17-18 . 2013

CONTENT

11 EditoriAl

12 iNtErviEw

13 AcAdEmic

14 rEGulAtioN trENdS

15 dAtES ANd Firm NEwS

16 FivE miNutES with…

PUBLISHED BYGesellschaft für Risikomanagement und Regulierung e.V.

mAiN triANGEl Zum laurenburger hof 76 d 60594 Frankfurt am main

Phone: +49 69 94 41 80 97 Fax: +49 69 94 41 80 19 internet: www.firm.fmE-mail: info@firm.fm

Editors:Frank romeike (v.i.S.d.P.), wolfgang hartmann, Andreas Eicher

Publication:8x per year as an insert in the magazine riSK mANAGEr

March of the Lemmings?Everyone has heard about how tens of thousands of lemmings fall into the sea or tumble from the bank into rivers and drown in a kind of mass suicide. So much so, in fact, that a “march of

the lemmings” has become a synonym for all kinds of mass behaviour, even though more recent research firmly refuted the veracity of the legendary mass deaths.

Unfortunately, the image of lemmings is one that applies very well to the current regulation debate. The extremely granular equity capital and liquidity regulation system in the banking sector runs the risk of promoting a “march of the lemmings” on the one hand, and establi-shing an expensive financial bureaucracy on the other. What we really need is a regulatory framework that will secure the long-term stability and functioning of financial markets without suffocating those markets under the burden of over-regulation. Financial market regulation should protect investors against default risks, reduce liquidity and systemic risks and thus guarantee the money supply in a macro economy and ensure price stability. How-ever, the current regulation debate is shifting the focus towards compliance with regulatory burdens as the priority, with the wellbeing of customers and the wider economy playing a secondary role.

One thing is clear: stabilisation of the financial industry must be primarily driven from the inside out, by the banks themselves strengthening their corporate governance. This is no longer limited to the roles and responsibilities of the executive and supervisory boards. It must also include ap-propriate risk management, in addition to the key components of modern corporate governance, such as internal control systems and compliance management.

These measures are increasingly in harmony with our basic market economic and free demo-cratic order. I believe there is substantial potential for improvement here, primarily in the work and qualification of risk committees. I simply cannot comprehend why in Germany it is still the norm for supervisory board chairman and risk committee chairman to be a dual function. This results in significant risks for financial institutions’ risk monitoring. It is essential for the risk function to be independent, and the current state of affairs does not guarantee this, in fact the reverse is often true. In this area, I think that creating a European banking union based on a “single rule book” is of critical importance. In future, there needs to be a qualified and forward-looking dialogue between the supervision authority for control of macro and micro prudential risks and the monitoring and management bodies of systemically important banks on a level playing field. The only way to achieve this is with a consistent direct link between European systemically important financial institutions (Sifi’s) and the ECB bank supervisory authority.

Best regards

Wolfgang Hartmann

In view of the ongoing financial crisis, why are we finding it so difficult to come up with academic findings and to quickly apply them in practice?

Wolfgang König: First of all, in many cases research tends to be reactive. In other words, it starts with a neutral and comprehensive review of what has already happened. This is then used as a basis for coming up with proposals for the future. But academics need a certain amount of time to do this, and new ideas are not always generated. And unlike in the USA, for example, many excellent academics here have a tough time carrying out politically driven comparative analyses of alternative actions.

One of the reasons for this is that the media like to discuss the results of research. The many assumptions that these kinds of academic models are based on hardly get a mention. In the case of the recent financial crisis, politicians frequently had to react so quickly that there was no time for systematic analysis beforehand. Added to that, those involved in the real economy failed to listen to the warnings that academics had already published about the rapidly intensifying financial crisis.

How could the dialogue between academics and policymakers be improved?

Wolfgang König: In view of the huge damage caused by the financial crisis, we now know that we should have put a great deal more money into basic and applied research many years ago. This would have increased the chances of avoiding a substantial proportion of the costs that taxpayers are now having to bear. However, there’s no point saying “there’s nothing we can do about it now”, as there is no doubt that this will not be the last major financial crisis. Looking to the future, it is essential to make sure that research plays a supporting and advisory role for financial markets, for trade and for stability.

