Table 1. Bank Deposits in percent of total bank liabilities

Due To Deregulation, Liberalization and Globaliza-tion The Traditional Bank Business Has Changed Dramatically.Banks can enter a business that had been off limits beforeDeepening of Capital markets connected corporates directly to the market.Corporate Finance business has suffered from highly specialized securities firms and institutional asset managers. Traditional Sources Of Bank Profits Have ShiftedBank Deposits are decreasing. Liabilities as bank loans are also decreasing on the assets side (Table 1,2).On the other side negotiable liabilities have increased (tradable securities on the asset side) (Table 3,4).

Table 1. Bank Deposits in percent of total bank liabilitiesIn Most G7-Countries Bank Deposits in Percent of Total Liabilities were Decreasing During the Last Twenty Years

Deposits to Liabilities

198019901995

USA75.569.958.5

Japan71.871.371.3

Germany73.971.265.7

France34.127.5

Italy46.344.236.9

UK86.584.686

Canada79.774.372.4


USA

Japan

Germany

France

Italy

UK

Canada

Bank Deposits in % of Total Bank Liabilities

Tabelle2

198019901995

USA63.362.958.9

Japan55.356.265.4

Germany83.681.277.7

France40.436.4

Italy35.745.642.4

UK43.657.952.4

Canada70.470.867.6

Tabelle2

1980

1990

1995

Bank Loans in % of Total Bank Assets

Tabelle3

Table 2. Bank Loans in percent of total Bank AssetsIn Some G7-Countries also Bank Loans as in Percent of Total Bank Assets Decreased


198019901995

USA75.569.958.5

Japan71.871.371.3

Germany73.971.265.7

France34.127.5

Italy46.344.236.9

UK86.584.686

Canada79.774.372.4


0000000

0000000

0000000

USA

Japan

Germany

France

Italy

UK

Canada


Tabelle2

198019901995

USA63.362.958.9

Japan55.356.265.4

Germany83.681.277.7

France40.436.4

Italy35.745.642.4

UK43.657.952.4

Canada70.470.867.6

Tabelle2

USAUSAUSA

JapanJapanJapan

GermanyGermanyGermany

FranceFranceFrance

ItalyItalyItaly

UKUKUK

CanadaCanadaCanada

1980

1990

1995


Tabelle3

Table 3. Negotiable Liabilities in percent of total Bank LiabilitiesBanks are Using More and More Capital Market Instruments to Refinance Their Businesses


198019901995

USA75.569.958.5

Japan71.871.371.3

Germany73.971.265.7

France34.127.5

Italy46.344.236.9

UK86.584.686

Canada79.774.372.4


USA

Japan

Germany

France

Italy

UK

Canada


Tabelle2

198019901995

USA63.362.958.9

Japan55.356.265.4

Germany83.681.277.7

France40.436.4

Italy35.745.642.4

UK43.657.952.4

Canada70.470.867.6

Tabelle2

1980

1990

1995


Tabelle3

198019901995

USA0.40.81.1

Japan2.03.94.8

Germany19.219.023.5

France...21.719.4

Italy12.218.722.0

UK3.96.17.3

Tradable Liabilities in percent of total bank liabilities

198019901995

USA18.018.920.1

Japan14.714.315.4

Germany10.212.115.7

France...7.313.7

Italy20.413.013.9

UK9.29.217.9

Tradable Securities Holding in percent of total bank assets

Table 4. Tradable Securities Holding in percent of Total Bank AssetsBanks Have Also Entered resp. Enlarged Their Asset Management Businesses


198019901995

USA75.569.958.5

Japan71.871.371.3

Germany73.971.265.7

France34.127.5

Italy46.344.236.9

UK86.584.686

Canada79.774.372.4


USA

Japan

Germany

France

Italy

UK

Canada


Tabelle2

198019901995

USA63.362.958.9

Japan55.356.265.4

Germany83.681.277.7

France40.436.4

Italy35.745.642.4

UK43.657.952.4

Canada70.470.867.6

Tabelle2

1980

1990

1995


Tabelle3

198019901995

USA0.40.81.1

Japan2.03.94.8

Germany19.219.023.5

France...21.719.4

Italy12.218.722.0

UK3.96.17.3


198019901995

USA18.018.920.1

Japan14.714.315.4

Germany10.212.115.7

France...7.313.7

Italy20.413.013.9

UK9.29.217.9


Three Major Changes In The Composition Of Banks Balance Sheets Displacement of lending by other activities. Growth of off-balance-sheet assets in percent of total assets. Displacement of deposit loan-income by other operating income.Changes Are Reflected By Desegementation And Restructuring Expanding into other markets (Securities) to face competition to the Asset Management Industry. Entering the insurance markets Entering Asset Management business providing investment management services and a wider range of financial services to their customers. All this changes are reflected by heavily increasing M & A activities.

Table 5. Balance Sheet Information of Top 50 Banks in percent as notedSource of Bank Profits Have Shifted From Interest Related Income to Other Income


198019901995

USA75.569.958.5

Japan71.871.371.3

Germany73.971.265.7

France34.127.5

Italy46.344.236.9

UK86.584.686

Canada79.774.372.4


0000000

0000000

0000000

USA

Japan

Germany

France

Italy

UK

Canada


Tabelle2

198019901995

USA63.362.958.9

Japan55.356.265.4

Germany83.681.277.7

France40.436.4

Italy35.745.642.4

UK43.657.952.4

Canada70.470.867.6

Tabelle2

000

000

000

000

000

000

000

1980

1990

1995


Tabelle1

199119931996

Other Earning Assets /33.3533.7837.14

Total Assets

Off-Balance-Sheet Items /14.5820.8120.33

Total Assets

Other Operating Income /49.1862.0067.06

Net Interest Revenue

Commission and Fees/86.5661.0957.54

Other Operating Income

Trading Income /24.8022.0618.15

Other Operating Income

Tabelle3

198019901995

USA0.40.81.1

Japan2.03.94.8

Germany19.219.023.5

France...21.719.4

Italy12.218.722.0

UK3.96.17.3


198019901995

USA18.018.920.1

Japan14.714.315.4

Germany10.212.115.7

France...7.313.7

Italy20.413.013.9

UK9.29.217.9


Traditionally banks intermediate between borrowers and savers by using deposits, securities firms were providing the distribution of new issues of equity and debt to public.On the supply side, Nonbank financial institutions have entered the traditional bank business. Insurance Comp., Investment banks, even telcos and food companies are providing bank-services.On the demand side, households were bypassing banks by investing directly to those investment firms which could cause of theire specializtion more effective handle the savings.As a result from this, the nonbank-sector became larger and larger. (Table 6,7). In the United States the nonbank-sector is managing (1995)11,5 trillion US$ compared to 5 Trillion $ in the banking sector.The Traditional View of Financial Intermediation Has Eroded

Table 6. Assets of Institutional InvestorsInstitutional Investors Were Steadily Growing at High Average Rates


