that ROE of Scotland (RBS) is perceived as highest risk BARC FR 67.8 Main, and both the German and European in France (6.6 percent) and the Netherlands (168.3 bps). CrAgr UK 68.8 economy as a whole. Through membership (8.0 percent) are well above the EU average RBS FR 72.7 and engagement, i.e. bringing the brightest and significantly above the German level; this Figure 5 gives an overview of current Market CS SW 74.3 industry experts together, both institutions is significantly driven by the fact that both capitalisation, i.e. the market value of the BNPP FR 84.4 make an important contribution to the over- SAN ES 92.4 countries had a major consolidation / restruc- all industry. BBVA ES 100.8 turing in their domestic banking sectors. HSBC UK 103.1 Market capitalisation UBS SW 110.0 There is a number of ongoing and relevant 5 Comparison of European and US Banks / Market (Selected international banks , in USD billion, as of 31 March 2017) LLOY UK 110.2 subjects on the table now and for the fore- 4 data as of March 2017 ING NL 110.4 seeable future, some of them controversial. G 11.4 CBK C US 80.6 Examples include a possible European reduc- G 26.7 Direct market comparisons between large DB BAC US 98.1 tion of the regulatory burden for banks (both SW 31.0 European and US banks illustrate that the CS JPM US 137.1 large and small), developments in data/cyber UCG IT 34.4 overall situation is significantly biased in WFC US 158.2 security, FinTech inventions, digitisation RBS UK 35.7 favour of US banks. 0 50 100 150 200 and disruptive innovation, risk methodology, CrAgr FR 38.6 SG FR 40.1 Source: SNL Financial, data retrieved on 31 March 2017 accounting standards, treatment of ‘interest Figure 4 compares CDS Prices / 5-year Senior BARC UK 47.8 rate risk in the banking book’, streamlining Debt, i.e. the annual amount of protection BBVA ES 51.0 processes, automation, outsourcing, and part- ING NL 58.8 is fundamentally wrong with the company. nerships / joint ventures. LLOY UK 59.4 A high P/B ratio, on the other hand, signals CDS price / 5-year senior debt UBS SW 59.5 that the firm is overvalued and will possibly As we say in German: “Es gibt viel zu tun, (Selected international banks5, in basis points, as of 31 March 2017) BNPP FR 83.3 motivate investors to ‘cash in’, which subse- packen wir es an [There is much to do, so let’s 89.5 SAN ES quently would reduce market capitalisation. get started]”. Or, as John F. Kennedy once said: HSBC UK 161.5 UK 168.3 A number of European banks are near or even “If not us, who? If not now, when?”  RBS C US 165.4 IT 164.1 above the 100 percent mark; however, a good UCG JPM US 236.2 DB G 126.5 WFC US 278.5 handful of banks are traded in the market ES 115.0 BBVA JPM US 313.8 below the level of 70 percent. CBK G 110.9 0 50 100 150 200 250 300 350 BARC UK 110.1 Conclusions / ‘Quo vadis’ European banks CS SW 103.0 Source: SNL Financial, data retrieved on 31 March 2017 SAN ES 98.8 Thomas Jefferson, once said “Banking insti- SG FR 89.9 tutions are more dangerous to our liberties BNPP FR 89.5 CrAgr FR 82.9 shares of each bank (share price) times the than standing armies.” While these words may HSBC UK 74.9 number of shares outstanding. The figure resonate with many people today, it is easy LLOY UK 65.3 speaks a clear language; large US banks are to forget that financial institutions have the ING NL 62.8 valued significantly higher than their European power to create a lot of good for society by UBS SW 54.8 peers. Only HSBC, one of the most diversified providing the liquidity needs for families and BAC US 63.1 banking groups in the world, is currently able business to invest in the future. And, equally C US 62.7 to keep pace with the Americans as they have important, banks provide a safe place to keep JPM US 55.0 recently benefitted from the Trump adminis- excess cash, known as deposits. Strong econ- WFC US 45.0 tration’s announcements to reduce regulatory omies need strong and successful banks! 0 50 100 150 200 burden on banks. Source: SNL Financial, data retrieved on 31 March 2017 Governments, central banks, and regulators, Figure 6 compares the Price-to-book ratios the banks themselves and other involved or- (P/B ratio) of large international banks, com- ganisations/institutions, need to ensure that paring the institutions’ stock prices to their banks have a playing field that allows them 4 SNL Financial, data retrieved on 31 March 2017 5 BAC (Bank of America), BARC (Barclays), BBVA (Banco book value. Investors typically find the P/B to stimulate the economy on one hand, i.e. Bilbao Vizcaya Argentaria), BNPP (BNP Paribas), C (Citigroup), CBK (Commerzbank), CrAgr (Crédit ratio useful because the book value of equity lend to businesses and consumers, and to be Agricole), CS (Credit Suisse), DB (Deutsche Bank), provides a relatively stable and intuitive met- profitable and sustainable on the other hand. HSBC (HSBC Bank), ING (ING Groep), JPM (JPMorgan Chase), LLOY (Lloyds Banking Group), RBS (Royal ric that can be easily compared to the market While banks work hard and continue their Bank of Scotland), SAN (Banco Santander), SG (Société value. A low P/B ratio typically indicates that efforts, i.e. reviewing or even reshaping busi- Générale), UBS (UBS), UCG (UniCredit Group), WFC (Wells Fargo) the firm is undervalued and/or that something ness models, de-risking, focusing on ‘capital Insights 72 Financial Centre Report 2017 73

FINTECH IN THE RHINE-MAIN-NECKAR REGION Global FinTech: Funding breakdown by region Germany’s FinTech ecosystem in 2016 (USD bn) On the back of several years of robust growth 20 Germany enjoyed yet another year of vibrant PARTNERSHIP REPLACES FinTech activity in 2016. Thus, our monitor- 15 ing of the local FinTech landscape revealed further expansion of the FinTech base in 10 2016 from 250 to 305 (+ 22 percent) compa- RIVALRY nies.1 Owing to its continuously and rapidly 5 developing FinTech ecosystem, Germany has thus rightly become Europe’s second largest 0 FinTech hub over the past three years, trailing 2012 2013 2014 2015 9M’2016 only the United Kingdom. AUTHORS  North America  Europe Christopher Schmitz, Partner Ernst & Young GmbH, Jan-Erik Behrens, Executive Director Ernst & Young GmbH,  Asia  Other Dmytro Shevchenko, Consultant, Ernst & Young GmbH Note: Funding figures for Asia include USD 4.5 bn raised by Ant Financial in China In terms of regional dispersion of FinTechs Source: EY Nov’2016 – “German FinTech landscape: opportunity for Rhein-Main-Neckar” within Germany there has been relatively little change from 2015. The FinTech ecosystem in Germany still remains rather fragmented led by the USA, still remains the global leader in comparison with other internationally in terms of the number of deals executed, relevant ecosystems. Thus, three major hubs accounting for roughly 50 