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

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. 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!

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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,

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§ 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.

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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.

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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.

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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.

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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.

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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.