198019901995

USA75.569.958.5

Japan71.871.371.3

Germany73.971.265.7

France34.127.5

Italy46.344.236.9

UK86.584.686

Canada79.774.372.4


0000000

0000000

0000000

USA

Japan

Germany

France

Italy

UK

Canada


Tabelle2

198019901995

USA63.362.958.9

Japan55.356.265.4

Germany83.681.277.7

France40.436.4

Italy35.745.642.4

UK43.657.952.4

Canada70.470.867.6

Tabelle2

000

000

000

000

000

000

000

1980

1990

1995


Tabelle1

199119931996

Other earning assets /33.3533.7837.14

total assets

Off-balance-sheet items /14.5820.8120.33

total assets

Other operating income /49.1862.0067.06

net interest revenue

Commission and fees/86.5661.0957.54

other operating income

Trading income /24.8022.0618.15


All Institutional Investors199019931995Annual

(in Billions of US$)Growth

Rate

United States6,820.609,262.2011,490.2010.99%10.99%

Japan2,490.603,576.704,068.2010.31%

Germany641.80776.201,179.8012.95%

France632.00870.501,159.0012.89%

Italy215.30244.70325.608.62%

United Kingdom1,248.501,637.001,908.908.86%

Canada348.20437.20509.707.92%

Total12,397.0016,804.6020,641.4010.73%

Total Assets all Investors199019931995Annual

(in % of GDP)Growth

Rate

United States118.70141.40158.605.97%

Japan77.9084.1087.002.23%

Germany39.5042.5048.904.36%

France49.8072.5074.008.24%

Italy18.5026.9029.109.48%

United Kingdom117.50175.20176.008.42%

Canada60.3081.2089.208.15%

Total84.70103.70110.505.46%

Tabelle3

198019901995

USA0.40.81.1

Japan2.03.94.8

Germany19.219.023.5

France...21.719.4

Italy12.218.722.0

UK3.96.17.3


198019901995

USA18.018.920.1

Japan14.714.315.4

Germany10.212.115.7

France...7.313.7

Italy20.413.013.9

UK9.29.217.9


Table 7. Assets of all Institutional Investors in % of GDPInstitutional Investors Were Steadily Growing at High Average Rates


198019901995

USA75.569.958.5

Japan71.871.371.3

Germany73.971.265.7

France34.127.5

Italy46.344.236.9

UK86.584.686

Canada79.774.372.4


0000000

0000000

0000000

USA

Japan

Germany

France

Italy

UK

Canada


Tabelle2

198019901995

USA63.362.958.9

Japan55.356.265.4

Germany83.681.277.7

France40.436.4

Italy35.745.642.4

UK43.657.952.4

Canada70.470.867.6

Tabelle2

000

000

000

000

000

000

000

1980

1990

1995


Tabelle1

199119931996


total assets


total assets







All Institutional Investors199019931995Annual

(in Billions of US$)Growth

Rate

United States6,820.609,262.2011,490.2010.99%10.99%

Japan2,490.603,576.704,068.2010.31%

Germany641.80776.201,179.8012.95%

France632.00870.501,159.0012.89%

Italy215.30244.70325.608.62%

United Kingdom1,248.501,637.001,908.908.86%

Canada348.20437.20509.707.92%

Total12,397.0016,804.6020,641.4010.73%

Total Assets all Investors199019931995Annual

(in % of GDP)Growth

Rate

United States118.70141.40158.605.97%

Japan77.9084.1087.002.23%

Germany39.5042.5048.904.36%

France49.8072.5074.008.24%

Italy18.5026.9029.109.48%

United Kingdom117.50175.20176.008.42%

Canada60.3081.2089.208.15%

Total84.70103.70110.505.46%

Tabelle3

198019901995

USA0.40.81.1

Japan2.03.94.8

Germany19.219.023.5

France...21.719.4

Italy12.218.722.0

UK3.96.17.3


198019901995

USA18.018.920.1

Japan14.714.315.4

Germany10.212.115.7

France...7.313.7

Italy20.413.013.9

UK9.29.217.9


GlobalizationFinancial Markets Are Facing Closer Integration Liberalization and Development of Information Technologies prepared the way to globalization and integration Securities Portfolios became far more internationally diversified (Table 8). The growth in gross portfolio flows increased by almost more than 200 times.Cross border transactions in Bonds and Equities reached up to between seven and one times GDP. In the US those transactions between US and foreign investors totaled 17 Trillion US$. (see Table 9) or 213% of the US - GDP.Although investment portfolios are fare away from beeing adequately internationally diversified, i.e. portfolios still do not reflect the the structure of the world market capitalization (USA: 42%, Japan 15%, UK: 9%, other industrial countries: 23%, emerging markets: 11%)

Mirroring this expansion firms also turned to international markets to raise funds (see Table 10).Even the volume of outstanding issues of international debt securities reached to 3,7 Trillion US $, sixfold larger than in 1985.Financial Globalization has been a counterpart to international trade. The foreign exchange market has far outpaced the growth of trade. In 1995 an annual worldwide trade volume of 6,1 Trillion US$ was faced by a daily market turnover of 1,2 Trillion US $. (see T.11.)Nonresidents holdings of public debt also increased substantially (see Table 12)GlobalizationFinancial Markets are Facing Closer Integration

Table 8. Gross and Net Flows of Foreign Direct and Portfolio Investment (G7)Foreign Net and Portfolio Investments (in bn $)


198019901995

USA75.569.958.5

Japan71.871.371.3

Germany73.971.265.7

France34.127.5

Italy46.344.236.9

UK86.584.686

Canada79.774.372.4


0000000

0000000

0000000

USA

Japan

Germany

France

Italy

UK

Canada


Tabelle2

198019901995

USA63.362.958.9

Japan55.356.265.4

Germany83.681.277.7

France40.436.4

Italy35.745.642.4

UK43.657.952.4

Canada70.470.867.6

Tabelle2

000

000

000

000

000

000

000

1980

1990

1995


Tabelle1

19911993

Other earning assets /33.3533.78

total assets

Off-balance-sheet items /14.5820.81

total assets

Other operating income /49.1862.00


Commission and fees/86.5661.09


Trading income /24.8022.06


All Institutional Investors19901993Growth

(in Billions of US$)rate

United States6,820.609,262.2014

Japan2,490.603,576.7013

Germany641.80776.2017

France632.00870.5017

Italy215.30244.7010

United Kingdom1,248.501,637.0011

Canada348.20437.209

Total12,397.0016,804.6013

Total Assets all Investors19901993Growth

(in % of GDP)rate

United States118.70141.406.00

Japan77.9084.102.20

Germany39.5042.504.40

France49.8072.508.20

Italy18.5026.909.50

United Kingdom117.50175.208.40

Canada60.3081.208.10

Total84.70103.705.50

Gross and Net Flows of19701980199019951997

Foreign Direct and Portfolio

Investment (billions US$)

Gross Flows

Foreign Direct Investment14.4582.82283.24369.01448.32

Portfolio Investment5.2660.93329.63764.341,040.19

Net Flows

Foreign Direct Investment-4.05-8.14-59.58-83.18-92.60

Portfolio Investment1.4216.0241.36186.53272.51

Tabelle3

198019901995

USA0.40.81.1

Japan2.03.94.8

Germany19.219.023.5

France...21.719.4

Italy12.218.722.0

UK3.96.17.3


198019901995

USA18.018.920.1

Japan14.714.315.4

Germany10.212.115.7

France...7.313.7

Italy20.413.013.9

UK9.29.217.9


Table 9. Cross Border Transactions in Bonds and EquitiesCross Border Transactions of Bonds and Equities


198019901995

USA75.569.958.5

Japan71.871.371.3

Germany73.971.265.7

France34.127.5

Italy46.344.236.9

UK86.584.686

Canada79.774.372.4


0000000

0000000

0000000

USA

Japan

Germany

France

Italy

UK

Canada


Tabelle2

198019901995

USA63.362.958.9

Japan55.356.265.4

Germany83.681.277.7

France40.436.4

Italy35.745.642.4

UK43.657.952.4

Canada70.470.867.6

Tabelle2

000

000

000

000

000

000

000

1980

1990

1995


Tabelle1

199119931996


total assets


total assets









United States6,820.609,262.2011,490.2014

Japan2,490.603,576.704,068.2013

Germany641.80776.201,179.8017

France632.00870.501,159.0017

Italy215.30244.70325.6010

United Kingdom1,248.501,637.001,908.9011

Canada348.20437.20509.709

Total12,397.0016,804.6020,641.4013


(in % of GDP)rate

United States118.70141.40158.606.00

Japan77.9084.1087.002.20

Germany39.5042.5048.904.40

France49.8072.5074.008.20

Italy18.5026.9029.109.50

United Kingdom117.50175.20176.008.40

Canada60.3081.2089.208.10

Total84.70103.70110.505.50




Gross Flows

Foreign Direct Investment14.4534.2582.8275.49283.24369.01357.53448.32

Portfolio Investment5.2627.1060.93233.44329.63764.341,162.641,040.19

Net Flows

Foreign Direct Investment-4.05-9.93-8.14-12.66-59.58-83.18-87.41-92.60

Portfolio Investment1.428.5316.0225.0341.36186.53267.37272.51

Cross Border197519801985199019951997

Transactions

Bonds & Equities

(in percent of GDP)