percent (640) of continue to dominate the local market: global deals. Europe’s FinTechs have attracted Berlin, the Rhine-Main-Neckar region and only ~ 10 percent of global FinTech funding Munich. Together they served in 2016 as base or ~ USD 1.7 billion over the same period with for more than 60 percent of all of Germany’s the EU-2 (Germany and the United Kingdom) FinTechs, while the remaining 40 percent of An overview of the global FinTech landscape in a broad customer base. We have thus seen a retaining their positions as the region’s Fin- the identified FinTechs were dispersed across 2016 suggests that FinTech activity remained shift towards collaboration between FinTechs Tech powerhouses. other cities. strong and the market continued to enjoy a and financial institutions increasingly gaining healthy expansion. Last year we saw greater traction in 2016. With 28 percent of the total landscape, Berlin collaboration between FinTechs and the financial Global FinTech: Funding source still retains the title of Germany’s leading sector, witnessed solid funding flows and dis- This shift in perception of FinTechs’ role in as % of total funding FinTech hub, although the Rhine-Main-Neck- cerned growing interest and engagement in the industry has in turn spurred more and ar region has been catching up fast in the last the public sector. more financial institutions towards greater 90 two years. In fact, the Rhine-Main-Neckar engagement with FinTechs. On the one hand, region, which includes Frankfurt as the main this has led to a growing number of various hub, has been the key driver of expansion of 60 Global FinTech trends initiatives aimed at supporting the devel- Germany’s FinTech universe in 2016 – the opment of FinTechs, such as, for instance, landscape in the region expanded by 45 per- Around two years ago, a prevalent opinion sponsorship through accelerator and incuba- 30 cent or 25 FinTechs to 81 in comparison to our among both market observers and existing tor programs, as well as provision of working last study.2 The region outpaced Germany’s industry players was to view FinTechs as space. On the other hand, financial insti- 23% start-up capital Berlin, which came in second, fierce rivals that are threatening to disinter- tutions have begun to play an increasingly 0 4% adding 24 percent or 17 FinTechs to its uni- mediate and unbundle financial institutions. active role in providing FinTechs with funding Q1 2012 Q1 2013 Q1 2014 Q1 2015 Q1 2016 Q3 2016 verse since our previous study. In contrast, Yet last year it became increasingly appar- through their corporate venture capital arms. Corporate VC PE & VC Angels & other Germany’s third largest FinTech cluster, ent that the relationship between FinTechs Thus, in 2016 we observed higher amounts of Munich, has seen only subdued activity in and incumbents is more symbiotic. Many corporate venture capital flowing to FinTechs Source: EY Nov 2016 – “German FinTech landscape: opportunity for Rhein-Main-Neckar” the last year, registering a mere six percent FinTechs have found it hard to navigate the than in previous years. In fact, the share of growth in the underlying period. This has complex web of regulatory requirements corporate venture capital in total FinTech Along with increased interest from the enabled the Rhine-Main-Neckar region to and struggled to achieve scale. At the same investment has been steadily increasing over corporate sector, in 2016 we also observed make considerable market share gains at the time, banks sought to respond to changing the past two years. Overall, in 2016 FinTechs greater activism on the part of governments expense of other hubs and come in almost customer demands and embrace digitisation enjoyed another year of sizeable funding and regulatory authorities in the FinTech neck-to-neck with Berlin in terms of the under outdated IT architecture. This led many inflows with global investment volumes field. More and more governments around the total number of FinTech companies (81 or 27 FinTechs and financial institutions to realise hitting USD 17.4 billion in September 2016 – world, particularly in world’s financial centres, percent of the universe). Although it is still that partnership rather than rivalry could also second highest FinTech funding amount ever have come to appreciate the role of FinTech be a viable and mutually beneficial option recorded. in the industry and its potential impact on

for both parties. FinTechs would offer banks the economy. To date, such activism has often 1 The figures relating to the size of Germany’s FinTech innovative solutions that could increase While Asia has managed to overtake North translated into provision of subsidised office universe presented in this article are based on our defini- tion of FinTechs and are subject to our FinTech research customer loyalty and potentially reduce America as a leading destination for FinTech space and initiation of various supporting methodology. As such, they may differ from figures in other costs. Banks, on the other hand, could offer funding in September 2016, owing mostly to programmes, most prominently the ‘regulatory publications. 2 “German FinTech landscape: opportunity for Rhein-Main- FinTechs regulatory expertise and access to a large one-off deal in China, North America, sandboxes’, as they have come to be known. Neckar” (March 2016) Insights 74 Financial Centre Report 2017 75

too early to state conclusively, we believe that Germany’s FinTech universe: Segment breakdown in 2016 German FinTech: Funding inflows vs the UK year before. This has reflected a global cooling a number of initiatives in the Rhine-Main- (USD m) off on the back of geopolitical uncertainty 3% 3% Neckar ecosystem may have had a positive 4% as well as greater scrutiny of the FinTech 9 24% 1,000 impact on this development (see next section) 10 business models by investors. This has also Banking and lending 5% 13 and expect the latter to enable the region led Payments 16 73 coincided with another trend that increasingly Enabling processes and 750 by Frankfurt to build on the recent momen- 10% garnered our attention in 2016 – the greater technology 31 tum going forward. InvesTech participation of corporate investors in funding e-marketplaces, 305 500 aggregators and FinTechs. The funding structure in countries Germany’s FinTech universe: Expansion by hub in 2016 intermediaries like the United Kingdom and Germany has RegTech 44 59 250 InsurTech 15% been gradually shifting from venture capital PropTech 50 investors towards corporate investors, which +22% Financial data analytics 19% 0 in our view indicates growing maturity of the 17 11 2 17% 25 2012 2013 2014 2015 9M 2016 FinTech base and reflects greater willingness +12% +6% Source: EY Nov 2016 – “German FinTech landscape: opportunity for Rhein-Main-Neckar” +45% +24%  UK  Germany of corporations to engage with FinTechs. 