Germany

Country Name Germany
Country Region Western Europe

Economic and Political Environment

The Banking Environment

The central bank of Germany is the Bundesbank, operating at the federal level and as the German arm of the European System of Central Banks (the “ESCB”).  The European Central Bank (the “ECB”) is also based in Frankfurt.

The Bundesbank carries out its mandate within Germany in part through its domestic branches in each federal state, the State Central Bank (the “Landeszentralbanken” or “LZBs”).

German banking is characterized by the existence of a large sector of public and cooperative banks. The share of total bank assets of public banks is around 50%, while the cooperative banks reach a share of 13%. The advantage the public banks gain from state guarantees has drawn criticism from the EU-commission, which argues that these guarantees, by lowering the respective banks' refinancing costs, are an unfair subsidy. This is particularly visible in medium-term business: loan notes (“Schuldscheine”) issued by such banks have lower yields because they are eligible for use in two ways that the notes of commercial banks are not:

• As collateral against credit facilities at the Bundesbank known as the “Lombard” facility; the notes are thus referred to as “Lombardfaehig” or “Lombard-eligible”
• For investment by trust funds which can include certain obligatory reserves of pension funds and insurance companies that can only be held in investments that are referred to as “muendelsicher”

The private banks, against this background, have only a limited share of the banking market (37% of total assets). The biggest private banks are Deutsche Bank and HypoVereinsbank. The third biggest, Dresdner Bank, has only recently been acquired by Allianz, the country’s largest insurance company. This acquisition was a milestone in the current trend of attempting to create successful "bancassurance" businesses. HypoVereinsbank is in a strategic partnership with MunichRe, the world’s largest reinsurance company. Germany still is overbanked in terms of branches per customer (0.6 bank branches per customer; US: 0.3), thus further consolidation is to be expected.

It is possible to establish resident and non-resident accounts in EUR or foreign currency without regulatory restrictions.

However, yields on credit balances can be lower than in other centres for two reasons:

• The impact of Minimum Reserves (which banks throughout euroland have to hold at their central bank as a percentage of customer sight deposits) is fully factored in
• Banks have to make a contribution to the national deposit insurance scheme (“Einlagesicherungsfonds”)

In both cases the charge on the bank equates exactly to an effective loss of interest to the bank on customers’ funds, and this is directly deducted from what can be paid to customers.

On the other side of the coin, overdraft is not as accepted a form of finance as in other centres. It is common to base the interest rate on the Lombard rate. Bearing in mind that the Lombard facility that banks have at the Bundesbank is looked upon as an emergency facility for end-of-day usage, the Lombard base rate is high compared to interbank rates that might prevail in the middle of the same business day.

Medium-term bank financing usually has a maturity of over 4 years, especially if it is not in EUR. Banks that make loans of foreign currency below 4 years and 1 day, or which borrow EUR from outside Germany for that time, have to place a portion of the loan interest-free at the Bundesbank – another form of Minimum Reserves.

This interest loss would be added back into the margin paid by the customer.

Lifting fees are still common on cross-border payments.  They can be up to 0.15%, with a minimum by no ceiling.  Payments within scope of the EU Regulation are charged at domestic prices.  The first bank in the country handling the payment is entitled to take the fee, but that bank should make the payment as “Fees Taken” in order to be sure that further banks in the chain do not try to take them as well.

The payments on which the fee may be claimed can be wide, depending on the bank:

• payments by a resident to their own account outside Germany;
• payments in foreign currency, even between residents and within Germany;
• payments in EUR between a resident and a non-resident, both accounts in Germany or even in the same bank;
• any payments to or from non-resident amounts held in Germany;
• the fee is taken where either the debit side or the credit side is at a German bank and another German bank did not already take the fee and make the payment “Fees Taken”.

As a result, the combination of lower yields, lifting fees and central bank reporting (see below) make it likely that non-residents will limit their accounts to EUR only, and hold non-EUR accounts elsewhere.

Cash Management Features

Strong domestic standards and low-cost communications enable a high degree of automation of basic processes.  The publicly-available electronic banking product, “Multicash”, facilitates domestic multibanking and domestic transaction costs are low.

The main items to note are:

• High usage of cash for retail transactions, meaning a need to access a branch network to deposit cash if the customer has retail sales.
• Major flows of non-cash retail payments are cleared bilaterally between the major commercial banks, and with the postal, savings and co-operative sectors.  There are value-dating disadvantages if one’s accounts are not with a bank that is directly participating in the Bilateral Clearing.
• Liquidity management is done either by zero-balancing accounts in the same bank, or using the respective module of Multicash to concentrate positions held in multiple banks (most proprietary electronic banking products have the same functionality as Multicash).
• Lifting fees on cross-border payments remain high, unless the payment falls within the scope of the EU Regulation, so it is important to negotiate these fees or make use of a banking arrangement where these are capped or do not occur.
• German laws on identifying account users are strict. Electronic transactions must be visible as having been ordered by a “natural person”; this can be challenging if a Germany-based account is being operated from offshore.

