Frankfurt’s world class financial center sets the continental benchmark

18 Feb Frankfurt’s world class financial center sets the continental benchmark

As Germany’s most important financial center, Frankfurt Main Finance enjoys an outstanding reputation, with its many members including major players throughout the global banking and financial services sector, as President, Gerhard Wiesheu, details.

Please tell us some of the key strengths that have helped Frankfurt’s financial sector perform so strongly? What differentiates the sector from other financial hubs in Europe and beyond?

I suppose there were general assumptions about who would be number one in continental Europe in the EU after Brexit. The numbers and the thriving ecosystem of Frankfurt as a worldwide financial center have proven the city to be the clear leader. It was obvious given that the major American investment banks, Japanese mega banks, Chinese banks, and European banks like UBS chose Frankfurt as their new hub. They used their existing infrastructure to scale up operations on the one hand, but they also applied for new licenses. Consequently, we now have about 250 banks domiciled in Frankfurt’s financial center. You can imagine the impact on many suppliers such as internet companies, or lawyers, to name a couple, with the expansion of the ecosystem. What makes us so unique is that Frankfurt has a very close quarters way of communication, meaning the community sticks together fiercely, whether we are talking about the city of Frankfurt, the State of Hessen, the ministry; the channels to Berlin are also exceptionally clear. The protagonists come together here and really go for a common strategy.

The other factor is we already had an incredibly solid infrastructure, even before Brexit. We have two central banks, the Bundesbank, of course, which has been here for many years, but now ECB with about 4,000 people employees. You can imagine how much capacity and knowhow came into the city with their arrival. Additionally, we have European Insurance and Occupational Pensions Authority (EIOPA), and the Financial Stability Board, many different players who help to leverage the existing infrastructure, due to the new initiatives of banks and financial institutions to have their new international headquarters in Frankfurt. It helped again to bring in many high-end jobs such as risk managers, for example, and CEOs, people who bring additional knowhow into the city which accelerates the whole process. It is important to emphasize Frankfurt as a leading financial center. We also want to become number one in green finance and sustainability, which is something else that is attracting a lot of foreign organizations to Frankfurt.

Please give us a brief history of Frankfurt Main Finance’s operations and the recent milestones that represent its success. In what specific ways is it looking to grow Frankfurt’s already powerful financial services sector?

Frankfurt Main Finance was established in 2008 and has been evolving and developing as the means to unify the communication and the interests of the financial industry in Frankfurt. We represent Frankfurt as a financial center internationally, but also domestically. Having 70 members and a very diverse landscape of financial institutions and different interests, it is very important to have a central mouthpiece who bundles all these interests and then speaks with one powerful voice to push things forward.

I took over in October 2021 and thanks to the wonderful work of my predecessor, we are now further developing the financial center. As for milestones, I am delighted that we have brought the International Sustainable Standards Board (ISSB) to Frankfurt. It was started by the International Financial Reporting Standards Foundation (IFRS) who defined the international accounting standards. As sustainability becomes progressively more important, it is crucial to have an international standard for disclosing sustainable Key Performance Indicators (KPIs) by companies. We need a reliable set of KPIs and a way to monitor them, which is not the case now. Currently, there is the taxonomy of the EU, and different standards in Asia and in North America. We truly need a standard for all participants, whether for the manufacturers or the financial industry. The chair, the deputy chair and the board members are now working on defining the disclosure of KPIs for sustainability. Their presence truly supports our claim as a leading worldwide financial sustainability center.

What kind of public sector initiatives are leading the charge in increasing sustainable finance and lowering the region’s carbon footprint? What is Frankfurt Main Finance’s role in promoting sustainable opportunities in the financial services sector?