305 250 by incumbents, and we expect to see greater Source: EY Nov 2016 – “German FinTech landscape: opportunity for Rhein-Main-Neckar” This year, we see still more room for organic collaboration between FinTechs and industry expansion in Germany’s FinTech ecosystem, March Rhine-Main- Berlin Other German Munich October incumbents in this segment. A good example as well as potential for attracting FinTechs 2016 Neckar region cities 2016 of this is the growing interest and activity certain FinTech business models can achieve from abroad in the aftermath of the Brexit ref- Source: EY Nov 2016 – “German FinTech landscape: opportunity for Rhein-Main-Neckar” base in RegTech. We believe the Rhine-Main- sufficient scale to remain in the market over erendum. In fact, we started to see evidence of Neckar region stands to benefit most from the long term. several FinTechs choosing to relocate from the this development, as many local FinTechs United Kingdom to Germany last year. Thus, a have B2B-oriented business models. In 2016 Aside from the expansion in the FinTech uni- Singaporean FinTech specialising in payment In terms of market segment focus our analysis we also observed increased interest in the verse, Germany’s FinTechs recorded another services, WB21 Pte., has chosen to move its revealed that German FinTechs remain most InsureTech segment, although activity has yet year of solid financing inflows. In 9M 2016 European head office from London to Berlin.3 active in the more mature and larger market to pick up here. local FinTechs raised USD 421 million, thus A real estate investment start-up BrickVest is segments, such as payments, and banking and outrivaling the United Kingdom’s with USD another example of a FinTech that decided to lending, which traditionally have B2C-focused Germany’s FinTech universe: Expansion by segment in 2016 375 million. The most prominent funding relocate to Germany. Going forward we expect business models. However, last year also deals were struck last year by FinTechs in the more FinTechs to choose to locate their offices marked an uptick of FinTech activity in the +22% banking and lending segment, with N26 col- in continental Europe, and in Germany in 10 enabling processes and technology market 19 lecting the highest amount (USD 40 million) particular. 2 3 segment, which was typically dominated by 11 9 in the same period. In 2016, we witnessed a 13 B2B-oriented business models. In our view, 14 generally healthier funding environment in In our last contribution to the Frankfurt Main this reflects an increasing shift of FinTechs 18 305 Germany with a greater number of FinTechs Finance Yearbook we noted that “Germany into the middle-office and back-office locking in smaller amounts in comparison has essentially reached a turning point and 250 domains of the value chain, where FinTechs to previous periods where fewer FinTechs could, under adverse circumstances, lose are viewed by incumbents more as potential March Enabling Ban- Pay- Invest- Insur- Reg- Fin. eMar- ** Prop- October secured larger investment amounts. its reputation as a potential future FinTech 2016 process king & ments Tech Tech Tech data ketplace, Tech 2016 partners rather than direct competitors, and & Tech len- ana- aggrega- market of international importance”. We can ding lytics tors thus face less competition than FinTechs that & inter- Yet, in spite of the still solid funding flows to now state that Germany’s FinTech market has aim at core banking services at the B2C end. mediates FinTechs, we observed a more subdued inves- made solid gains in developing as a potential FinTechs with these models should have less Source: EY Nov 2016 – “German FinTech landscape: opportunity for Rhein-Main-Neckar” tors’ appetite for FinTechs in 2016 than the future international FinTech centre. In 2017, difficulties in achieving scale as their tech- it is vital for Germany to sustain this positive nology-based innovation is highly welcome momentum by making further progress in German FinTech: Top funding deals in 2016 removing its competitive disadvantages and Overall, although the local FinTech ecosys- fostering a FinTech-supportive environment. Germany’s FinTech universe: Hub breakdown in Nov 2016 tem continued to expand in 2016, we have FinTech Segment Funding (US m) observed a hint of moderation in growth The Rhine-Main-Neckar Region: Progress in 1. N26 Banking & lending 40 momentum, particularly in comparison with developing “the German FinTech hub” 2. Finanzcheck.de eMarketplaces, 38 28% previous years. Thus, in contrast to a very aggregators & 33% robust expansion in 2015, last year recorded The Rhine-Main-Neckar region has made in 87 intermediaries 101 fewer newly-founded FinTech start-ups – a the meantime good progress in developing 3. Spotcap Banking & lending 32 development that we witnessed not in sin- a FinTech-friendlier ecosystem – 2016 saw a 305 gular market segments, but rather across the 4. Orderbird Payments 23 number of private and public sector FinTech whole landscape. Following several years of initiatives kick-started that should further 5. Friendsurance InsurTech 15 Berlin dynamic start-up activity, the market seems to increase the region’s attractiveness as a key Rhine-Main-Neckar 36 81 6. Kreditech Banking & lending 11 Munich have taken a respite as many of the business 12% 27% Other models developed so far have yet to be duly 7. Payleven Payments 10 tested and proven viable. In our view the 3 https://www.wsj.com/articles/singapore-startup- Source: EY Nov 2016 – “German FinTech landscape: opportunity for Rhein-Main-Neckar” next year will be crucial in showing whether Source: EY Nov 2016 – “German FinTech landscape: opportunity for Rhein-Main-Neckar” wb21-to-leave-london-for-berlin-after-brexit-1475251242 Insights 76 Financial Centre Report 2017 77