Federal-level corporation tax is 26.5%, and there are also trade taxes (“Gewerbesteuer”) on capital and income, levied according to the municipality where activity is carried out and varying from 12-20%.

There is a federal-level 5.5% surcharge on corporation tax as a social contribution to the costs of German reunification, making corporation tax 28%.

In principle, dividends are subject to 20% withholding tax and interest paid to resident individuals 30% (whereas interest to non-residents attracts 0%).  EU-based non-residents can usually get an exemption to the 20% withholding tax on dividends, or they can be reduced/eliminated on the basis of tax treaties.

The standard VAT rate is 16%; certain essentials are subject to a reduced rate of 7%.

Interest on loans taken by a subsidiary from a foreign parent is deductible only when the debt: equity ratio is below 5:1.

Transfer pricing must be on an arm’s-length basis between affiliated companies.

Payroll taxes for unemployment, health and retirement insurance total around 21% of basic pay for both the employer and the employee.

All transactions between residents and non-residents and transactions across accounts held by residents outside Germany, must be reported to the Bundesbank monthly, as long as the transaction amount is over EUR12,500.

Banks provide customers with electronic or paper forms, and submit the reporting – but accuracy and compliance are the resident’s responsibility.

None

Cash still accounts for 70% of all retail transactions.  By law, cash paid into a bank must be made available to the account holder on the same day.  This precludes many banks from being able to offer cash deposit facilities at all.

The credit transfer is the dominant non-cash instrument:  all paper orders are converted to his medium, except Express Payments destined for the RTGS PLUS system that are handed over the counters at LZBs.

Only Eurocheques have ever been substantial, and these are defunct as the guarantee scheme expired in 2001.

Collections

Cheques in amounts less than EUR3,000 are truncated and cleared as Direct Debits:  electronic banking systems enable clients to create the debit orders, or else the bank does them.  Clearing is then via the “Voucher-less cheque clearing process” – “Belegloser Scheckeinzugsverfahren”.

Cheques over EUR3,000 (and irregular cheques below that) have to be both truncated and cleared electronically, but also physically sent to the maker’s bank.  This is called the “Large amount cheque clearing process”, or “Grossbetrag – Scheckeinzugsverfahren”.

Disbursements

Cheque issuance by corporations is very low, although corporations may use cheques to limit their liability to cross-border payment fees; any banking fees have to be taken from the proceeds paid to the beneficiary because, by law, the maker’s account can be debited with no more than the face value of the cheque.

Germany has one system  - RTGS PLUS – that combines local RTGS settlement, access to TARGET, and local Net Settlement.  A major portion of domestic traffic is cleared bilaterally, but there is then the RPS clearing system for the same payment types.

This system replaced the separate EilZV (the RTGS) and EAF2 (a net settlement system), but it is a hybrid that contains two settlement modalities.

Firstly, payments sent to it have to be marked either “Express Payment” or “Liquidity-saving payment”.  The former are cleared immediately if the sending bank has cover.  The latter are cleared as soon as the clearing system identifies a series of payments that can be cleared using a minimum of cover.  TARGET payments have to be “Express Payments”.  The system has around 80 direct and 5,000 indirect participants.

The “retail” payment types are credit transfers, direct debits and truncated cheques.  Larger volumes of these are exchanged bilaterally between the major commercial banks – with settlement on accounts at LZBs – or else are exchanged between the major commercial banks and one of the three “retail banking” constellations.

These constellations are:

• Savings bank sector (“Sparkassen”) operating through their “Landesbank” at the federal state level.  The “Landesbank” operates as the “Girozentrale” (giro centre) for the savings banks in the same federal state e.g. Westdeutsche Landesbank Girozentrale has this role for the savings banks in Nordrhein-Westfalen
• Postal bank sector (“Postbank”) where the Girozentrale is “Deutsche Postbank AG”.
• Cooperative bank sector (“Genossenschaftsbanken”) which operate through regional “Girozentrale” banks such as WGZ or SWDGZ, or through the central DG bank.

Any payment can be passed between the networks within any federal state, but the market practice is for a payment to be held in the sender bank’s network and exchanged at the point nearest the beneficiary bank.

Example:  Payment from savings bank in Frankfurt to cooperative bank in Bavaria – is routed to Hessische Landesbank–Girozentrale and then to Bayerische Landesbank-Girozentrale, and from there into the Genossenschaft network’s Girozentrale in Munich.

Files are exchanged constantly during the day and the files are settled on the LZB that day:  this means that there is a built-in reduction in clearing times for payments routed through the bilateral clearing, compared to the RPS.