In the short term, I want to deal with two issues. Firstly, there needs to a systematic transfer, communication and discussion of research results in the decision-making bodies of parliamentary and supervisory authorities. Conversely, such contact is useful for academics to help them understand the real problems in the political arena at an early stage. To promote this dialogue, the new Sustainable Architecture for Finance in Europe research centre, SAFE for short, is setting up a policy centre. Secondly, the availability of real world data is a critical issue. High-quality research must be based on real-world data. Of course, this can and should be anonymised. But we need to get away from the situation where we as researchers often have to rely on data from America, while here in

Germany we are seeing our already sparse access to data becoming even more of a struggle. Research findings based on American data are often not relevant to Europe because of the different institutional framework.

Shrinkage processes are also in evidence everywhere. Will this affect student numbers?

Wolfgang König: No, here in Frankfurt applications are constantly increasing and graduates are still finding jobs. For our Bachelor programme, we receive around 15 applications for every place.

Wolfgang König gained his Doctorate in 1980 at the Goethe University in Frankfurt and obtained his post-doctoral lecture qualification there in 1985. From 1985 to 1991 he was Professor of Business Informatics at the private Academic College for Corporate Management (WHU) in Koblenz/Vallendar. In 1991 he accepted a position at the University of Frankfurt, where he became Professor of Business Informatics and Head of the Business Informatics Institute. He played a key role in the establishment of the E-Finance Lab at the end of 2002 and is still its chairman. Since July 2008 he has been the Executive Director of the House of Finance and a member of the FIRM board.

INTERVIEW

“High quality research relies on real world data”

firm Frankfurter Institut für Risikomanagement und Regulierung

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Academic NewsEffects of regulation on bank behaviour and competition

At the third event in the “discussion series on structural reforms in the European banking sector”, Professor Jan Krahnen and dr. theodor weimer discussed the impact of regulation on bank be-haviour and competition, particularly in respect of the proposals of the liikanen commission. weimer referred to the macroeconomic costs of excessively strict bank regulation, including negative effects on lending.

weimer also warned against having stricter regulation in Europe, specifically in Germany, than in other countries. Krahnen explained that the liikanen proposals were primarily an attempt to address the problem of systemic risk in the banking sector. one of the commission’s other aims was to regulate banks in such a way that taxpayers do not have to assume liability for banks’ risks in times of crisis. it is necessary to reform the bank sector so that banks can be wound up, even if they are linked to one another.

download at: http://safe-frankfurt.de/

The future of universal banks

At the second event in the “discussion series on structural reform in the European banking sector”, Professor Jans Pieter Krahnen and dr, michael Kemmer discussed the future of universal banks. the trigger for this was the proposal by the liikanen commission that financial institutions should hive off part of their investment banking, trading and market making activities above a certain level.

download at: http://safe-frankfurt.de/

Conference: Risk Management Reloaded

From 9th to 13th September 2013, the risk management reloaded conference, supported by the KPmG centre of Excellence in risk management, will be held at munich technical university. registra-tions for the conference and the individual workshops are now open.

Further information at www.mathfinance.ma.tum.de/kpmgce/conference-2013/

Only one Finance Masters degree from German university in world’s leading rankings

the master of Finance (m.Sc.) course at the Frankfurt School of Finance and management was in 27th place in the “Global masters in Finance Pre-Experience ranking 2013” published by the Financial times, a rise of five places on last year. As in 2012, the Frankfurt Business School is once again the only German institution to make the Ft rankings. the improved placing achieved by the master of Finance at the Frankfurt School was partly due to the increased sa-laries of graduates. while the average incoming in the 2012 ranking was 70,673 uS dollars, it is now 72,889 uS dollars. the FS also managed to attract more international students, with the proportion of international students rising from 23% in 2012 to 36 in 2013. the development of the FS faculty is also having an impact – the proportion of female faculty members rose from 10 to 16 percent, that of students earning a doctorate from 77 to 98 percent.

Professor Zagst and Mikhail Krayzler receive 2012 GAUSS Prize

to encourage and motivate young actuaries, insurance and finan-cial mathematicians to address unresolved issues in the actuarial business, the German Association of insurance and Financial ma-thematics (dGvFm) and the German Actuarial Association (dAv) award an annual GAuSS Prize for current practically relevant work in areas that identify and deal appropriately with problems and challenges in the actuarial business.

the 2012 Gauss Prize, along with Eur 15,000, was awarded on Scientific day during the annual conference of the dAv and dGvFm from 24th to 26th April 2013. the first prize went to rudi Zagst and mikhail Krayzler for their article “closed-form solutions for Guaran-teed minimum Accumulation Benefits”.

