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The Role of the Deutsche Mark As an International Investment And

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The Role of the Deutsche Mark As an International Investment And Deutsche Bundesbank Monthly Report April 1997 The role of the The Deutsche Mark has long been the second most important investment and Deutsche Mark reserve currency after the US dollar. as an international During the nineties, too, it has partici- pated in the sustained trend towards investment and internationalisation and diversification reserve currency of assets and has continued to strengthen its role in the internation- al financial markets. Overall, non- residents' financial Deutsche Mark assets came to over DM 1,400 billion in the middle of 1996 and were therefore nearly twice as high as at the begin- ning of the nineties. At the same time, there have been considerable struc- tural shifts between the various forms of investment. Whereas Deutsche Mark securities were particularly fa- voured by international investors, Deutsche Mark-denominated Euro- deposits lost some of their attract- iveness. There have also been substan- tial changes in the official Deutsche Mark reserves held by foreign central banks as part of their monetary re- serves. This article deals with the re- cent trends in non-residents' Deutsche Mark assets and their composition in detail; it links up with earlier publica- tions of the Deutsche Bundesbank on this subject. 1 1 See Deutsche Bundesbank, Non-residents' Deutsche Mark assets and liabilities at the end of 1990, Monthly Report, May 1991, page 23 ff. 17 Deutsche Bundesbank Monthly Report April 1997 domestic sectors and Deutsche Mark assets Non-residents’ Deutsche Mark assets, total * vis-à-vis foreign borrowers or banks. DM billion There are many links between the various Problems ... Level at the end of 1400 the period under review markets for Deutsche Mark assets, mainly as a result of the cross-market and cross-border 1200 activities of financial intermediaries. For ex- 1000 ample, credit institutions domiciled abroad accept Deutsche Mark deposits and subse- 800 quently pass them on to banks in Germany. 600 The result of this intermediation is that some of the investable funds are channelled 400 through a multiplicity of credit chains on their 200 way from the savers to the ultimate bor- 0 rowers. Consequently, total assets may be inflated substantially. It is therefore desirable 1980 1985 1990 June 1996 to avoid the resulting double-counting wher- ... as a result of double- * Where recorded in the statistics, adjusted ever possible. For that reason, it is appropri- counting ... for double-counting. ate, in principle, to take only the Deutsche Deutsche Bundesbank Mark assets held by foreign non-banks as a Non-residents' Deutsche Mark assets: basis. The Deutsche Mark assets of foreign definition banks which, as intermediaries, limit their for- eign exchange risks for prudential reasons, Approach In this article non-residents' Deutsche Mark are therefore disregarded. However, this div- assets mean financial assets held by non- ision cannot be strictly made in every case, resident investors in Deutsche Mark. Claims because a breakdown by the investor groups arising from foreign direct investment in ªForeign banksº and ªForeign non-banksº is Germany and from foreign suppliers' trade not always possible, especially in the case of credits to their German customers are, by foreign portfolio holdings. contrast, disregarded as these are not so much the result of portfolio decisions; they A special problem in this context is posed by ... and resi- dents' Deutsche are actually claims based primarily on real the largely tax-motivated Deutsche Mark Mark assets economic considerations. Foreign portfolio investment by German residents in the inter- abroad investment in Deutsche Mark paper can be national financial markets which is rechan- made on the German securities markets, at nelled from there into the German financial domestic credit institutions and in foreign fi- system on a considerable scale. To this extent, nancial centres. For statistical reasons, a dis- the inflows of funds from abroad are aug- tinction is made in the following sections mented by domestic savings and are there- between Deutsche Mark assets vis-à-vis fore not so much an expression of the prefer- 18 Deutsche Bundesbank Monthly Report April 1997 Non-residents' Deutsche Mark assets: statistical sources The most important source of informa- terly detailed data on the bank liabilities tion on non-residents' Deutsche Mark of major industrial countries, by country, assets in Germany is the external asset currency, and major sector, as well as and liability position compiled by the more aggregated data for some offshore Deutsche Bundesbank (Balance of pay- banking centres (BIS: International bank- ments statistics, Statistical Supplement to ing and financial market developments). the Monthly Report 3, Tables II.7). The as- The figures shown there in dollars were set and liability position gives a compre- converted into Deutsche Mark at current hensive account of the external assets market rates. and liabilities of the domestic sectors, by