FinTech hub. Our survey of corporate and steadily growing interest and increasing Fields of action in developing the Rhine-Main-Neckar region as a key FinTech hub institutional representatives of FinTech involvement of the corporate sector in the initiatives as well as start-ups concluded in FinTech ecosystem, as evidenced both by the Proposed actions Progress November 2016 indicated a generally positive rising share of corporate venture capital in  Decide on a building perception among respondents of the pro- the FinTech funding structure, as well as by 1  Offer subsidised office space gress made in the development of the region’s the growing number of FinTech-supportive FinTech Center Frankfurt  Coordinate settling of stakeholders in the centre to ease access to e.g. FinTech ecosystem. programmes (for example, corporate acceler- accelerators, incubators, investors, regulators ators and incubators, etc.). This has not least 2  Organise local hackathons with focus on the target proposition been driven by an increasing perception in the Innovation labs/  Tie winners of the events to Frankfurt as future location Evaluation of FinTech ecosystem success factors market of a more collaborative relationship hackathons between FinTechs and incumbents. 3  Set up local/regional development schemes to attract FinTechs in the Local/regional early stage 5 4.9 development schemes 4.6 4.4 At the same time the interviewees noted that 4.1 4.1 3.9 access to funding should be improved in the  Define market proposition with Rhine-Main-Neckar FS community (FS 4 4 3.4 region in the near future. FinTechs still face players, associations, multipliers, public institutions) 3.1 Market positioning 3 2.9 difficulties in tapping into investors, particu-  Use defined target proposition in all activities to penetrate message 3.2 larly in the early stages of development, where  Create showcases with coordinated support of regional financial 2 2.6 5 2.4 access to business angels and venture capital- service players (e.g. members of the Financial Service Community) to Show-case projects 1 ists is critical for the start-ups’ survival. The jointly test or implement FinTech solutions recent initiatives such as the Deutsche Börse  Penetrate message across channels to FinTechs, stakeholders and 0 6 Venture Network funding platform and as multipliers at regional, national and global level Funding Partners Coaching Regulator Infra- Events Marketing and networking well as the build-up of professional investor  Use Frankfurt-based events to attract German and international Fin- structure events Progress last 12 months  Importance networks in the private sector are vital steps in Techs and show activity facilitating FinTechs’ access to investors and Source: EY Nov 2016 – “German FinTech landscape: opportunity for Rhein-Main-Neckar” venture capital. More similar initiatives would Source: EY Nov 2016 – “German FinTech landscape: opportunity for Rhein-Main-Neckar” significantly contribute to increasing the re- gion’s attractiveness as a potential home base The survey revealed that the region made the for FinTech start-ups. strongest progress in raising greater aware- ness of FinTechs through increased location Similarly, respondents indicated that more marketing and the organisation of various supportive regulatory initiatives and govern- FinTech events – an overall average progress ment involvement would also be beneficial to score of 4.1 was achieved here. In compari- creating a more FinTech-friendly environment son to previous years, respondents noted in in the region. In this regard a positive example particular a significant increase in the number would be a growing number of government- of FinTech events, which have attracted more initiated programmes that aim to create attention to the state of the region’s FinTech conducive regulatory regimes where FinTechs ecosystem as well as to the issues faced by can test their solutions without the burden local FinTechs. of regulation, commonly referred to as the ‘regulatory sandbox’. The region has also made decent progress in improving the availability of infrastructure Last year we noted that “Frankfurt has the for FinTechs with a second-best score of 3.2 natural potential to become ‘the German awarded by the interviewees. There were sev- FinTech Hub’ but needs to initiate supporting eral important initiatives started throughout activities in the short term to avoid the risk the year that provide affordable office space of lagging behind the development of other to FinTechs, launched both by the private and global hubs”. Back then we also identified six the public sector. The most notable initia- fields of action that should guide the region in tives, in our view, comprise the launch of the establishing itself as a key FinTech hub. FinTech Center in Frankfurt by the Deutsche Börse Venture Network, which provides office From this standpoint 2016 will go down as a space and training to FinTechs, and the launch year of kick-starting the necessary supporting of Tech Quartier spearheaded by the Hessian activities and raising the profile of the region. government and funded by a collaboration of In 2017, the Rhine-Main-Neckar hub should various private sector stakeholders. take one step further and focus on broadening the scope and depth of supporting activities Notable progress has also been made in im- along the six ‘fields of action’ depicted above. proving FinTechs’ access to potential partners With this in mind, we are confident that in 2017 (for example, financial services providers, the region can make still bigger strides in its financial institutions, etc.). There has been way to becoming ‘the German FinTech Hub’.  Insights 78 Financial Centre Report 2017 79

HARMONISATION OF COVERED BONDS they are an especially stable and reliable ing at harmonising covered bonds in Europe refinancing instrument which is firmly an- in order to establish coherent regulation and chored in the real economy. As a result, they to mobilise more capital for the financing of have increasingly become the focus of the reg- investments and growth via an integrated AN IMPORTANT STEP ulators and politicians too. The “re-regulation” covered bond market. Additionally, covered of the banking sector triggered by the financial bonds are to be made more homogeneous and crisis consistently gives preference to covered more transparent in Europe, and therefore bonds in risk weighting for capital purposes more attractive for investors and issuers alike, TOWARDS LONG-TERM and the meeting of liquidity requirements in order to protect their core selling point. – not only in the case of bank investors but also with regard to insurance companies and To this end, the European Commission is PREFERENTIAL TREATMENT funds. On the contrary, due to the far-reach- seeking to harmonise the EU member states’ ing privileges granted to covered bonds, they various national covered bond regimes. We have understandably been subject to par- appear to have moved a step closer to this ticular scrutiny by regulatory authorities and since the European Banking Authority (EBA) AUTHOR politicians. As a consequence of the eurozone published a report on a harmonised EU-wide Jens Tolckmitt, Chief Executive of the Association of German Pfandbrief Banks crisis, the regulatory structures within the EU framework shortly before Christmas 2016. were noticeably centralised by the European This gives the Commission the foundations banking union at the end of 2014 in the form for a possible legal initiative which could be The success and global spread of covered bonds array of covered bond products and formats, of the Single Supervisory Mechanism (SSM) instigated as early as at the end of 2017.

