Europe’s largest economy is lagging behind other countries when it comes to capital markets financing, a reluctance which could put a dent in the future financing of initiatives such as pension schemes and industrial decarbonisation.
According to a new report, The role of capital markets in Germany, published by the Association for Financial Markets in Europe (AFME) and consultancy zeb, capital markets could help to plug the gap in the financing of future investments in Germany.
Adam Farkas, CEO of AFME, said: “Germany, Europe’s largest economy, faces the immense challenge of raising approximately €175 billion in financing every year until 2030 just to drive decarbonisation efforts. It is clear that the public sector and banks alone will not be able to finance these massive investment requirements.”
“If the German government wants to fulfil its ambitious goals of transforming its industry, infrastructure and transport in the coming years, it will need to turn towards the huge potential of financing via capital markets. Further integration of Europe’s capital markets will support and deepen Germany’s competitiveness and prosperity in the future,” Farkas said.
The report found that German companies rely heavily on bank loans while households still avoid capital markets for investing and retirement provision. The proportion of bank loans as a company’s main source of financing in Germany is 29%, higher than France (24%) and the USA (12%).
A uniquely German infrastructure – the Schuldschein – which combines the characteristics of loans and bonds, still represents an important financing source. The issuance of “Schuldscheindarlehen” rose to almost €40 billion in 2022, with banks acting as the first lenders and transferring tranches to investors.
According to the report’s estimates for the German market as a whole, banks will no longer be able to raise the funds required to decarbonise the economy in the future, even though they currently have a relatively good CET1 ratio (common equity tier 1 ratio) of 15.4%. Capital markets therefore represent an additional source of financing that has been little used in Germany to date.
Additionally, securitisation could free up bank capital, increasing capacity to finance the economy and allow companies to access new sources of funding and become less dependent on their bank.
The report also highlighted the faltering German statutory pay-as-you-go pension system in the face of an ageing society. To address this challenge, a pension scheme, partly based on capital markets funding, will be essential in the future, the authors said.
Dirk Holländer, senior partner at zeb, said: “Our international comparison of pension systems shows that countries with state-dominated pension systems have a less pronounced private equity culture in contrast to systems with capital markets funded elements. In Germany, a trend towards private pensions provision via the capital markets is starting to be seen.”
“Nevertheless, German households continue to invest almost 60% of their financial assets in deposits or life insurance. Without a fundamental change in the current pension system, the development of capital market-related private provision will only progress relatively slowly,” Holländer added.
The German government is working on an initiative called “Generationenkapital”, which would modernise the pension system by building a capital stock from public funds to use earnings to stabilise pension contributions. With start-up financing of €10-12 billion per year, a fund of around €200 billion is to be created by 2035.
Despite these efforts, nearly 60% of German households’ financial assets remain invested in bank deposits or life insurance policies. Typical capital market-related investments such as bonds, pension funds, investment funds and equities are still fairly niche, the report found.
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