United States4.009.0035.0089.00135.00213.00

Japan2.008.0062.00119.0065.0096.00

Germany5.007.0033.0057.00172.00253.00

France...5.0021.0054.00187.00313.00

Italy1.001.004.0027.00253.00672.00

Canada3.009.0027.0065.00189.00358.00

Total15.0039.00182.00411.001,001.001,905.00

Tabelle3

198019901995

USA0.40.81.1

Japan2.03.94.8

Germany19.219.023.5

France...21.719.4

Italy12.218.722.0

UK3.96.17.3


198019901995

USA18.018.920.1

Japan14.714.315.4

Germany10.212.115.7

France...7.313.7

Italy20.413.013.9

UK9.29.217.9


Table 11. Foreign Exchange TradingForeign Exchange Trading (Turnover in bn $ per day)


198019901995

USA75.569.958.5

Japan71.871.371.3

Germany73.971.265.7

France34.127.5

Italy46.344.236.9

UK86.584.686

Canada79.774.372.4


0000000

0000000

0000000

USA

Japan

Germany

France

Italy

UK

Canada


Tabelle2

198019901995

USA63.362.958.9

Japan55.356.265.4

Germany83.681.277.7

France40.436.4

Italy35.745.642.4

UK43.657.952.4

Canada70.470.867.6

Tabelle2

000

000

000

000

000

000

000

1980

1990

1995


Tabelle1

199119931996


total assets


total assets









United States6,820.609,262.2011,490.2014

Japan2,490.603,576.704,068.2013

Germany641.80776.201,179.8017

France632.00870.501,159.0017

Italy215.30244.70325.6010

United Kingdom1,248.501,637.001,908.9011

Canada348.20437.20509.709

Total12,397.0016,804.6020,641.4013


(in % of GDP)rate

United States118.70141.40158.606.00

Japan77.9084.1087.002.20

Germany39.5042.5048.904.40

France49.8072.5074.008.20

Italy18.5026.9029.109.50

United Kingdom117.50175.20176.008.40

Canada60.3081.2089.208.10

Total84.70103.70110.505.50




Gross Flows



Net Flows



Cross Border Transactions197519801985199019951997

in Bonds and Equities

(in percent of GDP)

United States4.009.0035.0089.00135.00213.00

Japan2.008.0062.00119.0065.0096.00

Germany5.007.0033.0057.00172.00253.00

France...5.0021.0054.00187.00313.00

Italy1.001.004.0027.00253.00672.00

Canada3.009.0027.0065.00189.00358.00

Total15.0039.00182.00411.001,001.001,905.00

Nonresident's Holdings of1983198819931996

Public Debt (in % of total)

United States14.9018.4022.2035.00

Japan...2.005.404.30

Germany14.1020.7032.8029.30

Italy......10.1015.90

United Kingdom7.2015.7021.8023.80

Canada10.7015.7021.8023.80

Foreign Exchange1986198919921995

Trading

Global Estimated Turnover

(daily, in billions of US $)1885908201190

As a percent of

World Exports of Goods7.4015.8017.4019.1

Total reserves minus gold36.7075.9086.0084.30

Tabelle3

198019901995

USA0.40.81.1

Japan2.03.94.8

Germany19.219.023.5

France...21.719.4

Italy12.218.722.0

UK3.96.17.3


198019901995

USA18.018.920.1

Japan14.714.315.4

Germany10.212.115.7

France...7.313.7

Italy20.413.013.9

UK9.29.217.9


Table 12. Nonresidents Holdings of Public Debt (in percent of total public debt)Nonresidents Holdings of Public Debt (in % of Total Debt)


198019901995

USA75.569.958.5

Japan71.871.371.3

Germany73.971.265.7

France34.127.5

Italy46.344.236.9

UK86.584.686

Canada79.774.372.4


0000000

0000000

0000000

USA

Japan

Germany

France

Italy

UK

Canada


Tabelle2

198019901995

USA63.362.958.9

Japan55.356.265.4

Germany83.681.277.7

France40.436.4

Italy35.745.642.4

UK43.657.952.4

Canada70.470.867.6

Tabelle2

000

000

000

000

000

000

000

1980

1990

1995


Tabelle1

199119931996


total assets


total assets









United States6,820.609,262.2011,490.2014

Japan2,490.603,576.704,068.2013

Germany641.80776.201,179.8017

France632.00870.501,159.0017

Italy215.30244.70325.6010

United Kingdom1,248.501,637.001,908.9011

Canada348.20437.20509.709

Total12,397.0016,804.6020,641.4013


(in % of GDP)rate

United States118.70141.40158.606.00

Japan77.9084.1087.002.20

Germany39.5042.5048.904.40

France49.8072.5074.008.20

Italy18.5026.9029.109.50

United Kingdom117.50175.20176.008.40

Canada60.3081.2089.208.10

Total84.70103.70110.505.50




Gross Flows



Net Flows



Cross Border Transactions197519801985199019951997

in Bonds and Equities

(in percent of GDP)

United States4.009.0035.0089.00135.00213.00

Japan2.008.0062.00119.0065.0096.00

Germany5.007.0033.0057.00172.00253.00

France...5.0021.0054.00187.00313.00

Italy1.001.004.0027.00253.00672.00

Canada3.009.0027.0065.00189.00358.00

Total15.0039.00182.00411.001,001.001,905.00

Nonresident's1983198819931996

Holdings of

Public Debt (in % )

United States14.9018.4022.2035.00

Japan...2.005.404.30

Germany14.1020.7032.8029.30

Italy......10.1015.90

United Kingdom7.2015.7021.8023.80

Canada10.7015.7021.8023.80

Tabelle3

198019901995

USA0.40.81.1

Japan2.03.94.8

Germany19.219.023.5

France...21.719.4

Italy12.218.722.0

UK3.96.17.3


198019901995

USA18.018.920.1

Japan14.714.315.4

Germany10.212.115.7

France...7.313.7

Italy20.413.013.9

UK9.29.217.9


Accompanying all this, we can observe extending linkages between international Exchanges (Eurex, CBOT and Eurex)OTC- and Exchange traded markets will mergeNew Markets for unbundling and trade of risks will emergeActually the risk market volume is estimated to reach up to a volume of more than 130 Bio US$ /year (notional amount outstanding per end of year). This would be more than the total volume of all traded bonds, equities and bank assets Outlook to new market propositionsIn future we will face an ongoing increase of methods and products concerning risk markets, also dealing new kinds of risks like:Catastrophe Risks (ART) will change insurance markets Credit Risks will change the business potential of credit business. Private Income Risks

New TrendsNew MarketsNew ChancesNew Risks

New Markets and Products for Unbundling, Pricing, Trading and Managing RisksExample:U.S. bank has given a floating rate Yen denominated loan to a Japanese bank.Credit-risk loaded floating-rate, Yen-denominated loan Riskless, fixed rate dollar denominated security

How Risk Management WorksUS BankJapanese Bank100 Bio Y at LIBORLIBOR Payed in YPayback in YenLIBOR in YenFixed rate in YenUS$ ReceiverYen - PayerInterest Rate SwapCurrency SwapFloating Rate Yen LoanFixed Rate Dollar Loan OTC - MarketCredit Default SwapFloating Rate Yen Credit

Growth in Global Security Issues,1990-2003Global debt & equityU.S. Issuers worldwide$ Bn