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Regulation trends

EU indicates exceptions to financial transaction tax

the Eu commission can live with a few exceptions to the hotly dis-puted financial transaction tax. in a speech to the Eu Parliament, tax commissioner Algirdas Semeta indicated that the commission is willing to look into “lower rates for products in specific markets”. Particularly for state loans and pension funds, as well as trade between subsidiaries of the same company, Brussels could be set to loosen the thumbscrews somewhat. “this could be a viable way forward”,

“There is no shortage of depth in regulation” Bank Association warns against over-regulation

regulation of banks must not strangle the institutions. this was the stark warning from the new President of the German Association of Public Banks (vÖB), Gunter dunkel. At an evening event attended by press representatives, dunkel drew attention to the fact that currently applicable banking regulations run to almost 15,000 pages.

“there is no lack of depth in regulation,” dunkel said. the Association’s President called for a sense of proportion in bank supervision and for the impact of the planned additional measures to be reviewed. Gunter dunkel expressed his opposition to exclusive use of the debt ratio. like other critics, vÖB President dunkel complained about a failure to include risk of investments in bank balances.

Source: Ernst & Young Banking Barometer for Germany/Europe 2013

2

6

10

14

16

16

18

21

56

64

65

72

13

17

24

17

26

18

27

24

52

50

57

65

0 10 20 30 40 50 60 70 80

Internationalisation/new international markets

Development of new business areas

New remuneration systems

Sale of assets

Acquisition of new assets

Development/introduction of new products

Restructuring of operational business

Financial reporting / IFRS harmonisation

Cost reductions

Process optimisation

Preparation for Basel III

Risk management

Europe

Germany

Percentage share “very important” and “important”

EU and USA: Agreement on cross-border derivative trading

the Eu commission and the uS authorities reached a last-minute agreement on rules for cross-border derivative trading. the two sides each accepted that important stipulations made by the other side were consistent. the agreement is seen as something of a surprise, after Eu internal market commissioner michel Barnier said just last month that the uS regulatory system is “full of flaws”. the new agreement will free financial institutions from the burden of having to operate under two sets of regulations. Banks can now choose which regulations they will comply with when they are trading complex securities with one another with no intermediate clearing body. Swaps that involve clearing houses, for example the stock exchange, will be subject to the stricter uS regulations, but no time has been specified for when this will apply. uS institutions can also use European clearing bodies until at least march 2014, when new laws will be passed in the Eu. the clearing houses in the Eu now have until the end of the year to bring themselves in line with the uS standards.

said Semeta. the specific levies are likely to be back on the agenda at a later date.

the tax should actually be collected from January 2014, but the schedu-le has been put back by at least six months due to discussions about the details. commissioner Semeta called on the eleven pioneering countries to come to a final agreement.

How important do you think the following activities will be for your institution in the coming six months?

firm Frankfurter Institut für Risikomanagement und Regulierung

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Dates and FIRM NewsFIRM Offsite 2013: Focus on sustainable financial architecture

As a centre of competence in the financial services industry and a central contact for politicians and regulators, the Frankfurt institute for risk management and regulation (Firm) has played an impor-tant role in discussions about improved regulation and professional risk management for many years. By providing sound training and development for risk managers and through targeted support for fundamental and applied research in the areas of risk management and regulation, it has succeeded in shaping the content of the debate, promoting the concerns of the financial services industry, and contributing to strengthening Germany as a financial location.

Against this backdrop, from 20th to 22nd June leading experts from the world of risk management and regulation in different industries met for a discussion at the hotel hyatt regency in mainz. it was preceded the day before by an academic conference, including a lecture by Prof. Arnd widermann (university of Siegen) on regu-

lation of the emission of structured financial products for retail investors. dr. Bernd Skiera (Johann wolfgang Goethe university, Frankfurt) addressed the effects of non-customer business and stability in the financial industry. Prof. Natalie Packham (Frankfurt School of Finance and management) presented a research method for measuring model risks of dynamic hedging strategies, and Prof. Andreas Pfingsten (westfalian wilhelms university, münster) spea-king about cyclic effects. Finally, Prof. Jan Pieter Krahnen, director of the SAFE centre of Excellence and the centre for Financial Studies, talked in his presentation about how functioning financial markets are an essential condition for a flourishing economy, for growth and prosperity. they divert capital to productive and innovative projects and thus increase macroeconomic welfare. however, recent years have shown that undesirable developments in the financial market and a badly structured financial system conceal unforeseen risks for the economy, society and the state.