such as the Pfandbrief have a great deal to do their liquidity and the broadness of the issuer and the Single Resolution Mechanism (SRM). with their stability during the financial crisis and scene also make the covered bond market Standardised supervision goes up against Significant differences among individual EU their comprehensive preferential treatment in interesting for investors not looking to hold to national regulations regarding covered bonds, countries all the regulatory activities initiated since then. maturity but focusing instead on trading and on which are the only non-harmonised product The harmonisation of covered bonds in Europe, pursuing a relative-value strategy. class within the EU financial market. It is indeed the case that the products and which is currently under discussion, would be product quality vary greatly to some extent an important step in the direction of establishing The preferential regulatory treatment given Less than a year later, late in the summer of from one EU member state to the next. Har- uniformly high product standards, thus securing to covered bonds is one of the keys to further 2015, the campaign for the European-wide monising the existing regulatory patchwork their preferential regulatory treatment in the long developing this market. Investment in covered harmonisation of covered bond requirements should further boost the investors’ perception term. But the success of such a project hinges on bonds was first given preferential treatment un- gathered speed when the European Commis- of this asset class as a whole. Bringing the var- the harmonisation being principles-based. der European law by Article 22(4) of the UCITS sion unveiled its Capital Markets Union plan, ious European products up to the same high Directive passed in the mid-1980s, in which a key element of its political programme. quality standard would also be an important four key criteria were defined for investments in Among other things, this plan involves look- step in the direction of not only defending The Pfandbrief is one of Europe’s longest- covered bonds: standing and most sought-after bank bonds. Primary market sales of various liquid benchmark covered bonds There’s a good reason for this: almost 250 years ƒƒ They must be issued by a credit institution (in EUR million) have passed without anyone defaulting on a which has its registered office in an EU Pfandbrief since it was first introduced in 1769. member state ƒƒ The bonds must be covered by claims 2012 The Pfandbrief’s success among investors and ƒƒ In the event of issuer insolvency, priority to its reliability for the issuers even in volatile these claims is granted to the bondholders times, as demonstrated in particular during ƒƒ The issuing of covered bonds is subject to the financial crisis, have made the concept special supervision by law 2013 of covered bonds one of the few export hits scored by Germany as a financial hub. Above and beyond the development of covered bonds into a European asset class, the supply- In view of the international success of liquid side complexity of the covered bond universe also 2014 jumbo Pfandbriefe in the mid-1990s, among began to reach critical mass in the mid-2000s other things, Germany’s European neighbours with the emergence of what are known as struc- modernised their laws on issuing covered bonds tured covered bonds, i.e. covered bonds issued or introduced new legislation. Covered bonds under private contractual agreements. There was 2015 have been on the rise in Europe since around a real danger that the quality standards – the the turn of the millennium. essence of covered bonds – would be diluted.

The low risk profile of covered bonds is espe- Refinancing instruments anchored in the real 2016 cially attractive for institutional investors such economy as insurance companies, pension funds and other asset managers with long-term liabilities Banks have been focusing on covered bonds 0 5,000 10,000 15,000 20,000 25,000

who are pursuing a buy-and-hold strategy. The in a big way since the 2008 financial crisis, as  GERMANY  FRANCE  SPAIN  AUSTRIA  BELGIUM  DENMARK  FINLAND  IRELAND  ITALY  NETHERLANDS  NORWAY  POLAND  PORTUGAL  SWEDEN  UK Source: LBBW Research, vdp Insights 80 Financial Centre Report 2017 81

the existing preferential treatment given by principles-based harmonisation approach in a HIGHER EDUCATION the international financial market regulators number of areas. In many cases, requirements to refinancing on the basis of covered bonds, such as those regarding how to handle the which have proven themselves to be resistant cover pools in the event of a bank’s insolvency to crises, but also of continuing this preferen- or relating to the maintenance of liquidity PROMOTING HESSEN AS tial regulatory treatment in the future. buffers are outlined in such detail that procedural matters such as documentation, However, while the recommendation proposed communication, advisory and approval re- by the EBA in December 2016 is to be welcomed quirements or IT specifications have likewise A PLACE OF ACADEMIA AND in principle, the Association of German Pfand- been regulated at the guideline level. brief Banks believes that it to some extent oversteps the mark. The authority’s proposal If the harmonisation of covered bonds is to BUSINESS gives definition to its previously posited three- be a success at the European level, technical step approach, Step I is the development of a issues like these must remain within the remit European framework defining the core elements of the national lawmakers. Only then can it be and minimum standards for the quality of guaranteed that successful covered bond regimes AUTHOR covered bonds – in other words, basic guide- in Europe such as the German Pfandbrief Act Boris Rhein, Hessian Minister of Higher Education, Research and the Arts lines for covered bonds that regulate all the (PfandBG) are left with sufficient leeway to product-specific principles within European accommodate their distinctive country-specific law as far as is possible. However, it has not features. And ultimately, this is also the only way yet been determined whether Step I will define in which to ensure that a consensus remains for cover pool requirements or not. In Step II, the European covered bond harmonisation, even tried and tested provisions of Article 129 of though it is uncontroversial in principle. the Capital Requirements Regulation (CRR) would be tightened and defined more accurately Were harmonisation to completely fail due to in order to make a clear distinction between excessive and therefore unjustified interven- high-quality covered bonds and products under tion in national regulations, this would be “Hessen schafft Wissen” (Hessen creates know­ institutions. It boasts not only five universities, the future Step I. Making such a clear distinction unfortunate for everyone involved. And then ledge) is more than merely the name of a regional five universities of applied sciences, a new would be a key prerequisite for maintaining the there is the question as to whether Step III initiative designed to showcase Hessen’s academic model of university of applied sciences in preferential treatment with regard to capital re- of the EBA’s harmonisation proposal is even activities, its projects and the people behind Geisenheim and two art colleges