Kreditanstalt für Wiederaufbau
Encyclopedia
KfW banking group is a German government-owned development bank, based in Frankfurt
. Its name originally comes from Kreditanstalt für Wiederaufbau, meaning Reconstruction Credit Institute. It was formed in 1948 after World War II
as part of the Marshall Plan
.
It is owned by the Federal Republic of Germany (80%) and the States of Germany
(20%). It is led by a five-member Managing Board headed by Ulrich Schröder, which in turn reports to 37-member Supervisory Board chaired by Rainer Brüderle
, Federal Minister of Economy and Technology, since October 2009.
). KfW thus acts as a second-tier bank.
KfW banking group has three business units with distinct functions, as well as several subsidiaries. Lending by KfW group’s two main business units, accounting for more than 90% of total lending, is in Germany and – to a more limited extent – in other European countries. However, its largest subsidiary, KfW IPEX Bank GmbH, lends predominantly internationally. A smaller subsidiary, the German Investment Corporation
(DEG), and one of the group’s smaller business units, KfW Development Bank, are exclusively active in the international arena, each within their particular business areas.
s) which has in turn received massive indirect subsidies through feed-in tariff
s under the Renewable Energy Law
of 2000. It also invests in municipal infrastructure such as public transport and sanitation through a sub-unit called KfW Kommunalbank (KfW municipal bank). More recently, it has also engaged in education where it provides student loans.
Small and medium enterprises. KfW Mittelstandsbank (which roughly translates as KfW small and medium enterprises bank), the second largest business unit of the group, provides assistance to German small and medium enterprise
s (SMEs) including individual entrepreneurs and start-ups. In addition to loans it also provides equity and mezzanine financing. Its financing totaled Euro 14.3bn in 2008.
KfW has been very active in securitization
before this market collapsed during the subprime mortgage crisis
. Through securitization it helped commercial banks to transfer risks from their housing and SME portfolios to the capital market. KfW also provides loans to European commercial banks to help them finance small and medium enterprises, housing and infrastructure (so-called global loans).
Development aid. KfW Entwicklungsbank (KfW Development Bank) provides financing to governments, public enterprises and commercial banks engaged in microfinance and SME promotion in developing countries. It does so through loans close to market terms using its own resources (so-called promotional loans), soft loans that blend KfW resources with support from the federal government’s aid budget (so-called development loans), as well as highly subsidized loans and grants, the latter two coming entirely from the federal aid budget. Different country groups are offered different financing conditions depending mainly on their per capita income. All these financing instruments are part of what is officially called development cooperation and is more commonly called development aid
. In German aid, the work of KfW Development Bank is called “financial cooperation” which is complemented by “technical cooperation” by GIZ and other public agencies. The main sectors of financial cooperation are water supply and sanitation, renewable energy and energy efficiency, as well as the development of the financial sector. KfW development bank also works, among other sectors, in health, education, agriculture, forestry, solid waste management. It provided Euro 3.7bn in loans and grants in 2008.
Export and import finance. The largest subsidiary of KfW banking group is the IPEX Bank. IPEX Bank is active in project finance
and corporate finance
related to German or European exports. It also promotes foreign investments in Germany. Unlike KfW banking group itself, it is in direct competition with commercial banks. Therefore, and in response to concerns voiced by the European Commission concerning unfair competition, IPEX Bank has become legally and financially independent in 2008. Thus it no longer benefits from the federal loan guarantees that allow the KfW banking group to refinance itself at advantageous rates. IPEX Bank’s main sectors of activity are ports, airports, toll roads, bridges and tunnels, railways, ships, planes, telecommunications, energy and manufacturing. IPEX Bank had a lending volume of Euro 17.6bn in 2008.
Another subsidiary of KfW banking group, the German Investment Corporation
(DEG), takes minority equity stakes and provides loans to private companies investing in developing countries. It pursues a business model broadly similar to that of the International Finance Corporation
of the World Bank Group. Its main sectors of activity are banking, agro-business, renewable energy, telecommunications and manufacturing. It lent 1.2bn. in 2008.
rated KfW as the safest bank in the world in its "World’s 50 Safest Banks 2009" rating. The rating is based on long-term foreign currency ratings from Fitch Ratings
and Standard and Poor’s and the long-term bank deposit ratings from Moody’s Investors Service.
Frankfurt
Frankfurt am Main , commonly known simply as Frankfurt, is the largest city in the German state of Hesse and the fifth-largest city in Germany, with a 2010 population of 688,249. The urban area had an estimated population of 2,300,000 in 2010...