For the financial industry, whether we are referring to asset management or banks, sustainability plays a critical role. In the case of banks, previously in risk management of loan business, people focused on non-performing loans of financial risks in their portfolios. Nowadays, it is very much important to figure in or to model into the credit risk models, the sustainability risks. On one hand, it is an opportunity, but on the other, the banks have to really comply with their risk models to competitively expand their loan business. If you are lending money to companies which are not fulfilling sustainability KPIs, then you need more capital and capital is a very scarce resource. Therefore, it is very important to get this done properly. On the asset management side, it is the same thing. For example, if you look at institutional asset management, clients who give money to institutional asset managers need a report from the asset managers about the carbon footprint in their portfolios, which is in turn used by companies when they make their KPIs public. This is like a circular economy. It is so essential to follow all the initiatives.

What we at Frankfurt Main Finance promote and encourage is that the financial institutions here are very much aware of this trend and get out ahead of what might be required in the future, such as the taxonomy of the EU. If you are an asset manager and the taxonomy KPIs come out, you must be immediately able to construct your portfolios in compliance with them and report these KPIs to your clients. You cannot just wait for them to come out and then start. These types of initiatives, talks, and information exchanges are very much also at the heart of Frankfurt Main Finance. There is an initiative from the Hessen State Ministry, the Frankfurt School of Finance, and the Green Finance Cluster where academia and practitioners come together to find ways of incorporating this type of information into their business models. There is an association called Value Balancing Alliance who develops sustainability KPIs in such a way that they bring them into the real world of companies, namely what they must do to implement it in their operating models. It is not just some theory. At the end of the day, it must somehow be practically implemented in all types of companies. Manufacturers and companies in the financial industry all have the same challenge. This is something in which Frankfurt Main Finance is also involved quite a bit. We are also a member of the board of the Frankfurt based risk management company FIRM. It is a very reputable organization that does a great deal to bring together the information of academia and practitioners. This is something which is indeed unique here in the financial center in Frankfurt.

How significant has the digital revolution been in Frankfurt’s financial services sector? What role do fintech SMEs on the play and what is the organization and sector doing to support them?

Fintechs are hugely important for us, especially when it comes to data and technology. We have a special site in Frankfurt, called the TechQuartier. It is an incubator where you can go as a startup and get first class access to all the resources here. We have an economic promotion corporation that enables newcomers to easily access academia infrastructure and all the things you need as a startup. Entrepreneurs have all these visions in their heads, and they do not want to get bogged down with administrative matters. This has been a very successful initiative that was established many years ago.

Ten years ago, people were saying that startups would change the landscape and the future of banks would be bleak. The reality is a different tale. Of course, you see harsh competition and some banks get into trouble, but in most examples, we see a symbiotic existence between the fintechs and traditional banks. The conventional banks bring a certain experience with regulation, for instance, while the fintechs have terrific ideas. Bringing this together really creates a vibrant and efficient ecosystem. This ecosystem has grown steadily over time.

This combination of fintech and the conventional banks will be the ignition for further technology trends and for other business models, which are not yet apparent. Digitalization is vital as we saw in the pandemic. It transported us to a different planet almost where banks worked remotely very quickly. My primary responsibility is as a partner at Bankhaus Metzler, which is one of the oldest banks responsible for asset management. We did not believe we would be able to do such sensitive work as the evaluation of funds from home. They need to be done daily and very precisely, with zero tolerance for mistakes. In the end, we were able to do everything from home. This goes to show we already had a sound IT infrastructure in place, which was leveraged during the pandemic.

In Germany, when the financial crisis hit in 2008, the banks had a very bad image for a couple of years because they had provided the subprime funding to investors. Nowadays, the image is changing because the banks have been part of the solution. We were able to immediately deploy money to freelancers, restaurants, and tourist organizations, for example, who needed money because everything was shut down, and it was done within four weeks. When the first package was approved in Berlin, within four weeks, the first €10 billion went to the people who needed it. This also shows that banks have a very vital function in society, and it must be backed increasingly by digitalization. This is extremely important and is a top priority for every financial institution.