but also quirements for traditional quality products such necessary considering the subsidiarity of them. It also succinctly encapsulates why societal public administration colleges, private uni- as the Pfandbrief, in spite of Step I potentially European legislation and whether the issues awareness of and investment in education and versities and vocational academies. This will extending the eligibility of covered bonds. Fi- stipulated there aren’t already covered by the academia are so incredibly important. be joined by another institution next year nally, Step III covers the further voluntary con- duties of transparency and information in when the Städelschule college of fine arts is vergence of national covered bond laws in areas relation to investors as set out in Step I. The taken over. Forward-looking research is also in which binding harmonisation is not currently Pfandbrief banks doubt that European regula- As a place of high technology, Germany is conducted at the numerous non-university possible or does not appear to be desirable. tion is necessary in the areas covered by Step – as is Hessen – reliant on a higher educa- research institutions, including the Max III and that such regulation would represent tion system that functions smoothly and is Planck and Fraunhofer Institutes, the Helm- The EBA approach points in the right direction added value compared with the existing provi- well equipped. The competitiveness of our holtz Centre and the research institutions of here, focusing in particular on the introduction sions at the national level. region depends significantly on its ability to the Leibniz Association. of high minimum quality standards. With innovate. As such, every single euro invested regard to system-based requirements resulting There is no denying that harmonisation at the in Hessen’s university and non-university A great deal of autonomy for Hessen’s universities in greater product security or even better European level can have a positive impact on the research institutions, in instruction, research, product perception among investors, uniform product and how it is used. The project should academic education and the transfer of tech- Strengthening Hessen as a place of learning rules at the European level are expedient and therefore certainly be continued on this basis nology is a euro spent on the region’s future. and establishing solid parameters for univer- are explicitly supported by the Pfandbrief – albeit with good judgement when it comes to This is corroborated by a 2012 study con- sities and non-university research institutions banks. However, the banks believe it would be intervening in existing successful markets. ducted by the German Institute for Economic are therefore fundamental measures with appropriate to limit the eligible cover pool of Research (DIW Berlin) on the economic sig- which Hessen’s state government can safe- covered bonds at least to long-term assets that From the German perspective in particular, nificance of the TU Darmstadt, the technical guard the region’s future viability and create already have marketable collateral in Step I. this means the Pfandbrief, which has proven university in Darmstadt, which showed that jobs in key technologies. And rather than prior- Based on such a strict definition, investors itself to be a stable and reliable source of the university generated gross regional value itising academia and research merely for show and issuers alike can rest assured that covered refinancing for the banking industry through added of approximately EUR 436 million in and prestige, the state government does so bonds will deliver what they promise in terms all sorts of crises, should not be weakened or 2010 alone. based on sustainable strategies and activities. of quality in Step I. diluted via the European back door. Similarly, the legislation governing its quality should This example clearly demonstrates the eco- With regard to the universities in Hessen, for Failure would be unfortunate for all involved not be undermined by unnecessarily detailed nomic significance of teaching and research example, this is demonstrated by the fact that regulation coming from Brussels. If this can to the region. Hessen has an established they have been granted new levels of auton­ Contrary to the expectations in professional be achieved, nothing stands in the way of network of higher education institutions and omy over the past 15 years or so, thanks to circles, the EBA proposals go far beyond a successful harmonisation.  high-performing non-university research legislation to this effect. The Goethe University Insights 82 Financial Centre Report 2017 83

Frankfurt – a university with an endowment – individual university, in which the university Both of these targets are directly reflected cance for Frankfurt as a financial hub, at this and the model university TU Darmstadt enjoy commits itself to realising specific achieve- in budgeting: at EUR 1.1 billion in 2017, the juncture I would like to mention the Frankfurt particular autonomy. ments. And last, but not least, a reporting sys- basic budget – which accounts for the lion’s School of Finance & Management, which, tem is used to monitor the financial benefits, share of university funding – will remain while being a private university, is none- However, as the state government has relin- distribution mechanisms and considerations performance-based. The state government theless an integral part of Hessen’s higher quished its detailed control over the universi- laid down in the University Pact and the target will continue to fund enrolled students who education scene. ties, in the interests of the clear assignment of agreements. stay within the designated period of study. areas of expertise, a new apparatus was called However, it will henceforth no longer be the Promoting Hessen as a place of academia in the for with which to manage the organisation Hessen’s University Pact guarantees planning case that more students equal more money in face of international competition of the universities, which are still primarily reliability comparison to other universities – this would financed by public taxes. The relationship lead to ruinous competition among the uni- Various other interesting issues such as the between the state and the universities was Hessen’s current University Pact for the years versities, thereby adversely affecting the edu- Bologna Process, academic further education, therefore reorganised on the basis of mutually 2016 to 2020 guarantees the universities a cation provided. The number of students per the transfer of technology, teacher training, agreed state university development planning budget totalling approximately EUR 9 billion university has therefore been fixed at the level gender equality at universities and measures – essentially with a three-pronged approach. for five years. Not only is this the largest sum already reached. To create an added incentive to realise the “family-friendly university” have This is founded on Hessen’s University Pact, of money the universities have ever had at for teaching and student success, the funding found their way into the state of Hessen’s a framework agreement between the state their disposal, but the agreement also guaran- based on graduation rates was increased by university development and management