instrument and currency, at half-yearly The data on the Deutsche Mark assets of intervals. The most recent ªbalance sheet monetary authorities are provided by the dayº was June 30, 1996; in the aggre- IMF. However, these data permit only a gated presentation of non-residents' rough allocation of monetary reserves to Deutsche Mark assets, all other data have groups of countries and not an analysis been reconciled with that date. of the investment instruments preferred by central banks, but they cover the The Bundesbank's capital market statis- period up to the end of 1996. tics (Capital market statistics, Statistical Supplement to the Monthly Report 2, In the case of all data provided by inter- Tables III) contain data on non-resident national organisations, it has to be borne issuers' Deutsche Mark-denominated se- in mind that the national currencies have curities outstanding. The securities of been converted into US dollars and that this type held by non-residents are calcu- the time series (may) therefore reflect ex- lated as a residual after deduction of the change rate changes over time. In the paper acquired by residents. The OECD's case of non-residents' Deutsche Mark as- capital market statistics (OECD Financial sets, this qualification is irrelevant for the Statistics) can be used for comparisons reporting day comparison since the ori- with other major issue currencies. ginal figures were denominated in Deut- sche Mark; however, it may have influ- In its Euro-market statistics the BIS re- enced the comparatively small shifts in ports on the Deutsche Mark assets held the market shares in individual curren- at foreign banks. The BIS publishes quar- cies. Deutsche Bundesbank 19 Deutsche Bundesbank Monthly Report April 1997 ences of foreign investors for the Deutsche Non-residents' Deutsche Mark assets in Mark as a reflection of saving processes in Germany Germany. From a conceptual point of view, such assets should therefore be disregarded At the end of June 1996 investors from Structure when analysing the Deutsche Mark assets of abroad held assets vis-à-vis borrowers in Ger- non-residents. In practice, however, this is many to the amount of DM 2,283 billion; just only partly possible. Particularly in connection over three-quarters of these were denom- with the introduction of the withholding tax inated in Deutsche Mark. Non-residents' fi- on interest income in 1993, the resulting nancial Deutsche Mark assets, which are of ªinaccuraciesº seem to have been fairly interest here, accounted for DM 1,417 bil- important, but it is not possible to state their lion. 2 significance with any degree of reliability. Since 1990 the financial Deutsche Mark Doubling of the Deutsche Mark The Deutsche A special form of non-residents' Deutsche assets held by non-residents in Germany have assets in Mark as a Germany reserve Mark assets is the foreign exchange reserves thus more than doubled; compared with the currency held by national monetary authorities. In dynamic rate of growth during the eighties, many cases these cannot be distinguished the pace of expansion has actually increased from other forms of Deutsche Mark assets even further. However, there has also been a held by non-residents, but, owing to their radical change in Germany's external situ- autonomous nature, they represent a special ation since that period. Whereas during the category. eighties Germany recorded large current account surpluses, external deficits have Overview of the The following section therefore focuses on determined the picture since 1991. In add- contents non-residents' Deutsche Mark assets in Ger- ition, the tax-related shifts of domestic sav- many. In the section after that, the foreign ings abroad and the rechannelling of the Deutsche Mark assets vis-à-vis borrowers out- funds by the beneficiary institutional investors side the domestic financial system are ana- abroad resulted in an upward distortion of lysed ± i.e. the Deutsche Mark bonds of for- the statistical data at the beginning of the eign issuers held by non-residents and the nineties. Deutsche Mark deposits held by non- residents in the international banking centres Despite the resulting statistical inaccuracies, (Euro-Deutsche Mark deposits). After the the dynamism of the trend in non-residents' elimination of double-counting, the aggre- Deutsche Mark assets in the German market gate of these represent the total Deutsche remains remarkable. Whereas non-residents' Mark assets held by non-residents. The Deutsche Mark investment in Germany ap- Deutsche Mark assets of foreign monetary proximately doubled, as mentioned above, authorities are particularly important here. The conclusions are drawn at the end of this 2 At the end of June 1996 the non-financial Deutsche Mark assets ± essentially foreign direct investment in Ger- article. many and trade credits ± totalled roughly DM 350 billion. 20 Deutsche Bundesbank Monthly Report April 1997 the gross lending volume in the Euro-market, Structure of German for instance, rose by only about one-quarter, external liabilities and domestic financial assets increased by ªonlyº roughly one-half between the end of 1990 and the end of 1995.
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