Derivatives - Notional Amount Outstanding per 12/1987 to 12/2005

Diagramm1

0.87

3.45

8.48

25.5

58.3

63.1

69.2

99.8

221.7

280.8

316.4

in Thousand Bio US$

Tabelle1

H87225.0

2H87$248.6

$865.6865.6

1H88$310.8

2H88$379.9

$1,654.31654.3

1H89$653.6

2H89$685.1

2,474.7

1H90$794.1

2H90$975.2

3450.3

1H91$1,122.2

2H91$1,210.7

4449.5

1H92$1,768.0

2H92$1,948.9

5345.7

1H93$2,604.9

2H93$2,911.9

8474.5

1H94$4,214.1

2H94$3,919.3

11303.2

1H97

1H95$4,258.52H97

2H95$6,910.8

17712.6

1H968310

2H969464.5

25453.1

$9,464.5

$25,453.1

$13,821.9

$28,733.328733.3

$8,359.0

$29,035.0

1H98

2H98

$36,974.0

1H99

2H99$50,997.0

1H00

$52,710.5

$58,265.0

$60,366.0

Tabelle2

19870.87

19903.45

19938.48

199625.5

199958.3

200063.1

200169.2

200299.8

2003221.7

2004280.8

2005316.4

Tabelle2

0

0

0

0

0

0

0

0

in Bio US$

Tabelle3

Markets are Interlinked Example: Spot and Futures Market

Spot Future - ParityToday, one (theoretical) Index-Future is sold at 5,500 (1 per Index-point). Long and Short-positions can be described by a profit and loss diagram:If you are Long-Future, then you may claim for delivery of one index at a price of 5,500 at the maturity of the index-future. That means, if the index at delivery is quoted at more than 5,500, you will win from your futures position.Spot Future ParityIndex Arbitrage (Example)

Spot Future - ParityYou hold an Index-Portfolio, currently valued at 5,500 (1 Index-point = 1 ). If the annual risk free rate rf is at 3.5 % and the expected dividends on your Index portfolio are at 100 (d = 100/5,500) , an Index Future with one year to maturity has a fair price of:To prevent our Index-Portfolio from losses, we could hedge the price risk by taking a short future position (selling a future at 5,592.40).Spot Future ParityIndex Arbitrage (Example)

Spot Future - ParityThe total expected payoffs from your portfolio will depend on the fu-ture state of the environment (see below payoffs 1-5). A decreasing stock market will be compensated by profits from the short future po-sition, increasing stock prices will be outbalanced by losses due to pay-ment obligations from the future.Spot Future ParityIndex Arbitrage (Example)

AssetsPayoff1Payoff2Payoff3Payoff4Payoff5Stock Portfolio+4500,00+5000,00+5500,00+6000,00+6500,00Dividends+100,00+100,00+100,00+100,00+100,00Short Future+1092,40+592,40+92,40-407,60-907,60Total+5692,40+5692,40+5692,40+5692,40+5692,40

Spot Future - ParityInitially you have paid 5,500 for your stock portfolio. Taking the short future position, the final outcome of your portfolio will be 5,692,40 , whatever the stock price will be, i.e. you will earn 192,40 which equals 3.5%. Obviously, this profit is riskless:Spot-Future-ParitySpot Future ParityIndex Arbitrage (Example)

AssetsPayoff1Payoff2Payoff3Payoff4Payoff5Stock Portfolio+4500,00+5000,00+5500,00+6000,00+6500,00Dividends+100,00+100,00+100,00+100,00+100,00Short Future+1092,40+592,40+92,40-407,60-907,60Total+5692,40+5692,40+5692,40+5692,40+5692,40

Spot Future - ParityRising future prices will due to arbitrage trading - induce rising spot prices. For example, a future traded at 6,000 is (relative to a spot market price of 5,500) clearly overpriced, if the stock price remains unchanged at 5,500 . In this case, smart traders will make arbitrage profits of 407,50 per contract and bring back the market to equilibrium:Note, that the arbitrage profit equals the difference between a fair- and mispriced future (6,000 5,592,40) plus Dividends. Higher Future prices will lead to massivly increased demand at spot markets until spot prices and futures are back to equilibrium. Spot Future ParityIndex Arbitrage (Example)

Actiont0t1Borrow money at rF (3,5%)+ 5,500.00- 5,692.50Buy/Sell Stock Portfolio- 5,500.00 + StockSell/Buy Future at 6,0000+ 6,000.00 - StockTotal0+ 307,50

Spot Future ParityFinancial Market StabilitySpot Markets and Future (Forward) Markets are interlinked.Mispriced spot or future market instruments will affect both markets.Future market speculations that drive futures prices will also drive spot market prices due to arbitrage trading (et vice versa).Speculation on futures markets, resulting in higher future prices will induce higher spot market prices due to arbitrage trading. Finally this may result in spot market bubbles that jeopardizes the allocation mechanism of real goods markets. Spot Future ParityIndex Arbitrage (Example)

Management of Operational Risks:WeatherDerivatives

Weather Derivatives HistoryWeather Derivatives occured in 1997 in the USA after the El Nio effects. (Aquila Energy, Kansas City/Missouri).At the end of 1998 first Weather Derivatives were issued in GermanySince 1998 Weather Futures and Weather - Options are traded at the Chicago Mercantile Exchange .In August 2001 London International Financial Futures Exchange (LIFFE) started trading Weather Futures.Eurex planned to launch weather related derivatives in 2004.

Weather DerivativesGerman Temperature Index Xelsius

HDDInterval = Max { 0, 18C - Temp } CDDInterval = Max { 0, Temp - 18C } Example: On December, 12th 2001 the average temperature in Berlin has been - 6 C. This day the Index shows 24 HDD.Weather DerivativesGerman Temperature Index Xelsius

Weather DerivativesIn many cases operational income is directly weather related

Tabelle2

SeasonHDDGWhTurnoverper HDD

199630471090810060.3301608139

1997264097859030.3420454545

1998237987858100.3404791929

1999260692478530.3273215656

2000242583577710.3179381443

Tabelle2

00

00

00

00

00

&A

Page &P

GWh

Umsatz

Tabelle1

HDDUmsatz

1600512

1700544

1800576

1900608

2000640

2100672

2200704

2300736

2400768

2500800

2600832

2700864

2800896

2900928

3000960

3100992

32001,024

33001,056

Tabelle1

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

Umsatz

The annual turnover (Business Unit Heating Energy) of the former Berlin Energy - Supplier BEWAG (now VATTEN-FALL) 1999 / 2000 mounted to 771 Mio DM. The winter season 1999/2000 showed 2.425 HDD. This equals an average turnover per HDD of 320 TDM. If the winter would have been warmer (for example at only 2000 HDD) this would have caused a lower turnover of approx. 425 HDD x 320 TDM = 136 Mio DM. Insofar BEWAGs operational income is directly related to the average temperature in winter season. Weather DerivativesIn many cases operational income is directly weather related

Weather Derivatives The Payoff-Profile from Heating Business remembers to the payoff profile of a financial future. Example: If 2500 HDD would represent an average cold winter, then a higher number of HDD would create additional turnovers, whereas a lower number would lead to a smaller turnover.

Weather Derivatives In this example the risk of warmer winters (i.e. < 2500 HDD) could be hedged by weather futures. At a Standard of 100 per HDD, a weather future on the basis of 2500 HDD has a contract value of 2500 x 100 = 250 T. Given a profit-margin of approx. 20% (turnover at 2500 HDD = 2500 x 320 TDM = 800 Mio DM (400 Mio ) i.e. a total average profit of 160 Mio DM or 80 Mio resp. an average profit per HDD of 32 T) BEWAG could hedge the weather risk selling 320 weather futures at an Index of 2500 HDD.