The RPS system clears the same transaction types as the Bilateral clearing.  It is run by the Bundesbank through the Landeszentralbank Hessen, in Frankfurt.

Orders must be in the standard DTA format, and there are layouts per transaction type.  DTA stands for “Datentraegeraustausch”, or “data record exchange”.  Data records sent to the LZB on D are passed to the clearing participant of the destination bank on D+1, meaning it can be D+2 before the beneficiary is credited.

The usual term for this is a “Ueberweisung”; it has to state the German unique identifier code for each domestic bank branch – the BLZ or “Bankleitzahl”.

Cheques below EUR 3,000 are presented as Direct Debits, as explained above.

The term for a Direct Debit is a “Lastschrift”; all such items presented in the clearing are identical, but behind that sit two distinct processes:

1. “Einzugsermaechtigungsverfahren”,  used for retail transactions, can be variable in amount.  The creditor has to have authority – which is revocable – from the debtor but the debtor’s bank does not need to be advised.  The debtor has the absolute right to reclaim the money debited through the banks.
2. “Abbuchungsauftragsverfahren”, used for commercial transactions.  The debtor’s bank needs in this case to be authorised to pay the debit when presented:  no amount is stated on the mandate.  The mandate is revocable but amounts paid cannot be reclaimed through the banks:  the debtor has to claim to the creditor direct.  The existence of the advice to the debtor’s bank, signed by the debtor, is the document that distinguishes this type of debit from the other one.

There is a special clearing system for handling foreign low-value payments, known as the “Auslandszahlungsverkehr” or “AZV”; there is a DTA format corresponding to it.  The system moves EUR foreign payments to and from the correspondents in Germany of the foreign banks involved.

Such payments can be subject to high lifting fees if proper control is not exercised.

Card usage – especially the usage of debit cards – has increased strongly from a low base.  ATMs are in wide use and the ATM networks of major banks have been pooled to allow interoperability.

The eurocheque card is the most widely held card and, since the retirement of the cheque guarantee scheme in 2001, is used on its own as a debit card.  Its functionality has been extended to permitting offline authorisation and to its use as a pre-paid card (the “Geldkarte” system).

Electronic Banking

Electronic banking in Germany has two pillars.  The first is the existence of universally accepted standards for payment transactions and statements, payments based on DTA standard with or without Edifact elements, and statements on DTA standard or a SWIFT MT940 populated to a strict standard.

The second pillar is the Bank Communication Standard or BCS, allowing high-speed and cheap communications between customer and bank.

The Multicash system – sponsored by the German banks in general but most enthusiastically by the smaller banks – allows the customer to connect to BCS and transact with multiple banks.  The larger banks with their own offerings are compelled to integrate to Multicash, to offer it themselves as an alternative to their own systems for certain market segments, or at least to support all the same standards in their proprietary products as exist in Multicash.  Multicash exists in a Windows version – often operating almost unseen and in tight integration with the user’s accounting and reconciliation – and a browser version.  Users can enjoy very high automation of day-to-day processes.  For larger users, host-to-host and file transfer applications are common – but run to the same standards.

Germany’s implementation of the Financial Action Taskforce recommendations includes that electronic transactions must be recognised as having been ordered by a “natural person”, i.e. the person at the keyboard must be identifiable, and must be recorded in the account mandate as authorised to operate the account.  This can be challenging where the person is offshore and/or is using an electronic banking platform that is not one provided by the bank where the account is held.

Liquidity Management

There are two common methods used.

The first depends on the use of electronic banking, primarily the Multicash system.  It can download balances from all connected banks and then suggest transfers to the user, aimed at concentrating positions at one bank.  The concentration may or may not involve intercompany loans – if the source accounts are owned by different subsidiaries – but it is assumed to involve different banks.

The second method is zero-balancing of accounts held in the same bank, again possibly owned by different subsidiaries.  This method is effective where it is possible to hold all operating accounts at the same bank, and this is feasible where:

the bank has a nationwide network but based on a common IT platform, AND
the bank participates in the Bilateral Clearing.
Notional pooling is difficult because of regulations around the banks’ ability to offset overdrafts against credit balances in the pool, when calculating their own liability to hold capital and liquidity reserves.  The bank has to price the overdrafts and credit balances in such circumstances as if there were no pool.

Notional pooling should not be necessary from a domestic tax perspective when there are several resident subsidiaries owned by a resident holding company (the most common construction).  The companies then sign an agreement to become a tax unity (an “Organ”) where the parent (i.e. the German holding) agrees to take over any profits or losses in the subsidiaries at year-end (known as “Profit and Loss Absorption” or “Gewinn – und Verlustabfuehrung”).  This is normally accompanied by an agreement for the parent not to divest the shares during the year without giving due notice to creditors.