JUVE Law Firm of the year

From old problems to new business ideas

In the summer months of 2017 it became clear that the clean-up work in Europe in the wake of the banking crisis was by no means over. In early June, the Spanish Banco Popular was wound up by the Single Resolution Board, the Brussels-based mechanism for the resolution of banks. Just a few weeks later, the Italian government controversially decided to rescue two regional banks by means of state aid.

And lastly, at the beginning of July, the EU Commission approved the state rescue plan for the largest problem area in the Italian banking sector, the traditional bank Monte dei Paschi di Siena. In Germany too, there is no end to the frenzy of activity in sight: while Commerzbank and Deutsche Bank continue to fine-tune their restructuring plans, Hamburg and Schleswig-Holstein are looking for a buyer for the ailing HSH Nordbank. If they do not find one by February 2018, asset stripping awaits.

While the Fed initiated an interest rate reversal in the US, the ECB is still taking its time with a monetary policy decision. Its ongoing low-interest policy means that the pressure to invest remains high and that even hard-to-sell securities are finding buyers.

Bonds still in the race

The IPO market gradually gathered pace from mid-2017 onwards after an extremely slow start, but the bond market was dynamic across the board. Companies like VW, Siemens and Deutsche Telekom obtained billions in fresh capital. Refinancing costs remained low. On top of this were the monthly bond purchases by the ECB, which generated further market demand. According to KfW’s credit market outlook, the ongoing strong economy and the increasing likelihood of higher credit costs in the future had a positive impact on demand in the credit market. Traditional banks as lenders remained under pressure, however, as the market share of alternative lenders increased. The financial institutions responded with more flexible terms. Borrowers seized on this opportunity to improve their interest and framework conditions.

Brexit causing domino effect

The most difficult issue for financial institutes at present, however, is Brexit. The outcome of the UK elections in June heightened uncertainty further and the flight began. In early July, Japan’s third largest bank, Sumitomo Mitsui, announced it would relocate its EU headquarters from London to Frankfurt. It thus became the third Japanese bank to choose the German metropolis as its alternative location in the space of a few days. In recent weeks and months, other international banks and financial institutes have also sounded out the Frankfurt market as a future alternative, among them Goldman Sachs, Morgan Stanley, Standard Chartered and Citygroup.

But by no means is it clear yet what exactly the changes in the individual institutes will look like, when the potential relocations will take place and which cities will profit from Brexit and to what extent. Frankfurt is just one of several options for many banks and financial services providers. Nevertheless, it is clear: despite the EU Commission’s veto on the merger of Deutsche Börse and the London Stock Exchange, Frankfurt still has a good chance of becoming the EU’s new financial capital in competition with Paris, Amsterdam and Dublin.

Banks cooperating with fintechs

Other factors are also having a major impact on business in the industry at present: a multitude of fintech startups are attempting to revolutionize financial services on a technical basis and thus encroaching on the traditional terrain of the established market players. As more and more banks are recognizing that they run the risk of losing work to the dynamic companies, they are joining forces with the new providers. According to a PwC study, seven out of ten financial services providers in Germany are already working in cooperation with fintechs. The trend is comparatively strong in Germany, as on a global level this figure is just 45 percent.

In the past four years, more than $40bn dollars flowed into financial startups, according to PwC. In each of the last two years, around $1bn dollars were invested in fintechs specializing in artificial intelligence. Besides venture capital funds, many large financial corporates were among the investors.

Financial industry reviewing use of blockchains

The new blockchain technology, which could provide a completely new technical basis for the financial sector in the not too distant future, is being discussed intensively. At the end of June, Daimler turned heads when the carmaker and Landesbank Baden-Württemberg (LBBW) issued a debenture with a volume of €100m with the help of the technology, in parallel to the required regulatory process. Many in the financial market are currently reviewing how they can use blockchain technology in the future.

International commercial transactions and the associated goods and financial flows are the focus of many banks’, companies’ and academic institutions’ digitalization approaches. Commerzbank and the Fraunhofer Institute for Material Flow and Logistics, for example, are working together to investigate how the technology could be deployed in trade finance and supply chain management. But it has not yet been clarified how to deal with blockchain in regulations.

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