Banking, Financial Markets and Regulation
Like the regulatory framework, the structure of the international financial markets influences the development of financial service providers and economies. Scenarios for the future development of the global financial market, and the related opportunities and risks, are a major part of the work of Deutsche Bank Research.
Talking point
European bank performance: Weak start to the year, but no disaster
After two years of recovery, European banks suffered a setback in the first quarter of 2016. Capital market revenues were hit by concerns about global economic growth and banks’ own business models. Cost cuts and a further decline in loan loss provisions helped only somewhat to smooth the fall in profitability. Still, net income was about the same as in Q1 2014, and progress continued in other areas. [more]
Global financial markets
Free market in death? Europe’s new bail-in regime and its impact on bank funding
With the Single Resolution Mechanism taking full effect in 2016, winding-up large European banks in distress has become a more realistic scenario than ever before. One of the key elements of such a resolution is the bail-in tool. It is supposed to ensure that for investors, higher returns also involve higher risk, thereby establishing greater discipline and differentiation in markets for bank debt. Indeed, our analysis shows that market participants see the new bail-in regime as credible, which is a necessary precondition for a successful application. Important issues that still remain are the market depth for bail-in instruments and legal clarity about bail-in hierarchies. In any case, banks’ funding costs are likely to rise as a result, especially in the medium term. [more]
Global financial markets
Promoting investment and growth: The role of development banks in Europe
The financial and economic crisis brought development banks back in the spotlight. They are seen as part of the economic policy toolkit for overcoming cyclical and structural difficulties in economies, complementing financial systems by improving their functioning and bolstering economic resilience. Interest in development banking to promote growth and boost investment has increased especially in Europe of late. Given the current economic environment and changes in Europe’s banking and financial markets, development banks are bound to continue playing an important role in the coming years. Rather than crisis relief, their focus is shifting (back) to supporting structural change in economies. Here, they can play a useful complementary role, focusing on areas of market failure but risks lie with potential “overburdening” of development banks and setting expectations too high for what they can achieve. [more]
Corporate funding in Germany
Monitor Corporate funding in Germany
German corporates and self-employed both took out more bank loans and used financing alternatives such as bonds, commercial paper and leasing more actively in Q1 2016. Lending volumes increased by EUR 13.3 bn and are now up 1.7% yoy. Driving forces were the mechanical engineering/car industry as well as the services sector, which benefited most banking groups with the exception of Landesbanks and development banks. Deposits continue to grow faster than loans, despite zero interest rates, hence the corporate sector remains a net saver. The German economy continued its expansion also in Q1 (GDP +0.7% qoq). Domestic demand was again the sole contributor – solid private and public consumption as well as robust investment. However, the latter may have already declined in Q2, and the outlook for H2 2016 and 2017 has clouded somewhat due to the surprising Brexit decision in Britain (expected GDP growth in Germany in 2016: 1.7% yoy) (available only in German). [more]
Research Briefing
High-frequency trading: Reaching the limits
The tremendous growth momentum in high-frequency trading seems to have reached its limits in recent years. The increasing cost of infrastructure and relentless competition within the industry are probably the first to blame. In addition, high-frequency trading firms are hardly participating in those dark pools where large block transactions are executed. Both trends are challenging their business model and trading strategies as high-frequency traders have seen their revenues and profits erode. Furthermore, forthcoming tighter prudential regulatory oversight may lead to an overhang of capacity in the high-frequency trading industry. [more]
Talking Point
ECB’s corporate bond purchase programme: More distortions
Since the ECB’s announcement to include investment-grade corporate bonds in its QE programme (CSPP), corporate bond issuance has surged in the euro area. However, even though this is a boon for issuers, benefits for the real economy may be quite limited. The value added for SMEs is hard to see, and funds raised will most likely be used predominantly for refinancing of existing debt and for stock buybacks instead of new investments. Moreover, potential side effects of the corporate bond programme such as inefficiencies in the pricing of risks and deterioration in liquidity could increase the distortions in bond markets. [more]
Spotlight on Germany
 
 
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