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Annual Reception 2015: Speech of Dr Joachim Faber


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Annual Reception 2015: Speech of Dr Joachim Faber, Chairman Supervisory Board, Deutsche Börse AG

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Annual Reception 2015: Speech of Dr Joachim Faber

  1. 1. Convenience translation from German into English Check against delivery New Year’s Reception 2015 Deutsche Börse Group 19 January 2015 [Embargo: 19 January 2015, begin of Faber´s speech] Joachim Faber Chairman of the Supervisory Board Deutsche Börse AG, Frankfurt/Main
  2. 2. Check against delivery / embargo 19 Jan 2015, begin of Faber´s speech 2 Honourable Chancellor, honourable President of the Bundesrat, Presidents of the European Central Bank and the Bundesbank, ladies and gentlemen, I consider it an honour to be able to open the evening's events in the presence of such eminent guests from the fields of politics, business and of course the financial sector. For about a quarter of a century now, we have kicked off the new year with this event here in the financial centre. And it has also become a tradition for the German heads of state and various personalities from other countries to join us in doing so. I am therefore particularly pleased that our Chancellor will shortly be speaking to us. Chancellor, this is your second speech to us, the first being in 2007. We consider this to be a particular sign of appreciation for the Deutsche Börse Group's Annual Reception, and I would like to welcome you most warmly!
  3. 3. Check against delivery / embargo 19 Jan 2015, begin of Faber´s speech 3 The world of politics has not always had an easy time with the financial sector in recent years, and the financial market has also been tested to the extreme. Deutsche Börse has proved itself to be a cornerstone of the capital market, and also promoted the stability of the financial market as a whole in the process. You will not be surprised by the special importance I assign to the capital market, or my repeated references to the important function it provides for our entire society. It is the ideal instrument for passing on funds that have been saved, inherited or collected by institutions to those who need financing for their ideas and projects, as well as to promote the growth of successful businesses. Functioning and effective capital markets and financial systems are an essential requirement for our social order and economic prosperity. The need for equity has rarely been as strong as it is today. § Banks need the capital market in order to be able to meet the growing regulatory requirements with respect to equity, § our growing industry needs expansion capital to finance its growth, § the digitalization of large parts of our industry requires the revision of previously successful business models, involving substantial investment,
  4. 4. Check against delivery / embargo 19 Jan 2015, begin of Faber´s speech 4 § and our flexible start-up culture in Germany needs start-up and growth capital in order to transform new ideas into commercially viable businesses. And even though the stock exchange can only support the access of these young companies to the capital market once they have achieved a certain level of maturity, the successful IPOs of Rocket Internet and Zalando show how important a high-profile IPO is for every entrepreneur at the end of the arduous start-up phase. We would have difficulty financing these future challenges without a broad and extensive capital market. Today banks are required to focus more on their own stability, and can no longer provide growth capital in the same way that they did in the times of unrestricted and leveraged lending. The consequences of the financial crisis have significantly limited their capacity to act as the unconditional drivers of growth. Germany's capital market is however failing to fulfil its potential given the size of the domestic economy. This can be seen from the ratio between market capitalisation and gross domestic product in an international comparison. In the United States, the market capitalisation of the equity market amounts to 111 per cent of the country's gross domestic product, compared with just 40 per cent for Germany. This ratio for Europe's largest economy is even lower than the average for the euro area, which is 50 per cent. And what is more, this exceedingly small capital market in relation to total economic value creation is largely supported by foreign investors.
  5. 5. Check against delivery / embargo 19 Jan 2015, begin of Faber´s speech 5 At 64 per cent, the proportion of foreign investors in listed German companies is unusually high in comparison to the other G8 countries. The figure for the USA is a mere 15 per cent, and the average for the EU is around 40 per cent. Ladies and gentlemen, these figures are as impressive as they are concerning. Impressive, because a high proportion of foreign investors does of course indicate a high level of confidence in the strength of German companies. It also reveals confidence in Germany as a place to do business, and reflects a free global market that is working well. We should be happy that the entire world wants to invest in us here in Germany. But what this also means is that German investors, both institutional and private, are not playing a sufficient part in the huge task of financing our economy, and as a result are systematically losing out on opportunities to participate in the strength of the domestic economy. Because based on the DAX index, the value of German shares rose roughly ten-fold between 1988 and 2014. It came as a surprise in the summer when per-capita financial assets in Germany was reported to only be in the region of 44,000 euros, which puts it towards the bottom of the table behind countries like France, Italy and Belgium despite the subjective impression of affluence. This can be partly explained by the exceptionally low level of participation in the capital market.