Weather Derivatives If BEWAG takes the short-position this could result in the following scenarios: Operational Income Income from HDD Turnover (Mio ) Profit (Mio ) Short Future (Mio ) Total Profit (Mio ) 2000 320 64 16 80 2100 336 67 12,8 80 2200 352 70 9,6 80 2800 448 90 -9,6 80 2900 464 93 -12,8 80 3000 480 96 -16 80

Weather DerivativesPayoff-profiles of a hedged (operational) business are similiar to the payoff-profiles of a future hedged trade.

Weather DerivativesOptions Put - OptionsHedging with weather futures means not only to eliminate operational risks but also to eliminate the chance of having a better result than hedged. To avoid this, one could lmake use of weather options (as traded at LIFFE). To minimize option premiums, options frequentlly contain caps or floors.

Long Call at a Strike of 2500 HDD2500 HDDShort Call at a Strike of 2500 HDDFloor at 2700 HDDWeather DerivativesOptions Call - OptionsTo buy a put at a strike of 2500 HDD leads to compensations when the average number of HDD is below 2500 HDD. To buy a call wouold mean, that the buyer can claim fo compensation-payments if the number of HDD is above 2.500 HDD.

Max. ChanceMax. RiskWeather Collar Short Call 2700 HDD and Long Put at 2300 HDD

Weather Collar (Short Call 2700 HDD and Long Put at 2300 HDD) A Zero Cost Weather Collar (Short Collar) can be designed to restrict the volatility of weather related profits wo to the boundaries of an upper and lower limit.

Management of Operational Risks: Non Performing Loans and Credit Risk Marktes

Topics Covered:NPLs in China and GermanyOrigin and Dynamics of NPLsCentralized Problem Solving ApproachesDecentralized Problem Solving ApproachesOutlook

Germany: At a Total Volume of 3,500 bn. Loans Outstanding approx. 300 bn. are Non Performing (estimated in 2004)

Referring to Fundamental Data (Profits) German Stock Markets Were Overvalued From 1997-2001

Diagramm2

11

1.37339055791.0140186916

2.01430615161.1355140187

2.38721983791.308411215

3.31807343821.2710280374

3.06771578451.3317757009

2.4606580831.3691588785

1.37911301861.4065420561

1.89079637581.4158878505

Index

Unternehmensgewinne

Tabelle2

trifft voll zutrifft eher zuindifferenttrifft eher nicht zutrifft nicht zuwei nicht

38.80%46.50%6.20%7.80%0.80%

Auslagerbar sind nur einfache standardisierte Kreditprozesse wie Privatkunden/Retail. Die Abwicklung komplexer Produkte wie strukturierte Finanzierungen fr Corporate / Industrials verbleiben.

Tabelle2

0

0

0

0

0

0

Tabelle3

VertriebRisikobernahmeAbwicklung

89.10%15.10%9.20%

Tabelle3

0

0

0

Tabelle4

triff voll zutrifft eher zuindifferenttrifft eher nicht zutriff nicht zuwei nicht

2.30%18%13.30%24.20%39.80%2.30%

Tabelle4

0

0

0

0

0

0

Liegen Informationen zu allen Prozesskosten vor ?

Tabelle5

199019921994199619982000200120022003

KSt.15.415.91015.118.523.6-0.42.98.3

Lohnsteuer92.6126.5136.3128.5132.1135.7132.6132.2133.1

Tabelle5

00

00

00

00

00

00

00

00

00

KSt.

Lohnsteuer

Steuereinnahmen in Mrd

Marktkapitalisierung Turnover

Dm

199619971998199920002001200220032004

Marktkapitalisierung1203681658573855452

Aktienumsatz961496140095920190742016341318806725611822277253

Aktienumsatz (Stcke)

199519961997199819992000200120022003

Dividendenzahlungen5859638191102118110100

Steuerzahlungen223030384042192024

199519961997199819992000200120022003

Index209728804224500669586433516028923965


Unternehmensgewinne214217243280272285293301303

199519961997199819992000200120022003

Index100.0%137.3%201.4%238.7%331.8%306.8%246.1%137.9%189.1%

Dividendenzahlungen100.0%105.4%117.9%148.2%162.5%180.4%205.4%187.5%185.7%

Unternehmensgewinne100.0%101.4%113.6%130.8%127.1%133.2%136.9%140.7%141.6%

Marktkapitalisierung Turnover

00

00

00

00

00

00

00

00

00

&A

Page &P

Index

Unternehmensgewinne

Dax und Akteure

00

00

00

00

00

00

00

00

00

&A

Page &P

Index

Dividendenzahlungen

Indexentwicklung und Dividendenzahlungen

NPL Struktur in Deutsch

19921994199619971998199920002001200220032004

Shareholders (Corporate Shares)15521498141414621658159916011459147413481330

Shareholders (Other Shares)24322436234024582857340646104235352636983244

Fondsowners (Only Shares)15912222319156496036488543804505

Total3984393437545511673781961186011730988594269079

Index15452097288042245006695864335160289239654250

198819921994199619971998199920002001200220032004

Shareholders (Corporate Shares)2.30%2.50%2.40%2.20%2.30%2.60%2.50%2.50%2.30%2.30%2.10%2.10%

Shareholders (Other Shares)4.50%3.90%3.90%3.80%3.90%4.50%5.30%7.20%6.60%5.50%5.70%5.00%

Fondsowners (Only Shares)2.50%3.50%5.00%8.80%9.40%7.60%6.80%7.00%

Total6.80%6.40%6.30%6.00%8.70%10.60%12.80%18.50%18.30%15.40%14.60%14.10%

Years19871988198919901991199219931994199519961997199819992000200120022003

(DAX)10001329179013981578154522552097226028804224500669586433516028923965

19921994199619971998199920002001200220032004

Belegschaftsaktionre15521498141414621658159916011459147413481330

Andere Aktionre24322436234024582857340646104235352636983244

Aktienfondsbesitzer15912222319156496036488543804505

Index15452097288042245006695864335160289239654250

NPL Struktur in Deutsch

0.0230.04519880.068

0.0250.03919920.064

0.0240.03919940.063

0.0220.03819960.06

0.0230.0390.0250.087

0.0260.0450.0350.106

0.0250.0530.050.128

0.0250.0720.0880.185

0.0230.0660.0940.183

0.0230.0550.0760.154

0.0210.0570.0680.146

0.0210.050.070.141

Shareholders (Corporate Shares)

Shareholders (Other Shares)

Fondsowners (Only Shares)

Total

Tabelle1

15522432199239841545

14982436199439342097

14142340199637542880

14622458159155114224

16582857222267375006

15993406319181966958

160146105649118606433

145942356036117305160

14743526488598852892

13483698438094263965

13303244450590794250

&A

Page &P

Shareholders (Corporate Shares)

Shareholders (Other Shares)

Fondsowners (Only Shares)

Total

Index

0000

0000

0000

0000

0000

0000

0000

0000

0000

0000

0000

&A

Page &P

Belegschaftsaktionre

Andere Aktionre

Aktienfondsbesitzer

Index

Aktienbesitzer in 1000

Index DAX

BestandNPL gesamtNPL (Spark./ LB)

Kreditbanken956.8

Landesbanken579.2

Sparkassen702.4

Sonstige Institute810.6

Genossen-schafts-banken423.5

Bausparkassen121.030060

Summe3593.5

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

CooperativeBanks12%423,5 Mrd.

Others23%810,6 Mrd.

Mutual Savings20%702,4 Mrd.

MortgageSavings3%121 Mrd.

Federal Banks16%579,2 Mrd.

Credit Banks26%956,8 Mrd.