via, government and the universities. This com- tees them greater financial planning reliability. EUR 30 million within the 2016 success-based for example, the target agreements. Some- prises the key university goals agreed upon for A mechanism agreed upon in the coalition budget. An additional 30 percent share of the thing which is especially worthy of mention the next few years by the state government agreement signed by the governing CDU and annual budget increases will also be used to is departments at universities of applied and the universities, and it also addresses BÜNDNIS 90/Die Grünen parties is especially boost the success-based budget as of 2017. sciences which prove to be strong on research university funding – in terms of both the noteworthy. This mechanism means that the and which are organised as centres of doctoral provision of funds and the performance-based basic funding within the Hessian University Since 2007, there has also been the 2020 Uni- studies being granted the right to award distribution of funds. Pact for the years 2016 to 2020 increases versity Pact which is funded 50/50 by the Ger- doctorates. These centres of doctoral studies annually by one percent above the rate of man federal government and the state govern- are required to meet criteria recommended by inflation to a maximum of three percent. ment – not to be confused with the Hessian the German Council of Science and Human- Hessen’s University Pact Funding breakdown The annual university budget thus amounts University Pact, in spite of its similar name. ities regarding PhD quality assurance. These (in EUR bn; LOEWE and HEUREKA not included) to approximately EUR 1.6 billion – and then The 2020 University Pact provides additional aspects, which are frequently directly relevant 0.03 0.02 there are the funds from the 2020 University funding for the increase in the universities’ to management, are complemented by two Pact, the Hessian state’s HEUREKA building education services since 2005. Between 2016 other key issues relating to Hessen’s academic 0.3 programme and its LOEWE research promo- and 2020, this averages at around EUR 300 policy, which I will go on to address, as prom- Basic budget tion programme, all of which I will discuss in million per annum for Hessen’s universities. ised – namely the building of universities and Success-based budget due course. This affords them additional funds equal to the promotion of research. Special financing 0.19 University Pact between 1.9 20 percent of the state’s basic financing. These the German federal 1.1 The key elements of the University Pact are, funds will be used not only to significantly Attractive university locations, modern teach- government and the state government 0.26 for example, stabilisation of the basic budget advance Hessen’s state universities of applied ing and research institutions, and important Funding and a significant increase in the importance sciences between now and 2020, but private social institutions such as day-care centres for Budget for innovation and structure development of the graduation rate for their success-based universities are to be able to benefit from the children of academics are major factors budget. As such, it was agreed upon with the these funds too. Not least due to its signifi- that boost a location’s position within the Source: State of Hessen universities that they were to accommodate the increasing demand for skilled workers and the rising number of those entitled to study Heureka II budget breakdown The universities are afforded a basic budget, by maintaining the number of university (total EUR 1 bn) which is primarily determined on the basis of places they offer. There is to be a sustainable University of Kassel the costs incurred for the students. This repre- and permanent increase in the proportion of University of Marburg University of Giessen sents the lion’s share of the overall budget. The students attending Hessen’s universities of Goethe University Frankfurt prices can vary due to subject-specific differ- applied sciences, in particular in the STEM TU Darmstadt ences and different expenses for the research disciplines and thanks to new dual education University of Applied Sciences Mittelhessen infrastructure. In addition to agreed special fi- courses. In other words, the state of Hessen is Fulda University of Applied Sciences nancing that covers a specific location’s special not looking to generally increase the propor- Frankfurt University of Applied Science tasks or competition disadvantages, the univer- tion of those studying. Rather than further in- RheinMain University of Applied Sciences sities are then also awarded a success-based creasing the number of students within a birth Hochschule Geisenheim University budget. The aim of this is to recognise special cohart to the detriment of vocational training, Darmstadt University of Applied Sciences achievements, such as the acquisition of much more weight is lent to the universities’ Frankfurt University of Music and Performing Arts third-party grants for research or a particular efforts to increase their graduation rates. To Offenbach University of Art and Design Reserve graduation rate in the area of teaching. this end, the universities will, for example,

handle the transition from school to univer- 0 20 40 60 80 100 120 In the next step, the Ministry of Education sity and will offer better support to students concludes a target agreement with each during their orientation phase. Source: State of Hessen Insights 84 Financial Centre Report 2017 85

international knowledge-based competitive academic findings to the worlds of business, already been issued. The additional LOEWE academics and to accelerate the transfer of field. The state government has therefore politics and society. funding is also helping Hessen to catch up research results to teaching and practice. The been advancing its university infrastructure in terms of expanding and attracting more House of Finance combines several interdis- in a manner and, above all, at a pace which Top-level research non-university research institutions that are ciplinary research and education activities in is unparalleled throughout Germany with its jointly funded by the German government and the area of finance at the Goethe University HEUREKA university building programme The LOEWE programme facilitates top-level the federal states. For example, two Leibniz Frankfurt and is a prime example of an open which has been running since 2008. The research – not only in the fundamentals but institutions in Frankfurt, the German Institute meeting place and cooperation forum for buildings – and in some cases entire campuses also in applied research and in direct product for International Educational Research (DIPF) academia, politics and practitioners. In this – which have been developed at universities development. The topics that scientists tackle and the Senckenberg Gesellschaft für Natur- way, the existing links, which are productive in Hessen over the past ten years thanks to in LOEWE projects – often in conjunction forschung (natural sciences research associ- for both parties, are further expanded and HEUREKA send out a clear signal. It is already with businesses – are highly relevant. LOEWE ation) have all already been expanded thanks intensified. plain to see that the aim