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International Seminar Guarantee systems in
European Union countries searching for the best
model The German Guarantee Banks Warsaw, 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.

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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 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 gt
  special steering committe on German Federal
  Government level.

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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 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

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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 risks Western Federal
States (In brackets where differing Eastern
Federal States)
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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 -gt
  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.

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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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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.

These guarantees could replace insufficient collaterals but not the credit rating or the profit ratio of the final beneficiary!
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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 debts
• Discharge 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
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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.

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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.

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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

• 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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Relation to public authorities (I)

• Structur of the state / souvereign counter
  guarantee
• First level
• Federal Republic and Federal Statss provide in
  their budget acts items for the counter
  guarantees granted to Guarantee Banks (first
  level sovereign acting)
• Second level
• Granting 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.

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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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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, Lawyer Division Manager
Legal Regulatory Affairs Association of
German Guarantee Banks (VDB) Schillstrasse 10,
10785 Berlin Tel. [phone]Fax
49 (0) 30 263 96 54 20E-Mail
achtelik_at_vdb-info.de www.vdb-info.de