000000

000000

000

Kreditbanken

Landesbanken

Bausparkassen

Sparkassen

Sonstige Institute

Genossen-schafts-banken

000000

000000

000000

Kreditbanken

Landesbanken

Sparkassen

Sonstige Institute


Bausparkassen

Struktur Kreditbestand und Non Performing Loans(Stand April 2004, Quelle: Deutsche Bundesbank)

stimme zuwei nichtstimme nicht zu

91.40%4.70%3.90%

0

0

0

Die Auslagerung von Kreditprozessen steht erst am Anfang

Although Investments (Plant, Machinery) Were Decreasing Loans to Enterprises Remained High

After the Bubble Bad Debt and Bad Debt Losses Increased

Solving the ProblemStock ProblemFlow Problem

China: In 2002 Total NPL Amounted to $ 770 bn. Which Corresponded to 61% of GDP or 37% of Total LoansTotal Outstanding LoansTotal Non Performing LoansApprox. 2,508 bn$ 168 bn$ 602 bn

Diagramm1

602

168

Total

$ 168 bn

$ 602 bn

Tabelle1

Total Loan

Total NPL

Total

Non Performing602

Transfers to AMCs168

Tabelle1

956.8

579.2

702.4

810.6

423.5

121

CooperativeBanks12%423,5 Mrd.

Others23%810,6 Mrd.

Mutual Savings20%702,4 Mrd.

MortgageSavings3%121 Mrd.

Federal Banks16%579,2 Mrd.

Credit Banks26%956,8 Mrd.

Tabelle2

956.8579.2BestandBestand300Bestand

NPL gesamtNPL gesamtNPL gesamtNPL gesamt60NPL gesamt

NPL (Spark./ LB)NPL (Spark./ LB)NPL (Spark./ LB)NPL (Spark./ LB)NPL (Spark./ LB)NPL (Spark./ LB)

Kreditbanken

Landesbanken

Bausparkassen

Sparkassen

Sonstige Institute


Tabelle3

956.8579.2702.4810.6423.5121

NPL gesamtNPL gesamtNPL gesamtNPL gesamtNPL gesamt300

NPL (Spark./ LB)NPL (Spark./ LB)NPL (Spark./ LB)NPL (Spark./ LB)NPL (Spark./ LB)60

Kreditbanken

Landesbanken

Sparkassen

Sonstige Institute


Bausparkassen


Total

1,885 bn

1,415 bn

839 bn

Total

$ 602 bn

$ 168 bn


Kreditbanken956.8

Landesbanken579.2

Sparkassen702.4


Genossenschaften423.5


Summe3593.5

Gesamtvolumen ausstehender Kredite in 2004:

3,5935 Mrd. Euro,davon ca. 300 Mrd. Euro NPL

956.8

579.2

702.4

810.6

423.5

121

956.8

579.2

702.4

810.6

423.5

121

956.8

579.2

702.4

810.6

423.5

121

Genossen-schaften12%423,5 Mrd.

Sonstige Institute23%810,6 Mrd.

Sparkassen20%702,4 Mrd.

Bausparkassen3%121 Mrd.

Landesbanken16%579,2 Mrd.

Kreditbanken26%956,8 Mrd.




Kreditbanken

Landesbanken

Bausparkassen

Sparkassen

Sonstige Institute

Genossenschaften

956.8579.2702.4810.6423.5121



Kreditbanken

Landesbanken

Sparkassen

Sonstige Institute

Genossenschaften

Bausparkassen


8, 5 %300Mrd.

Notleidende Kredite

Gesamtvolumen:3,59 Mrd. Euro

MBD00178FD8.xls

Diagramm1

956.8

579.2

702.4

810.6

423.5

121







Abbildung 1

Abbildung 2

Abbildung 3

Abbildung 4

Abbildung 5

Abbildung 6a

Abbildung 6b

Abbildung 7

Abbildung 8

Abbildung 9


Kreditbanken956.8

Landesbanken579.2

Sparkassen702.4


Genossenschaften423.5


Summe3593.5

Gesamtvolumen ausstehender Kredite in 2004:

3,5935 Mrd. Euro,davon ca. 300 Mrd. Euro NPL

Abbildung 9

956.8

579.2

702.4

810.6

423.5

121

Abbildung 10

956.8

579.2

702.4

810.6

423.5

121

Abbildung 11

956.8

579.2

702.4

810.6

423.5

121







Abbildung 12




Kreditbanken

Landesbanken

Bausparkassen

Sparkassen

Sonstige Institute

Genossenschaften

Abbildung 13

956.8579.2702.4810.6423.5121



Kreditbanken

Landesbanken

Sparkassen

Sonstige Institute

Genossenschaften

Bausparkassen


Abbildung 14

Abbildung 15

Abbildung 16

Abbildung 18


38.80%46.50%6.20%7.80%0.80%

Abbildung 18

0.388

0.465

0.062

0.078

0.008

wei nicht

Abbildung 19

Abbildung 20


2.30%18%13.30%24.20%39.80%2.30%

Abbildung 20

0.023

0.18

0.133

0.242

0.398

0.023


Abbildung 21

Dm

199619971998199920002001200220032004


Aktienumsatz961496140095920190742016341318806725611822277253


199519961997199819992000200120022003



199519961997199819992000200120022003

Index209728804224500669586433516028923965



199519961997199819992000200120022003

Index100.0%137.3%201.4%238.7%331.8%306.8%246.1%137.9%189.1%



11

1.37339055791.0535714286

2.01430615161.1785714286

2.38721983791.4821428571

3.31807343821.625

3.06771578451.8035714286

2.4606580832.0535714286

1.37911301861.875

1.89079637581.8571428571

&A

Page &P

Index

Dividendenzahlungen


Dm

199619971998199920002001200220032004


Aktienumsatz961496140095920190742016341318806725611822277253


199519961997199819992000200120022003



199519961997199819992000200120022003

Index209728804224500669586433516028923965



199519961997199819992000200120022003

Index100.0%137.3%201.4%238.7%331.8%306.8%246.1%137.9%189.1%



11

1.37339055791.0140186916

2.01430615161.1355140187

2.38721983791.308411215

3.31807343821.2710280374

3.06771578451.3317757009

2.4606580831.3691588785

1.37911301861.4065420561

1.89079637581.4158878505

&A

Page &P

Index

Unternehmensgewinne

11

1.37339055791.0535714286

2.01430615161.1785714286

2.38721983791.4821428571

3.31807343821.625

3.06771578451.8035714286

2.4606580832.0535714286

1.37911301861.875

1.89079637581.8571428571

&A

Page &P

Index

Dividendenzahlungen


MBD000B4BFE.xls

Diagramm13

0.023

0.18

0.133

0.242

0.398

0.023


Tabelle4


2.30%18%13.30%24.20%39.80%2.30%

Tabelle4

0

0

0

0

0

0


Tabelle3


89.10%15.10%9.20%

Tabelle3

0

0

0

Tabelle2


38.80%46.50%6.20%7.80%0.80%

Tabelle2

0

0

0

0

0

0

Tabelle1


91.40%4.70%3.90%

Tabelle1

0

0

0


MBD0017BB35.xls

MBD000A44CF.xls

Diagramm2

0.914

0.047

0.039


Tabelle4


2.30%18%13.30%24.20%39.80%2.30%

Tabelle4

0.023

0.18

0.133

0.242

0.398

0.023


Tabelle3


89.10%15.10%9.20%

Tabelle3

0.891

0.151

0.092

Tabelle2


38.80%46.50%6.20%7.80%0.80%

Tabelle2

0.388

0.465

0.062

0.078

0.008

wei nicht

Auslagerbar sind nur einfache standardisierte Kreditprozesse wie Privatkunden/Retail. Die Abwicklung komplexer Produkte wie strukturierte Finanzierungen fr Corporate / Industrials verbleiben.

