KfW’s impact on the economy

Mr Marjanovic, from time to time there is debate in the media as to whether a promotional bank such as KfW still makes sense in Germany. What do we need promotional banks for anyway?

A promotional bank such as KfW is ultimately a policy instrument of the federal government, specifically for economic, development and climate policy. Promotional banks are useful wherever market weaknesses occur that can be mitigated effectively and efficiently with the specific instruments of a promotional bank. Depending on what is needed, KfW offers low-interest loans, guarantees, equity investments or grants.

Are there no other ways to address market weaknesses? Many countries don’t have a promotional bank...

Alternatively, a government can also use laws (dictates and prohibitions) or fiscal-policy instruments to control and improve suboptimal market results. But both interfere directly with market activity. Promotional banks, on the other hand, use incentives for behavioural changes without disrupting the market and are therefore often the more effective and more flexible instrument. Just recently, many countries have founded promotional banks of their own, such as the British Business Bank or the Portuguese Instituição Financeira de Desenvolvimento. The benefit of promotional banks is widely recognised internationally.

But critics say that in Germany market weaknesses or total market failure exist only in the financing of degree courses...

Unfortunately, that is not so. The free interplay of market forces is less than optimal on a much broader scale. Business founders, for example, above all innovative start-ups, still face great challenges financing their projects, for example because they have no collateral. Small and medium-sized enterprises are generally at a structural disadvantage compared with large corporations because they can hardly access capital markets. Market weaknesses today are also clearly visible in the financing of national and international environmental and climate action projects, or in development finance, where they are particularly significant. So market weaknesses exist in many sectors.

Doesn’t KfW compete with commercial banks?

KfW and the commercial banks are partners, not competitors. Our business is based on the fundamental principle of subsidiarity. That means KfW focuses on addressing market weaknesses without disrupting or crowding out private-sector enterprises.

How is this ensured?

With very few exceptions such as municipal finance, KfW does not interact with the customer directly but supports banks – with favourable funding and by assuming risks – in offering finance that would otherwise be unavailable, or at least not at economically desirable terms. It operates in line with what is referred to as the on-lending principle. In other words, KfW’s loans supplement banks’ lending offers and make projects possible that in some cases would not have materialised at all without it. More energy-efficient houses are being built in Germany because KfW is supporting these projects on behalf of the federal government, for example with repayment bonuses.

What sets KfW’s loans apart from others?

KfW’s promotion is geared to sustainability. What this means is that we apply the highest ecological, social and corporate governance standards – and thereby generate impetus on the market. Sustainable finance is becoming increasingly important overall. For example, KfW has committed EUR 250 billion in the area of environmental protection and climate action all over the world in the last ten years – a noteworthy result.

What do you say to allegations that KfW is too big?

Measured by its total assets, KfW is indeed large compared with Germany’s commercial banks. It ranks third after Deutsche Bank and DZ Bank. Comparing the total assets of commercial and promotional banks, however, is the wrong yardstick.

Why?

First, KfW is not a commercial bank but an institution that offers promotional measures, especially financing, on a mandate from the state. Moreover, Germany’s banking market is one of the world’s most competitive. We have some 1,900 commercial banks here. These are comparatively small, so that KfW naturally appears big. For example, the five largest commercial banks in Germany together have a market share of just 33 per cent. In the Netherlands, however, that share is 82 per cent.

How, then, can you measure its size?

Instead of comparing KfW with commercial banks, it is more meaningful, for example, to look at promotional banks’ total assets in relation to their respective economy, that is, to gross national product. On that basis KfW is within a normal range in international terms. In 2016 that ratio was around 16 per cent for KfW, while in Italy or South Korea it was about 25 per cent.

So larger economies are allowed to have larger promotional banks?

They should have larger promotional banks. Otherwise they cannot generate an economically relevant impact. Measured as a proportion of the German banking market’s total financing volume, KfW’s financing volume, incidentally, is currently around six per cent. From a regulatory point of view, it’s not the size of a promotional bank that matters. What is crucial is that promotional banks operate on a subsidiary basis.

What will KfW’s growth look like in the future?

Growth is not one of KfW’s goals. Internationally, other promotional banks are growing much more strongly, for example in Italy, France or South Korea, and the EIB Group is also growing at a faster pace. KfW’s growth is very selective and restricted to areas of its policy mandate. For example, development finance is being expanded – as a contribution to addressing the causes of poverty and displacement and to achieving international climate targets. The venture capital finance segment will grow as well. The remaining areas of KfW’s business develop in accordance with the growth of the economy, where we focus on promotional areas of high political priority. These include environmental protection and climate action, infrastructure, education, innovation and digitalisation.