is to use HEUREKA opens up opportunities to expand knowledge to the involvement of LOEWE Centres. to turn Hessen into a place of state-of-the-art and identify future-oriented solutions, for The diverse exchange between academia and universities. And the fact that the universities’ example, to combat diseases, conserve the en- Coordination of business and academia practice is a win-win situation for everyone profiles have been boosted and both research vironment or safeguard the financial markets. involved. It facilitates amicable dialogue and student numbers are growing at a rapid LOEWE projects bring together universities, Another example of success is the Sustainable that sensitises researchers to the challenges pace is undoubtedly attributable in part to universities of applied sciences, non-university Architecture for Finance in Europe (SAFE) faced in practice and raises awareness among the appeal of the Hessian universities being research institutions and businesses; there is LOEWE Centre, a cooperation between practitioners of the latest research findings. boosted by the structural improvements made major potential in the innovative capacity of Frankfurt’s Center for Financial Studies and The same goes for teaching: the unique loca- to them as a result of HEUREKA. these interdisciplinary groups for developing the Goethe University Frankfurt in place since tion and the appeal of the House of Finance’s the economy and therefore for safeguarding 2013, which has received some EUR 28 million training and education programmes, which It therefore goes without saying that Hessen’s and creating jobs. in funding. The SAFE LOEWE Centre is an at- can compete in the international arena, at- state government is to continue with HEUREKA tempt to establish a leading European institute tract well-educated young people to Frank- until 2020 in spite of the financial challenges The LOEWE research promotion programme of research and policy advice in the area of furt. And Frankfurt is reliant on such people posed by the balanced-budget amendment. is unique in Germany, not only in terms of finance. While ambitious, it does have a real- if it wishes to continue to grow as a financial With the moderate one-year extension of the the concept but also as far as the volume of istic chance of success thanks to the ground- hub and defend its international position. current programme coupled with its continu­ funding is concerned. Between 2008 and 2016, work performed at the Goethe University and ation for a further five years and a corre- the state government put a total of around the advantages of Frankfurt as a location. The To summarise, this means excellent teaching sponding funding increase of EUR 1 billion, EUR 671 million into the LOEWE programme. SAFE LOEWE Centre takes up pressing issues and research are the bedrock of prosperity, Hessen has sent a clear message in the current The LOEWE budget for 2017 is approximately such as financial market stability and systemic economic and social strength, and innova- legislative period here too: the state of Hessen EUR 58 million. Not only does Hessen feel it risks and researches them, bringing togeth- tion in Hessen. The state is maintaining its offers its universities parameters they can de- has the endorsement of the German Council er basic research and policy advice in the successful model of university autonomy, pend on, even during difficult times. After all, of Science and Humanities, the highest advi- process. Financial institutions can likewise thereby boosting the positive development of in order for sustainable decisions to be made sory council in the German academic sector, benefit from the research findings. this place of academia. The sum of all the rele- regarding further campus planning and for the thanks to the council having given the LOEWE vant activities in Hessen and the outstanding building plans to be continued and modified programme a positive evaluation in 2013. The This kind of coordination of business and successes that these activities result in clearly accordingly, it is important that an outlook for raw data equally highlight the effects that academia is a core issue in terms of Hessen’s demonstrate what a positive impact the state the time after 2020 be developed now. the LOEWE programme is already having on future-oriented science policy. After all, government’s carefully considered academic Hessen as a location. Frankfurt is the capital of finance on the policy is having on the region’s academic As far as the promotion of research is European mainland and is the only city in and research scene. It is creating excellent concerned, Hessen’s universities achieve For example, in the period 2008 to 2015, the the world which can lay claim to being the foundations and the ideal parameters for success in various national and international 46 LOEWE Centres and LOEWE Research home of two central banks. There are more developing innovation, academia and research research formats – including, incidentally, in Clusters selected for funding succeeded in than 200 banks based in Frankfurt, and then – including and in particular for Frankfurt as the field of finance, a discipline not known to raising EUR 628 million in third-party grant there are also insurance companies, invest- a financial centre.  generate much third-party funding nationally money; some of the third party-funded pro- ment companies and countless efficient speaking. This success is in part thanks to the jects will run until 2021. The majority of these suppliers and service providers for the finance state’s LOEWE research programme, through third-party funds are spent here in Hessen industry. At the same time, the region’s which the state government has been system- and therefore contribute to the state’s value research and academic scene boasts excellent atically investing in education, research and added. There were more than 1,600 employees conditions on which it can build. For exam- development by means of a competitive pro- involved in LOEWE projects in 2015, includ- ple, the Goethe University with its focus on cess since 2008, thereby also contributing to ing just under 300 professors and more than economics and business administration offers strengthening Hessen as a place of academia 1,000 academic and art staff. Additionally, just attractive parameters for interdisciplinary re- and business. LOEWE stands for targeted and under 1,100 doctorates and habilitations were search and teaching. In 2008, the business and sustainable funding. It finances outstand- successfully completed as part of the LOEWE law-related research, teaching and advisory ing research and development, additional projects running between 2008 and 2015. And institutions working separately in the Frank- academic chairs and the promotion of the a total of 120 patent applications were sub- furt financial hub and at the university were next generation of academics, interdiscipli- mitted to the German Patent and Trademark brought together geographically within the nary partnerships, expansion of the research Office (DPMA) and the European Patent Office House of Finance (HoF) in order to support infrastructure and the transfer of the latest (EPO), of which just under 40 patents have the excellent research being conducted by the 86

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