1 International Seminar Guarantee systems in European Union countries – searching for the best model The German Guarantee Banks Warsaw, 9th February 2011.

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International SeminarGuarantee systems in European Union

countries – searching for the best model

The German Guarantee BanksWarsaw, 9th February 2011

Dr. Olaf Achtelik, Division Manager Legal & Regulatory Affairs

Association of German Guarantee Banks (VDB)

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Agenda

The Association of German Guarantee Banks

The German Guarantee System

The German Guarantee Banks

Guarantees granted by Guarantee Banks

State/ souvereign Counter Guarantees put to Guarantee Banks

Statistics

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The Association of German Guarantee Banks

The Association of German Guarantee Banks

is the voluntary union (lobby) of the legally and economically independent German Guarantee Banks and is based in Berlin;

represents the joint business and general interests of its members in all matters relating to banking policy and banking law, promotes cooperation between member banks and supports them in the fulfillment of their missions;

represents and promotes the interests of its members through communication with lawmakers on the national and state level, national and international regulatory authorities, the media and the public;

briefs political decision maker and the public amongst other of the macroeconomic benefits of Guarantee Banks;

is member of the European Association of Mutual Guarantee Banks (AECM);

itself carries out no active guarantee business. 3

Agenda

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The Association of German Guarantee Banks

The German Guarantee System

The German Guarantee Banks

Guarantees granted by Guarantee Banks

State/ souvereign Counter Guarantees put to Guarantee Banks

Statistics

The public guarantee system in Germany (I)

The public guarantee system in Germany can be sub-divided into three resp. four segments:

Guarantees granted by Guarantee Banks

Compentence: Guarantee Banks in each German Federal State (Bundesland).

Amount of Guarantee: 1 Mio. Euro at most (until end of 2010 2 Mio. Euro at most due to the financial and economic crisis).

Due to market failure of the remaining banking sector, Guarantee Banks are nearly in a position of a unique selling point in this segment.

KfW, as the leading and nationwide acting German public development bank, offers indemnity products for house banks in this segment.

Guarantees granted by Federal States

Competence: German Federal State (acting by Ministry of Finance or Economics or public development banks in each Federal State).

Amount of Guarantee: 10 Mio. Euro at most (new resp. eastern German Federal States) and 50 Mio. Euro at most (old resp. western German Federal States).

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The public guarantee system in Germany (II)

Guarantees granted by the Federal Republic of Germany

Competence: Common Guarantee Committee of the German Federal Government and the German Federal States.

Amount of Guarantee: More than 10 Mio. Euro (new German Federal States).

Amount of Guarantee: More than 50 Mio. Euro (old German Federal States).

Amount of Guarantee more than 300 Mio. Euro => special steering committe on German Federal Government level.

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Agenda

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The Association of German Guarantee Banks

The German Guarantee System

The German Guarantee Banks

Guarantees granted by Guarantee Banks

State/ souvereign Counter Guarantees put to Guarantee Banks

Statistics

The German Guarantee Banks (I)

Private self-help institutions

The German Guarantee Banks are private self-help institutions (private limited companies) in form of credit institutions according to the German Banking Act.

They are founded in the western part of Germany in the beginning of the 1950s and in the Eastern part – after the falling of the wall between Western and Eastern Europe – in the 1990s.

In principle there is one Guarantee Bank in each of the sixteen German Federal States promoting small and medium-szied enterprises (SMEs) and free professionals in their Federal States or SMEs least investing in the Federal State they are based.

Founders resp. shareholders of the Guarantee Banks

Chambers of Crafts, of Industry , of Commerce, of free professions.

Trade associations Credit institutions (principal resp. house banks), Insurance

companies 8

The German Guarantee Banks (II)

Generel object

Assuming default / deficiency guarantees to SMEs to shore up the disadvantage SMEs face on the capital market.

The guarantees make available credits to healthy companies and freelance professionals which do not have sufficient – if any – collateral for borrowing.

In addition to granting guarantees to SMEs Guarantee Banks make possible equity financing by taking on the main part of default risk of participations by private equity investment companies in SMEs by providing guarantees.

State / Souvereign Counter Guarantees

Collateralisation of Guarantee Banks is based mainly on counter guarantees from the German Federal Government and the German Federal States.