  6. 6. Check against delivery / embargo 19 Jan 2015, begin of Faber´s speech 6 What is the explanation for the low percentage of German investors in German companies? It is reasonable to suspect that the problem is structural. In my view there are two aspects to the problem. It is partly the result of an insufficient capital market culture, and partly a product of financial intermediaries that are not sufficiently receptive. Figures published by Deutsches Aktieninstitut indicate that we have suffered setbacks instead of making progress with respect to our capital market culture in recent years. Between 2001 and 2013, almost 4 million private German investors (almost one in three shareholders) turned their backs on the equities market. The decline is particularly pronounced among equity funds – our country's most important financial intermediaries after insurance companies. But while large government and private capital-backed pension systems are available in comparable industrialised countries such as the United States, Australia, the Netherlands and Switzerland, as well as in countries with comparable demographics to us, such as Korea and Japan, the German capital market relies on a small number of private investors and fund management companies as well as a number of insurance companies to act as financial intermediaries.
  7. 7. Check against delivery / embargo 19 Jan 2015, begin of Faber´s speech 7 I see two ways out of this unfortunate situation. 1. The capital investment structure of the insurance industry could be re-opened for a larger volume of shares. I understand that this is now only possible in an overall European context. But it would not only benefit Germany, but all of the countries in the European Union. Of course I also understand that the insurance provisions of Solvency II have only just been ratified following ten years of arduous negotiations, and that the enthusiasm for taking another look at this issue is low. But it is important to remember that the radical reduction of the assumption of risk in connection with insurance investment was mainly a response to the imbalance among British insurance companies following the crash of 2001, when the high equity ratios in England led to considerable problems after the market contracted by 50 per cent. The fact that we currently have equity ratios of between 5 and 10 per cent in the insurance industry is not justified by the level of risk, nor is it a good idea in terms of yield given the minute yields generated by government bonds.
  8. 8. Check against delivery / embargo 19 Jan 2015, begin of Faber´s speech 8 2. A second, highly desirable way out of the situation would be to significantly expand capital coverage for pensions. While the Riester initiative was certainly a good start, it didn’t amount to more than that on account of its many deficiencies. In Germany we will not have a truly effective investment market unless we create large pension pools. I understand that nobody wants to stump up the capital coverage for future claims at a time when yields for ten-year government bonds stand at just half a percent. But we have to understand that we are talking about a long-term project here, with respect to both the creation of well-secured pension provision and the widening and deepening of our German capital market. A country's financial infrastructure provides an important prerequisite for building up a base of capital – thanks in no small part to our stock market organisations. Germany has such an organisation in the form of Deutsche Börse, which supports capital markets well beyond the borders of Germany and Europe.
  9. 9. Check against delivery / embargo 19 Jan 2015, begin of Faber´s speech 9 For me, this is a welcome opportunity to thank Dr Reto Francioni, Deutsche Börse's longstanding CEO, for his excellent work on building the company up to its current strength as well as his efforts on behalf of Germany as a financial centre. You are probably already aware that we will be handing over to the next generation during the current year. Reto Francioni has successfully led the company for about a decade. In the turbulent times of the financial crisis in particular, it was good for Deutsche Börse to have such an experienced helmsman. It is thanks to his strategic vision that Deutsche Börse is now equipped to meet its clients' new requirements, and is also increasingly well represented in important markets inside and outside Europe. In the middle of the year, Mr Francioni will be handing the keys to our well-ordered house to his successor, Carsten Kengeter. And I am happy that we have found a suitable successor in the form of Mr Kengeter, who is also here today and is an experienced participant in and shaper of the market. In addition to having worked in the senior management levels of some of the most important banks in the world, Mr Kengeter also brings many years of experience in Asia to the leadership of Deutsche Börse. Mr Kengeter has impressed me not only with his expertise, but also with his personality. Chancellor, as you can see, you are joining us not only during an important time for the capital markets, but also on the eve of a key milestone for Deutsche Börse. And now I join our guests in looking forward to your speech.