In times of crisis, the question of the right banking partner immediately comes to the fore. Banks have repeatedly slipped into bankruptcy, with dramatic consequences for customers. It is therefore all the more important to observe a few basic principles …..
Positive bank capital secures loans
A good and therefore stable bank has a lot of equity capital – by law it should be at least around 6% in relation to the loans granted. The situation can be much worse when taking into account liabilities due to risk papers transferred to special purpose vehicles: Some banks have a real equity ratio of around 1% – or less. Other banks in German-speaking countries have equity capital of well over 20% – and no direct risks due to the financial crisis. How long the taxpayer will put up with propping up ailing banks without a viable business model, in particular “throwing good money after bad”, is a question of policy: bank failures occur again and again. However, experience shows that customers are confronted with significantly higher interest rates in the event of a bank failure – liquidators or insolvency administrators also want to close the books at some point: Therefore, customers are “motivated” to change banks. It can also take years for balances to be compensated through the deposit insurance scheme. One development that is not very pleasing for loan customers is when banks sell their receivables to “locusts” – having the small print checked carefully ensures existential advantages. Perhaps the conversation at the regulars’ table will also help to find out which bank “arbitrarily” cancels loans, only to hand them over to a collection agency as its own refinancing for further processing. Entrepreneurs are well advised to have both the terms and conditions reviewed and to keep a close eye on the capital strength of their house bank.
Examine the bank’s business model
In the past, more than 20 years ago, banks lived on the “margin”, i.e. the difference between the interest paid out to savers and the interest charged on loans. Competition in this area led banks to increasingly look to fees and commissions as their main sources of income. It is often difficult for customers to see through the details – without an expert it will hardly be possible to have the accounts checked once. It is astonishing that some banks – contrary to the legal basis – have charged 50% more in interest and fees over the years: The tax advisor regularly does not have the tools to recognize such misconduct. In addition, the business acumen of some – but not all – credit institutions became known through press reports. For example, the brokerage of capital investments that are later exposed as tax evasion schemes are an indication. Similarly, many investors have been sold “guarantee” products that guarantee a return of capital in a few years, but are worth only a fraction today – in effect, unsaleable. This includes the phenomenon that especially the portfolio of the generation “60-plus” was completely invested in certificates and derivatives. Negative press exposes business methods and can be a clear signal to consider switching.
Inflation – deflation – credit management
Experts think there are only three methods to act in a crisis: Liquidation of banks, etc., that are unsustainable, or inflation to reduce government debt, or propping up over-indebted banks at taxpayer expense. At the moment, it is still true that as deflation rises, money continually becomes worth more and tangible assets fall in price; too much debt can be fatal. In this respect, those companies that have the highest possible equity capital are at an advantage, in order to remain as little dependent as possible on lenders. High equity capital is the basis for being able to cope with economic setbacks. Around 30,000 corporate insolvencies a year show that not every commercial enterprise succeeds in doing this – a political “rescue umbrella” is regularly not available in such cases. And in the future: With rising inflation, it will look the other way round: Money will continuously become worth less and tangible assets will rise in price; debts will then be less of a problem with suitable business ratios. However, here again it comes down to planning: If credit funds are required at fixed and thus calculable interest rates, the contracts should be designed accordingly. The tolerated overdraft with de facto any time terminability would be the most expensive and most dangerous variant. Again and again it can be observed that applications for government interest rate reduction and guarantee programs are “left behind” or “lost” at the house bank – the house bank often earns too little on them. If a multiple of interest is then charged, this can “eat up” more than the current profit.
Risk diversification – Multi-culti
Comparing the deposit guarantee schemes, it is noticeable that some are potentially over-indebted. Domestically, it looks to some entrepreneurs as if the proverbial choice is between plague and cholera. Big banks under a “bailout umbrella” – potentially over-indebted? Savings banks liable for Landesbanken – potentially over-indebted? Volks- und Raiffeisenbanken are burdened by a major bank – potentially over-indebted? The question then arises as to how large the deposit insurance actually is, and how many of these reserves might also be invested in “toxic securities”? Transparency is probably the exception in this field. However, there are enormous differences between individual credit institutions: cooperation with several institutions can significantly reduce the risk for companies. The differences become even more serious in the German-speaking countries alone when one realises that there are institutions that simply cannot go bankrupt at all. Or if an analysis shows that there are enormous differences in the conditions. Without setting a strategic course, however, it is not possible to find the banking partners that are really “right” for an entrepreneur in each individual case.
Companies with quality management know that all suppliers have to be evaluated regularly. Credit institutions require customers to provide proof of creditworthiness before a loan is extended. For some years now, the situation has been reversed: the entrepreneur considers whether the credit institution can prove that it is set up in conformity with the company’s objectives. And beyond that, the following also applies: If the company or the entrepreneur invests money, the selection of the optimally suitable financial partner is no less decisive.
by Dr. Johannes Fiala
by courtesy of
www.computern-im-handwerk.de (published in Computers in Crafts 04/2009, page 6-7 and Computers in Crafts 06.2009, page 5-6)
www.der-bau-unternehmer.de (published in Der BauUnternehmer 03/2009, page 7)
www.gemeindezeitung.de (published in Bayrische Gemeinde Zeitung 19.03.2009, page 5)
www.kohlhammer.de (published in The Municipal Budget 04/2009, pages 89-90: under the heading: Why the lending institution threatens the existence of the entrepreneur).
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About the author
Dr. Johannes Fiala has been working for more than 25 years as a lawyer and attorney with his own law firm in Munich. He is intensively involved in real estate, financial law, tax and insurance law. The numerous stages of his professional career enable him to provide his clients with comprehensive advice and to act as a lawyer in the event of disputes.
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