Defaults in the context of granting guarantees most only be borne partly by the Guarantee Banks themselves.

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Diversification of risksWestern Federal States(In brackets – where differing – Eastern Federal States)

100%

Investment or working capital credit by principal

bank

Risk sharing Principal Bank/Guarantee

Guarantee Bank/

State Counter Guarantor

80% Guarantee Bank

35% (20 %)Guarantee Bank

39% (48 %) Federal Government

26% (32 %)

Federal State

20%

28%(16 %)

31,2%(38,4 %)

20,8%(25,6 %)

20% Principal Bank

Risk sharing

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The German Guarantee Banks (III)

Guarantee Banks and State Aid Law

According to the Law of the European Union, state aid to companies given by a member state are generally forbidden. Reason: State aid could result in undesired distortions of competition in favour of/at the expense of single companies.

The European Commission can allow exceptions from the general ban of state aid (e.g. in single cases, in general circumstances, up to certain amounts).

Guarantee Banks obtain quotal state / soevereign counter guarantees by the German Federal Government and the German Federal States. State counter guarantees imply a state aid element in relation to the final beneficiary of the guarantee (there is e.g. no fee to be paid for the counter gurarantee – neither by the Guarantee Bank nor by the final beneficiary).

Guarantee Banks therefore can carry on their business just in the legal framework of the European State Aid Law (leading to caps of guarantee quota, exclusion of certain commercial sectors, report obligations to the European Commission etc.).

A methode to calculate the state aid amount of guarantees granted by Guarantee Banks had been approved by the European Commission in September 2009.

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The German Guarantee Banks (IV)

Approval of a method to calculate the aid element of state counter guarantees to guarantee banks by the European Commission

Applicable inter alia for the calculation according to General Block Examtion Regulation and De-minimis Regulation as the most impoertant legal basis.

Basis of of the calculation is the reimbursement plan of the underlying credit . Based on this reimbursement plan the amount of the market premium that should be paid for the counter guaranteed amount can be established for each year and compared with the premium actually paid (counter guarantee is granted free of charge -> this calculation element is „nil“). The yearly differences are then discounted to the moment of the granting of the counter guarantee and summed up to obtain the aid element.

The (hypotetical) amount of the market premium is the addition of the administrative costs, the remunertion of capital for the year and the expected loss.

For more tecnical details of the calculation compare the approval document: http://ec.europa.eu/competition/state_aid/register/ii/doc/N-365-2009-WLWL-en-15.09.2009.pdf

The Association of German Guarantee Banks had established an online state aid calculator needing as manual input just the approval data of the guarantee, the Federal State, the credit period , the counter guarantee quota, the credit-reimbursement plan and the rating of the final beneficiary according to the Associations Rating System to calculate the state aid element of the counter guarantee.

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The German Guarantee Banks (V)

Decision making structures

Management board of the Guarantee Bank Obligation under company law Consisting of two or three members Is responsible für all business of the Guarantee Bank

Supervisory board of the Guarantee Bank For private liability companies no obligation under company

law but for credit institutions an obligation under banking supervisory law

The supervisory board is responsible to control the activities of the management board.

Guarantee/Approval Committe Body according to the articles of the Guarantee Bank Members are the management board, shareholders of the

Guarantee Bank and representatives of the state / soevereign counter guarantors

The Committe makes the final decision regarding the approval of each guarantee

The state / souvereign counter guarantors have the power of veto. 13

Agenda

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The Association of German Guarantee Banks

The German Guarantee System

The German Guarantee Banks

Guarantees granted by Guarantee Banks

State/ souvereign Counter Guarantees put to Guarantee Banks

Statistics

What are the financial needs of SMEs?

Business-orientated start-up and corporate financing.

Adequate medium and long term financing of investments.

Funding framework for financing of working capital.

Pre-financing of orders.

Adequate credit lines.

Problem: The house bank demands collaterals for the financial or credit support. In many cases SMEs have no or insufficient collateral for borrowing.

Solution: Guarantees of Guarantee Banks.

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These guarantees could replace insufficient collaterals but not the credit rating or the profit

ratio of the final beneficiary!

Eligible development measures

Guarantees regarding the financing by principle banks:

Business start-up

Investment and/or working capital, cost for tapping a new market etc.