Why do you think Frankfurt has attracted so many new players and what was Frankfurt Main Finance’s involvement in promoting the location to the world’s largest banks?

There are a bunch of factors, not just one. When you evaluate a financial center, there are so many different functions and so many different people who contribute to a fully functional hub. On the one hand, it is the talent pool. Frankfurt has a very highly qualified pool of talent to offer and many young people. For example, we have the Goethe University, which is a public institution, the University of Applied Sciences, and the private universities. At the Goethe-Institut, we started very early on with the House of Finance, which concentrates on financial education, including quantitative analysis and how to run banks efficiently. Our banks recruit very talented people at a reasonable cost. This is crucial because your people determine your success.

The other thing is, of course, the infrastructure, which was already in place. Having the ECB so close to your doorstep is immensely important because of the importance of fluid communication with the regulator. There are so many different things which come together to form a competitive ecosystem. There were so many different drivers to lure the central bank. Of course, we have the biggest economy in the EU here. To banks, this means you have access to a big client base, and to large companies and major financial institutions, investment banking, and IPOs. To be able to serve this prestigious client base out of Frankfurt is an incredibly attractive proposition. When you make such a momentous change, a place like Goldman Sachs had to re-onboard their clients from the London operation to the Frankfurt operation. I witnessed many cases like this because I am on some supervisory boards, and I saw how cumbersome it is and how long it takes. It can take two years until you have all the contracts in place to onboard existing clients from one location to another. This means, even if Brexit were to be reversed, they would never go through this process again.

The other thing is to look at the financial sector in terms of products. As we have the ECB here in Frankfurt, they decide what type of products must be handled onshore in the EU area. For example, the bulk of CDS interest derivatives, close to 100 percent, were always traded in London. Now, however, as the regulation has changed, we already have almost 20 percent traded here in Frankfurt and it will increase further. Clearly, this is where you want to be. We have the biggest exchange here, as well, the Deutsche Börse with Euroclear, which has all the clearing facilities here. You want to be close to this institution, which is also part of the infrastructure, of course. These are some of the reasons why international financial institutions chose Frankfurt as their main hub for the EU market.

What role do academia and its research centers have within Frankfurt’s financial services ecosystem? How does Frankfurt Main Finance work to bridge the gap between research and action?

One of our main functions is to bring people together, namely academia and practitioners. We give studies in certain areas to the universities, they publish a research paper, and then we circulate it among the practitioners. We do a lot of seminars where people can participate and share information. We are a part of different organizations such as the Frankfurt Institute for Risk Management and Regulation (FIRM) who plan studies with universities with us. This is also like a circular economy, and we are in the center of information sharing and connecting people. For example, with the Hessen ministry, we are closely cooperating with the Green Finance Cluster at the Frankfurt School of Finance. We are a part of all these initiatives. The same goes for Goethe University and the House of Finance. We always try to be close to our members and close to their needs. This is our most important angle because there must be a benefit for our members. Membership is not cheap.

As President, what are your priorities going forward for Frankfurt Main Finance and the greater financial services industry? How would you like the ecosystem to look in the future and what can be done to get there?

I have a 10-item program, of which the most important item is green finance and sustainability. That is the umbrella under which everything else exists, because our goal is to become number one worldwide. This is not easy, because the other financial centers will not sleep. They are very competitive, so we must be ahead of the curve. This will take a lot of energy and resources, but we are up to the challenge and our members are as well.

The other thing is digitalization, which will be the backbone; it is essential we upgrade and develop further. It is also important for us to promote diversity, especially by increasing the percentage of female leaders in the financial center. There is a lot of knowhow and resources in the talented women that are coming out of universities. Mrs. [Angela] Merkel’s initiative stipulates that, if the supervisory board of a listed company exceeds a certain size, they must have at least one female supervisory board member. This is another very important differentiating factor. Of course, this is a long-term project, but we must make sure we speed up the process because of its gravity. These are the three items we will focus on in the coming years.