Tabelle1


91.40%4.70%3.90%

Tabelle1

0

0

0


Origin and Characteristics of NPL

NPLStockFlowStock and Flow Problems Need Different ApproachesSolve the Flow Problem:Credit Ceilings Efficient Legal Framework Operational Restructuring Centralized Bad Bank Hard Budget Constraints

Market for Credit Derivatives Source: British Bankers Association (in Bio. US$)

Basics of Credit Derivatives Asset Swapspays fixed Swap-rate (Coupon Rate)Receives fixed ratereceives LIBOR + var. Premium (spread)The Investor protects his portfolio against credit quality degradations by a simple swap construction: using a interest swap the investor swaps fixed income from his portfolio into variable + premium payments from the risk buyer.

Credit Default Swap (C.D.S.)Premium: bps x Notional ValueCredit Event ?Yes: Compen-sationNo: No Com-pensation

Total Rate of Return Swap (Synthetic Sales or Short Sales of Loans)Reference Value (e.g. Bondes, Indices Asset baskets, Loans)LIBOR +/-Spread Fixed Interest Ratespositive Market price changesnegative Market price changes

Credit Linked Notes (CLN)Fixed Rate CLNRepayment of C.L.N. possibly minus compensation if Credit EventNotional Value of CLN

Credit Spread Put Construction of strike-spreads Example: 5-y. Corp.Bond: 5,95% 5-y. Swap-rate (fix against 6-M-EURIBOR): 5,50%Credit Spread: 0,45% = 45 base points At an agreed strike-spread of 45 bps, the short side will pay a compensation, if the spread increases.

Credit Spread Put Mechanism

What is A Credit Event ?The ideal case would be a reference value (e.g. a bond) that is highly correlated with the secured loan.

Credit Default Swap / Option Settlement Versions

Extension of Risk Management by Credit DerivativesMarket RisksRisk of Default Insolvency RiskSpread RiskCredit Default SwapCredit Spread PutTotal Rate of Return Swap

Alternative I: ABS Transactions (True Sale)

Market Securitisation of Credit Risks (Europe 2002 in Mrd. $)

Alternative II: Synthetic Sales by Collateralized Debt Obligations (C.D.S.)

FazitDie Problemkreditbearbeitung wird zuknftig deutlich strker von risikoprventiven und/oder risikokurativen Managementaufgaben geprgt sein.Im risikoprventiven Bereich erwarte ich einerseits eine intensive Auseinandersetzung mit portfolio-orientierten Risikostrategien, andererseits eine sprbare Zunahme des Transfers von Adressen-risikenIm risikokurativen Bereich erwarte ich eine strkere Akzentuierung eines fundamentalen (Kredit-)Sa-nierungsmanagements auch unter Einbeziehung bankexterner Funktionen

Management of Operational Risks: Capital Markets and Refinancing of Insurance Industry

Alternativer Risiko Transfer (A.R.T.)Katastrophen - DerivateKatastrophen Anleihen (Cat Bonds)Act of God - Bonds

A.lternativer R.isiko T.ransfer Grte versicherte Schden 1989 - 2001

Alternativer Risiko Transfer Versicherbarkeit von RisikenZuflligkeitMax. Schaden schtzbarAusr. Anzahl gleichartiger RisikenRisikenAusfall Olympische SpieleProdukthaftpflicht fr ArzneimittelAttentat mit nuklearen WaffenXXX??nein?neinnein

Klassischer vs. Alternativer Risiko TransferKlassischer versicherungstechnischer Risiko-transferAlternativer versicherungstechnischer Risiko-transfer

Produktentwicklung im Risikogeschft

A.R.T. - ProdukteFinanztiteloriginrderivativBondsPrincipalCouponOptionsFuturesUnderlyingVerknpfung mit versicherungstechnischem RisikoGCCI , PCS (Property Claims Services) - IndicesPrincipal und / oder Coupon at Risk

A.R.T. - Produkte Struktur eines CAT - Bonds mit S.P.V.Versicherungs- nehmerVersichererSpecial Purpose VehicleInvestorenKapitalmrkteRefinanzierung des SchadenausgleichsTilgung, ZinsenKapitalTilgung ZinsenWert-papierePrmienPrmienSchadens-ausgleich

A.R.T. - Produkte Ausstattungsmerkmale Cat-BondsPionierprodukt war der Cat-Bond (Hagelbond) der Winterthur Versicherung (WinCat). Der erste WinCat Bond enthielt folgende Formulierung:Die Zahlungen auf den Zinscoupon entfallen, wenn die Winterthur whrend der Beobachtungs-periode, die jeweils vom 1. November bis zum 31. Oktober des Folgejahres dauert, als Folge min-destens eines groen Hagel- oder Sturmereignisses fr mehr als 6,000 Motorfahrzeuge ihrer Motorfahrzeug-Kasko-versicherung Leistungen erbringt. Dabei werden Schden, die innerhalb eines Kalendertages auftre-ten, dem gleichen Schadensereignis zugeordnet.

A.R.T. - Produkte Beispiel Cat-Bonds1997 plazierte ein SPV (United Services Automobile Association und Residential Reiunsurance Limited) einen Cat-Bond ber 477 Mio USD in zwei Tranchen mit jeweils einjhriger Laufzeit: Die erste Tranche war nominalwert-geschtzt (Class A-1, LIBOR + 273 bps) und umfate 164 Mio USD, die zweite Tranche (Class A-2, LIBOR + 576 bps) ber 333 Mio USD unterlag Tilgungsrisiken. Die Zahlungsstrme der Tranchen waren auf Hurricane Katastrophenschden bedingt, soweit diese in ausgewhlten Regionen einen Gesamtbetrag von 1 Mrd. USD bersteigen. Erreichen die Hurricane - Schden ein Volumen von 1,5 Mrd. USD, verlieren die Class-A-2 Investoren ihr gesamtes Kapital.

A.R.T. - Produkte Optionsprodukte/ BeispielAn der Chicago Board of Trade werden seit 1992 indexbasierte Optionsprodukte, Puts und Calls, gehandelt. Der zugrunde-liegende Index ist der PCS - Property Claims Services - Schadensindex. Jeder Indexpunkt reprsentiert einen Marktschaden von 10 Mio USD. Beispiel: Ein Erstversicherer mchte sein Sturmrisiko / Florida reduzieren. Er nutzt hierzu den an der CBOT gehandelten Florida PCS - Call Spread 100 / 150, d.h. er kauft Call Optionen auf einen PCS - Indexstand 100 und verkauft gleichzeitig Call Optionen auf einen PCS - Indexstand von 150.

A.R.T. - Produkte Wirkung eines 100/150 Call Spreads auf den PCS-Index

Diagramm2

-105-5

-105-5

-105-5

055

10515

20525

30535

40-535

50-1535

60-2535

70-3535

80-4535

Gehedgtes Risiko

Long Call 100

Short Call 150

Total

Tabelle1

8090100110120130140150160170180190

Long Call 100-10-10-1001020304050607080

Short Call 1505555555-5-15-25-35-45

Total-5-5-551525353535353535

Tabelle1

Gehedgtes Risiko

Long Call 100

Short Call 150

Total

Tabelle2

Tabelle3

A.R.T. - Produkte Optionsprodukte/ BeispielSzenario A:Liegt der PCS -Index aufgrund der in Florida aggregierten Marktschden bei weniger als 1 Mrd. USD, verfallen beide Optionen. Per saldo sind Prmien von 5 Mio USD verloren. Szenario B:Marktschden bersteigen 1 Mrd. USD, bleiben jedoch niedriger als 1,4 Mrd. USD: Die Long Call Position bei einem Strike-Index von 100 gert ins Geld, die Short-Position verfllt wertlos. Schadensausgleich wird im Idealfall kompensiert durch A.R.T. Gewinne. Szenario C: Die Marktschden liegen bei mehr als 1,4 Mrd. USD. Der Wertzuwachs der Long-Position wird kompensiert durch Verluste aus der 140er Short-Position.