Corporate succession

Purchasing price of shares, company value.

Existing SMEs

Corporate extension, relocation, development costs, cost for tapping new

markets, modernisation, working capital.

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Uneligible development measures

Conversion of debtsDischarge of existing credits / loans given by the principal bannk, discharge of overdue tax

Financing of losses

Financial restructuring

Auccouting insolvency

Sectoral and other exclusions based on European State Aid Law Sectorale exclusions (e.g. undertakings active in fishery,

aquaculture, primary production, processing and marketing of certain agricultural products, coal sector, road transport vehicles)

Other exclusions (most important one: undertakings in difficulties, compare Art. 1 (7) of the General Block Exemption Regulation ).

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Mandate of development

The Guarantee Banks guarantee

for conomically appropriate and promising investments projects;

by granting guarantees up to an amount of 1 Mil. EUR at most (during the current financial and economic crises 2 Mil. EUR at most) and up to a guarantee quota of 80 % of the credit at most;

in general independent of other collateral (in case other collaterals exist, they have to be provided);

in general the personal liability (e.g. guarantee) of the natural person „behind“ the SME, the initiator of the undertaking, is necessary.

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Advantages of the guarantee for the parties

Advantage in favour of the principal bank

Gets a sustainable and valuable collateral .

Has lower capital adequacy requirements because of the collateral.

Advantage in favour of the SME resp. final beneficiary

Gets a business-orientated financing.

Has scope for further growth.

Advantages for both parties

External expert knowledge through assessment of the undertaking by

commercial and trade chambers.

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Application of a guarantee

SME

Chambers, AssociationsInvlovement in assessment

Guarantee BankAssessment, Customer

meeting

Guarantee Bank Approval by Credit Committtee

Application filed by house

bankAntragsstellung

Alternative: Guarantee „without a bank“

Deed of GuaranteeSend to house Bank

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Required data

Dependending on the complexitiy of the undertaking the Guarantee Bank

needs for a guarantee decision et al. the following data and information:

Annual accounts of the last three years and additional data of the ongoing business year

Description of the undertaking

Liquidity planning of the SME

Expected profitability (best-/worst case)

Indication of capital needs

Overview of existing interest payments of the SME

Financial circumstances of the SME (including personal financial situation of the management)

Positive assessment of the responsible chamber, association etc.

Significant business contracts of the SME

Adequate own funds of the SME

CV and financial disclosure of the initiators resp. the management

Proffesionalo and commercial qualifikation of the initiators

Adequate calculation of the borrowing requirement (borrowing amount).

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Common rating system of the German Guarantee Banks (I)

The German Guarantee Banks had developed their own rating system to

analyse

the required data / information for a final decision regarding the granting

of a

guarantee.

The rating consists of

qualitative,

quantitative and

macro-economic elememts

and results in a total score for each final beneficiary and the total score

corresponds to a probability of default on the basis of histrorical data.22

Common rating system of the German Guarantee Banks (II)

Qualitative modul

Based on expertise of evaluators and amounts to a future oriented estimation of

the default risk. Involves the assessment of factors relating to the market, the

management and the enterprise in question.

Quantitative modul

Based on a balance sheet scoring system and has been developed on the basis of

financial statements of over 25.000 German companies forming a representative

sample of clients of German Guarantee Banks.

Macro-economic modul

Covering specific information on the risk profile of the sector and the legal form

of the respective enterprise and more general information of the business climate

index. 23

Fees and charges

One-off processing fee:

1,0 % - 1,5 % of the guarantee or credit amount

Guarantee commission:

1,0 % - 1,5 % p.a. of remaing guarantee or loan amount on January, 1st

Fees have to be paid by the SME, bank is free of charge

State / souvereign counter guarantees for free

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Agenda

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The Association of German Guarantee Banks

The German Guarantee System

The German Guarantee Banks

Guarantees granted by Guarantee Banks

State/ souvereign Counter Guarantees put to Guarantee Banks

Statistics

Relation to public authorities (I)

Structur of the state / souvereign counter guarantee

First levelFederal Republic and Federal Statss provide in their budget acts items for the counter guarantees granted to Guarantee Banks (first level: sovereign acting)

Second levelGranting of counter guarantees takes place on a second, civil law, level. Federal Republic and Federal States execute deeds of guarantees and forward them to the Guarantee Banks.