SAFE Centre of Excellence

Termine

the economic crisis has resulted in extensive doubt about financial markets’ ability to stabilise themselves. the “Sustainable Architecture for Finance in Europe” (SAFE) centre of Excellence has taken the wide-ranging challenges as an opportunity to research the requirements for an optimum regulatory framework for the financial markets and their actors, with a view to defining a “sustainable architecture”. Pre-vious research into financial markets has tended to focus too much

on individual actors and issues. SAFE is pooling knowledge of what happens in different markets, not just in the traditional financial and economic research areas, but also incorporating more general issues (such as “systemic risks”).

Further information at www.safe-frankfurt.de

Date Event Location Link

09 – 13 September risk management reloaded conference munich www.mathfinance.ma.tum.de/kpmgce/conference-2013/

23 – 24 September cEQurA conference 2013 munich www.cequra.uni-muenchen.de/conference2013/

07 october qSkills Security Summit 2013 Nuremberg www.qskills-security-summit.de/

18 – 22 November 16th Frankfurt Euro Finance week Frankfurt/main www.malekigroup.com

Ausgabe 16/2013

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What is your greatest pleasure?

Wolfgang Hartmann: Getting together with a small group of close friends – a maximum of eight people – to set the world to rights over good food and a nice glass of red wine.

What music helps you switch off?

Wolfgang Hartmann: Richard Wagner, Prelude to Tannhäuser or Lohengrin, The Beatles (early songs)

What is your philosophy for life?

Wolfgang Hartmann: “If you fight you can lose, but if you don’t fight you’ve already lost” (based on Heraclitus) and “To create something you have to be happy” (Fontane).

What book would you most recommend?

Wolfgang Hartmann: Hitler and Stalin – Parallel Lives (Alan Bullock), and I Ching – The Book of Changes (Richard Wilhelm)

What business achievement are you most amazed by?

Wolfgang Hartmann: The establishment of the Ford Motor Company by Henry Ford and of Microsoft by Bill Gates. I also rate the achievements of Ferdinand Piëch in making Volkswagen the world’s largest and most profitable car manufacturer very highly.

What annoys you regularly in discussions about risk management?

Wolfgang Hartmann: The fact that responsibility for poor commercial decisions in financial institutions are regularly passed on to risk managers, although the major responsibility lies with the Chairman of the Supervisory Board and the CEO.

Also, the fact that the independence of the CRO has not yet been assured. The fact that in Germany the Chairman of the Supervisory Board is often also the Chairman of the risk committee and can also be the regulator, totally undermines the independence of the CRO.

What risk would you most like to eliminate from the world?

Wolfgang Hartmann: None, because the concept of risk is just another word for uncertainty about the future. And life is worth living because this uncertainty exists, otherwise we would all be machines. Where there are risks, there are also opportunities. What moves the world forward is not certainty, when that means resting on your laurels and the kind of peace you find in a graveyard, but the principle of creative destruction.

Five minutes with …wolfgang hartmann, chairman of the Frankfurt institute for risk management and regulation (Firm)

Wolfgang Hartmann has dedicated the last several decades of his life to risk management – from 1993 to 2000 as Head of the Central Credit Department, and from 2000 to 2009 as Chairman and Chief Risk Officer (CRO) at the Commerzbank Group. He left them in May 2009, shortly before his 60th birthday.

As a former longstanding member of the Global Risk Management Round Table at the Risk Management Association, Philadelphia (RMA), the G8 Group of CROs of major German banks (which he founded himself), the Financial Location Germany initiative and head of its SME financing working group, the IIF Steering Committee on Regulatory Capital, the European Parliament’s Financial Service Expert Panel, and the risk policy committee of the German Banking Association, he has an immense number of contacts and a wealth of experience in all areas of risk management in banking.

As well as leading the Frankfurt Institute of Risk Management and Regulation, Wolfgang Hartmann is currently a member of the Executive Board and Steering Committee of Frankfurt Main Finance.

Welche Fähigkeiten muss ein guter Risikomanager mitbringen?

Wolfgang Hartmann: Sachverstand für die relevanten Risikothemen (Experten- und Modellwissen), ein Blick für das Ganze und das Wesentliche, Durchsetzungsstärke gepaart mit Überzeugungskraft und die Fähigkeit Nein zu sagen und das auch durchzuhalten. Ein gutes Netzwerk mit anderen Risikomanagern, um nicht betriebsblind zu werden.

Dieser Absatz fehlt in der Übersetzung!!!

firm Frankfurter Institut für Risikomanagement und Regulierung

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