GAURI DEVPURAROLL NO. 864VI SEMESTERB.B.A. LL.B.

Money Market in Germany

Development of Money Market in Germany.

In what was formerly West Germany, where the money market developed strongly after World War II, transactions have been to a large extent confined to interbank loans.

Insurance companies and other nonbank investors are also important lenders of short-term funds.

Treasury bills and other short-term bills and notes from government agencies (railways and post) were gaining in importance by the 1960s.

In 1955 certain nonmarketable securities (the so-called equalization claims, created during the 1948 currency reform) held by the Bundesbank were transformed into short-term marketable securities in order to obtain suitable market material for the open-market operations of the Bundesbank.

Money Market in Germany

The market for commercial paper is of some significance, and dealing in it takes place from time to time between banks, especially in times of tight market conditions.

Comprehensive regulations have been given through the Bundesbank about the re-discountability of the several kinds of commercial paper.

The influence of the Bundesbank on the monetary situation through open-market operations by the 1960s was greatly hampered by the vast liquidity of the banking system as a consequence of the persistence of Germany’s favourable balance of payments situation.

Money Market in Germany

The securitized money market is relatively small in Germany.

Traditionally, money market paper has played a minor role in terms of interbank trading in central bank money, the short-term financing of non-banks and investment of funds by non-banks.

However, since the early nineties, the importance of securitization in the money market has increased.

This is because of introduction of new instruments and dealing methods.

Money Market.

Short term-loans and advances and securities are traded in the money market.

It is a counterpart of capital market.There is no clear dividing line between the

two because “short-term” and “long term” are very subjective.

Common practice is: Maturities of 1 year or less: money market Maturities of more than 1 year : capital market

Functions of money market

Comercial banks, producing enterprises, public authorities or institutional investors use money market transactions for purpose of liquidity management.

Principal players: commercial banks, which operate to clear individual surpluses and shortage of liquidity.

Central bank manages the overall supply by monetary policies. (Bundesbank)

Central banks position is “interest rate leader”. Its interest rate policies are soon applied to other money market transactions.

Forms of Money Market Instruments

Short term government paperCommercial papers (CP) of enterpriseCertificates of Deposites (CDs) issued by

banks.Treasury Bills

Legal Provisions

Section 21 of Bundesbank Act provides legal basis for providing specified money market paper with a commitment to purchase it, therby giving the holders the option of converting such papers into central bank balances at any time.

It entitles the Bundesbank to buy or sell the specified debt instruments in the open market at market prices in order to regulate the money market.

As a part of Stability and Growth Act, a provision was added to the Section 42 of the Bundesbank Act in 1967 to the effect that the Fedral Government had to supply to the Bundesbank additional Treasury Bills or Treasury Discount paper (designated liquidity paper) up to the maximum amount of DM 8 Billion.

The Bundesbank is however liable to the government for meeting all the obligations arising from the paper.

Bundesbank Liuquidity Treasury Discount paper

Foreign Monetary Authorities, which often are subject to strict investment regulations and place their funds only in high-quality and highly liquid paper. (Bundesbank liuquidity treasury Discount paper: “Bulis”)

There share rose from around 2/3rd to 80%Domestic banks participation remained small:

around 15 % and fell virtually to zero.These transactions have a maturity period of only 3

days. This instrument was applied for the first time in

1973.

Deutsche Mark Commercial Paper

Short-dated debt securities were issued for the first time in 1991.

It was brought on large scale by the non-residents from the outset.

Foreign investors purchsed roughly ½ of the issues.

Fedral Treasury Discount paper (Bubills)

Fedral Ministry of Finbance and the Bundesbank agreed on this issue in 1996.

They had a maturity of less than a year, and its circulation is not to exceed the limit of DM 20 billion.

Factors affecting growth of money-market

High degree of price stabilty favoured the emergence of long-term financial relationships.

Lock-in periods of interest rates worked against the short-termism in the financial sector.

Liberalisation of Bank interest rates enabled credit institutions to offer loans and deposits at fair market rates.

Tax Regualtions and Monetary policy regualtions.

Issue of CP hampered by the issue authorization procedure.

International Comparison

In Germany, the raising of borrowed funds by issuing short-term securities plays minor role both by international standards and in comparison with the issue of long-term paper.

Largest Securitized market worldwide is that of the United States, followed by Japan and Italy.

As a percentage of the total volume of debt Securities outstanding, the German Money Market is at merely 1¾ %.

Role of German Banks in Money market of Europe

German banks pay for liquidity in the main refinancing operations of the European Central Bank (ECB). These are the most significant sources of liquidity in the euro area.

German banks accounted for around 30% of total reserve requirements in the euro zone.

In Germany interbank deposit trading is dominated by the 4 large German commercial banks and the semi-public Landesbanken. However, most of these main players tend to have a euro-area wide approach rather than focusing on domestic trading.

Comparison with Indian Money Market

Indian Money Market includes:Treasury Bills,Commercial Paper, Certificate of Deposit,Repos, etc.

The Unorganized Sector includs: moneylenders, Chit lenders, etc

Players in organised sector are:RBI, Private Banks, Public Sector Banks, Development Banks and Non-Banking Financial Companies. RBI regulates the organized banking sectorInterest Rate is deregulated by lifting the ceiling rates

The Bundesbank regulates the Money market in Germany to a greater degree.The money market in India is fully developed and very vast as compared to Germany where it is very small.

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