The maturity of the state / souvereign (portfolio) counter guarantee amounts in general to five years and covers all gurarantees granted by the guarantee bank within the maturity.

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Relation to public authorities (II)

Main tenor of the deeds of the guarantee:

Admissible final beneficiaries (e.g. SMEs, free professionals) Maximum amount of the total counter guarantee sum (portfolio guarantee) Requirements for the inclusion of guarantees under the counter guarantee

(e.g. credit has to be granted by a credit institution, definition of credit, maximum quota of the guarantee granted by the Guarantee Bank in relation to the credit amount, power of veto, criterion for exclusion of applicants, ban of cession of the guaranteed credit exposure)

Obligations of the Guarantee Bank (e.g. maximum amount of guarantees, maximum maturity of the guarantee, quota of guarantees for working capital in relation to total guarantee volume, covering of incidental claims like interests, forwarding obligations of the guarantee bank to the principal bank, e.g. reports regarding declinig of credit rating of final beneficiary, right of inspections of counter guarantors )

Definition of loss (e.g. beneficiary is definitely not able to repay the loan as result of insolvency or unsuccessful enforcement or a period of 12 month after loss is expired) and modalities of allocations of cash benefits, proceeds of enforcement.

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Guarantee/Approval Committee

Members of the Guarantee/Approval Committee are the management board, shareholders of the Guarantee Bank and representatives of the state counter guarantors. The Committe is responsible for the final decision regarding the approval of guarantees.

Partially Guarantee banks distinguish between a large committee and a small committee. Members of the small committe are just one member of the management board, one member of the shareholders and the state counter guarantors. The smaller committee just has limited responsibilities (e.g. maximum amount of 25 % of the highest guarantee quota).

Because of the high counter guarantee quota and the application of public money in case of a loss of the underlying credit representatives of the state counter guarantors have the power of veto in the Guarantee / Approval Committee.

Guarantee/Approval Committee meets generally biweekly.

Members of the Committee receive decision memos one week before the meeting, so they are able to prepare it sufficiently. 28

Agenda

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The Association of German Guarantee Banks

The German Guarantee System

The German Guarantee Banks

Guarantees granted by Guarantee Banks

State/ souvereign Counter Guarantees put to Guarantee Banks

Statistics

Business volume of German Guarantee Banks in 2010

In 2010 the German Guarantee Banks have granted guarantees for credits and equities in the amount of 1,8 milliard Euro. This amount corresponds to an investment volume of 5,0 milliarde Euro.

Approximately 8.000 guarantees had been granted by the German Guarantee Banks in 2010.

More than 90.000 jobs had been maintained or created in 2010 as a result of the guarantees.

3.000 business start-ups had been promoted in 2010 (33 % of the total guarantee business). Total Guarantee Assets of the Guarantee Banks at the end of 2010 (number):45.500

Total Guarantee assets of the Guarantee Banks at the end of 2010 (absolut value): 5,6 Mrd. Euro

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Macroeeconomic benefit of German Guarantee Banks

In 2006 and 2010 two studies of the Institute for Small- and Medium-Sized Enterprises at the University of Trier/Germany had been carried out and demonstrated the significant value of the Guarantee Banking System. Compared to a scenario where Guarantee Banks did not exist,…

… the gross domestic product increases by an average of 3,4 Mrd. Euro p.a.

… the number of employed grows by an average of 29.500 p.a.

… the number of unemployed falls by an average of 23.200 p.a.

… social insurance contributions by the corporate sector are in average of 100 Mio. lower in the longer term.

… tax an goods increases by an average of 500 Mio. EUR and income and wealth tax by an average of 500 Mio. EUR.

You can download the studies on the website of the Association of Guarantee Banks under

www.vdb-info.de

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Thank you for your attention!

Dr. Olaf Achtelik, LawyerDivision Manager

Legal & Regulatory Affairs

Association of German Guarantee Banks (VDB)

Schillstrasse 10, 10785 BerlinTel.: +49 (0) 30 263 96 54 16Fax: +49 (0) 30 263 96 54 20E-Mail: [email protected]

www.vdb-info.de

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