Alternativer Risiko TransferA.R.T. - Refinanzierung der Versicherer / Rckversicherer ber die Kapitalmrkte erffnet Chancen zur Kapazittser-weiterung und Versicherung bislang unversicherbarer Risiken.A.R.T. bietet Instrumente, die aufgrund ihrer Kovarianzpro-file gut in viele Anlageportfolios passen wrden.A.R.T. bieten sich an zur kapitalschonenden Risikodiver-sifkation der Versicherer bzw. zur Ergnzung von klassischen Investor - Portfolios aus traditionellen Finanzmarktprodukten.A.R.T. Produkte sind schwierig zu bewerten. Es exisitiert kein allgemein anerkanntes Preisbildungsmodell, Investoren verhalten sich deshalb abwartend. A.R.T. Markt ist klein und entwickelt sich zgerlich.

Financial Markets Imbalances areAccompanied By Increasing Size and Activity of Alternative Investments

Alternative Investment StrategiesAnd Financial Market Stability

Southwestern University of Finance and EconomicsChengduSeptember 2006

The only hope to produce a superior record is to do something different. If you buy the same securities as other people, you will have the same results as other people John Templeton Prof. Dr. Rainer StachuletzBerlin School of Economics

Berlin School of Economics

ContentsBusiness models of hedge fund investors and their current role in financial marketsTypical designs, mechanisms and conditions of hedge funds investment strategiesDo alternative investments jeopardize the stability of financial marketsSummary / Conclusions / What to do ?

The Universe of Alternative Investments

General Characteristics of Alternative Investment Strategies

Hedge Funds Business ModelMostly unregulated, offshore residing eclectic investment pools with aggressively managed short term portfolios. Hedge Funds employ investment techniques like short selling, leverage, and are allowed to create a variety of synthetic positions by unlimited usage of derivatives.Often hedge funds are set up as private partnerships, open to a limited number of investors and require a very large initial minimum investment. Typically hedge Funds are illiquid as they often require investors keep their money in the fund for a minimum number of years.Hedge funds managers typically charge a management fee (1-2% of asset value) and a performance fee of about 20% of the capital gains and capital appreciation.

Development of Hedge Funds Number and Portfolio (in Bio US$)

Risk and ReturnHedge Funds Investment Strategies

Relative Value Strategy Long / Short Equity Hedge

Directional Strategies Non Hedge Long-/ShortDirectional Strategies represent unhedged, directional speculations on growing (long) or declining (short selling) markets. By additional usage of debt (leverage) respectively completing short or long-positions synthetically, the total risk and return positions can be amplified.

Event Driven Strategies (Merger Arbitrage)

Event Driven Strategies LongShortEquity and Merger Arbitrage

Event Driven Strategies (Merger Arbitrage)

Three Popular Arguments on Hedge Fund Investments and Financial Market Stability ?Hedge Funds operate high leveraged portfolios of mostly risky assets. As a result, market processes tend to be more volatile and more uncertain. Thus syestemic market risk will increase !Hedge Fund investments tend because of their sheer size to manipulate asset prices. This will directly compromise the pricing mechanism and thus lead to inefficient factor allocations !As Hedge Funds often do not have to follow any regu-lations that are used to be applied to onshore finan-cial institutions (transparancy of investment styles, accounting, disclosure and auditing, taxes etc.) investors are not sufficiently protected.

1. Do Hedge Funds Increase Market Volatility ?

1. Are Hedge Fund Strategies Risky Investments ?

1. Do Hedge Funds Increase Systematic Risk ?(Theoretical Portfolios of Traditional Assets (MSCI 50%, JP Morgan Global 50%) and the CSFB-Hedge Fund Index based on monthly figures between 1994-2004)

2. Hedge Funds and Market ManipulationHedge Funds do not rely on momentum investments and often take contrary positions. Thus, their engagement will support the pricing mechanism while providing liquidity and keeping the market process running. By this, Hedge Funds help substantially to rebalance the markets and smooth volatility. Hedge Funds, that operate in smaller markets generally have the potential of market manipulation. In the case of arbitrage trading or related relative value strategies, hedge funds activities target directly to change market prices. A manipulation of prices back to the equilibrium is desired. This may be seen different concerning other investment strategies.

2. Hedge Funds and Market Manipulation In fact, only 20% of the total investment is arbitrage tra-ding. The rest is more or less directional. The major part of directional investments is represented by directional equity-investments (long-/short-only).

Diagramm1

0.0880.1150.674

0.2070.2010.55

0.1950.1850.479

ARBITRAGE

EVENT DRIVEN

DIRECTIONAL

Tabelle1

199420022004

Managed Futures5.60%ARBITRAGE8.80%20.70%19.50%

Equity Market Neutral4.50%EVENT DRIVEN11.50%20.10%18.50%

Fixed Income Arbitrage7.90%DIRECTIONAL67.40%55.00%47.90%

Convertible Arbitrage4.90%

Global Macro Investments9.43%

Event Driven Arbitrage21.30%87.70%95.80%85.90%

Long/Short Equity26.30%

Emerging Markets3.70%

Others13.10%

Tabelle1

Tabelle2

1994

2002

2004

Tabelle3

ARBITRAGE

EVENT DRIVEN

DIRECTIONAL

0.173

0.1187

0.4953

0.213

The Hedge Funds market is dominated by well experienced, well informed and educated powerful investors (average entry investment at 630 T$ !) like banks, pension funds, endowments and wealthy individuals (HNI). As they are strong enough to take care of their specific information needs, no regulation is required. 3. Need Investors to be Protected ?

Diagramm2

0.27

0.53

0.14

0.06

Diagramm1

0.27

0.53

0.14

0.06

Tabelle1

Banks, Insurances27%

High Networth Individuals53%

Pension Funds14%

Endowments6%

Tabelle1

0

0

0

0

Tabelle2

Tabelle3

Investor protection seems to be a week argument, if it is focused on the typical hedge fund investor as shown above. As hedge funds have started to copy the profitable investment model of private equity funds in a short term version, there are not the hedge fund investors that need to be protected, but those long term investors, who are affected by short term hedge fund investment activities.Therefore, to focus investor protection on the hedge fund investor is misleading. Investors should be protected against hedge fund investors. 3. Need Investors to be Protected ?

Summary and ConclusionsCurrently Hedge Funds control an investment volume of about 1.2 Trillion USD, which means a proportion of 12% of the total global fund investments.Although they are powerful, Hedge Funds are widely un-regulated, e.g. they do not report their acitivities like other financial institutions, mostly they dont have to fol-low minimum capital requirements, minimum disclosure standards or minimum audit standards. In a strong sense they do not contribute to rational decision making. Due to their characteristics non regulated offshore residents, excessive leverage, short sales and unlimited incorporation of derivatives (synthetic assets) their investment styles and their sheer size, hedge funds affect or have the potential to affect market processes.

Summary and ConclusionsThe total business model including investors who provide equity, hedge fund corporations that select investments and investment styles and investment banks which provide the loan is highly concentrated and interlinked. That high integrated and concen-trated business modell increases the probability of extensively widespread cascading effects in case of a failure (see the LTCM Case in 1998).As Hedge Funds have started to copy typically Private-Equity-Engagements even those parts of the real economy that have not been direktly linked to capital markets, have become the target of short term financial investments and will be exposed to intensified leverage risks.

Does The Market Need Hedge Fonds ?Hedge Funds are in general non transparent, offshore located and tax avoiding investment strategies beyond any national jurisdiction. With the today known market strategies that includes desireable arbitrage trading only to a proportion of approxi-mately 20% and the observable move to directional strategies concerning long equity positions Hedge Funds need to be regulated to support long term oriented micro- and macro-policy approaches.Hedge Funds have not only the potential but also strong incentives to manipulate market processes e.g. to generate price movements that enhance the profitability of their underlying positions.

Private Equity Investments and Regulatory (Tax) ArbitragePrivate Equity means to invest in non-listed, frequently undervalued corporations and any other (undervalued) assets. Mostly returns result simply from tax arbitrage.

Documents

Table 1. Bank Deposits in percent of total bank liabilities