. Its name originally comes from Kreditanstalt für Wiederaufbau, meaning Reconstruction Credit Institute. It was formed in 1948 after World War II
World War II
World War II, or the Second World War , was a global conflict lasting from 1939 to 1945, involving most of the world's nations—including all of the great powers—eventually forming two opposing military alliances: the Allies and the Axis...
as part of the Marshall Plan
Marshall Plan
The Marshall Plan was the large-scale American program to aid Europe where the United States gave monetary support to help rebuild European economies after the end of World War II in order to combat the spread of Soviet communism. The plan was in operation for four years beginning in April 1948...
.
It is owned by the Federal Republic of Germany (80%) and the States of Germany
States of Germany
Germany is made up of sixteen which are partly sovereign constituent states of the Federal Republic of Germany. Land literally translates as "country", and constitutionally speaking, they are constituent countries...
(20%). It is led by a five-member Managing Board headed by Ulrich Schröder, which in turn reports to 37-member Supervisory Board chaired by Rainer Brüderle
Rainer Brüderle
Rainer Brüderle is a German politician and member of the FDP. He served as Minister of Economics and Transport of Rhineland-Palatinate from 1987–1998. On 28 October 2009, he was appointed Federal Minister for Economics and Technology in the Cabinet Merkel II. On 12 May 2011, Brüderle left Federal...
, Federal Minister of Economy and Technology, since October 2009.
Operations
KfW banking group covers over 90% of its borrowing needs in the capital markets, mainly through bonds that are guaranteed by the federal government. This allows KfW to raise funds at advantageous conditions. Together with its exemption from corporate taxes due to its legal status as a public agency and unremunerated equity provided by its public shareholders, this allows KfW to provide loans for purposes prescribed by the KfW law at lower rates than commercial banks. KfW is not allowed to compete with commercial banks, but it facilitates their business in areas within its mandate. Typically, KfW does not lend directly to enterprises or individuals, but it provides commercial banks with liquidity at low rates and long maturities, as well as with instruments to transfer risk (securitizationSecuritization
Securitization is the financial practice of pooling various types of contractual debt such as residential mortgages, commercial mortgages, auto loans or credit card debt obligations and selling said consolidated debt as bonds, pass-through securities, or Collateralized mortgage obligation , to...
). KfW thus acts as a second-tier bank.
KfW banking group has three business units with distinct functions, as well as several subsidiaries. Lending by KfW group’s two main business units, accounting for more than 90% of total lending, is in Germany and – to a more limited extent – in other European countries. However, its largest subsidiary, KfW IPEX Bank GmbH, lends predominantly internationally. A smaller subsidiary, the German Investment Corporation
German Investment Corporation
Deutsche Investitions- und Entwicklungsgesellschaft translates into German Investment Corporation. DEG is a member of KfW Bank Group , an arm of the government of the Federal Republic of Germany....
(DEG), and one of the group’s smaller business units, KfW Development Bank, are exclusively active in the international arena, each within their particular business areas.
Subsidiaries and group units
Housing and Environment. KfW Förderbank (KfW promotional Bank), the largest business unit of the group, committed EUR 33.8 billion in 2008, mostly for housing and environmental protection in Germany. It is especially active in promoting energy-efficient housing for owner-occupied houses as well as for landlords, both for new houses and refurbishments. Its energy efficiency standards for houses (KfW-60 and KfW-40) have become accepted standards in Germany. Concerning environmental protection, it promotes, among others, photovoltaic energy (solar cellSolar cell
A solar cell is a solid state electrical device that converts the energy of light directly into electricity by the photovoltaic effect....
s) which has in turn received massive indirect subsidies through feed-in tariff
Feed-in Tariff
A feed-in tariff is a policy mechanism designed to accelerate investment in renewable energy technologies. It achieves this by offering long-term contracts to renewable energy producers, typically based on the cost of generation of each technology...
s under the Renewable Energy Law
Renewable energy law
Renewable Energy Law is a part of energy law, and relates primarily to the transactional legal and policy issues that surround the development, implementation and commercialization of renewable sources energy, namely solar, wind, geothermal and tidal...
of 2000. It also invests in municipal infrastructure such as public transport and sanitation through a sub-unit called KfW Kommunalbank (KfW municipal bank). More recently, it has also engaged in education where it provides student loans.
Small and medium enterprises. KfW Mittelstandsbank (which roughly translates as KfW small and medium enterprises bank), the second largest business unit of the group, provides assistance to German small and medium enterprise
Small and medium enterprise
Small and medium enterprises or small and medium-sized enterprises are companies whose headcount or turnover falls below certain limits.The abbreviation "SME" occurs commonly...
s (SMEs) including individual entrepreneurs and start-ups. In addition to loans it also provides equity and mezzanine financing. Its financing totaled Euro 14.3bn in 2008.
KfW has been very active in securitization
Securitization
Securitization is the financial practice of pooling various types of contractual debt such as residential mortgages, commercial mortgages, auto loans or credit card debt obligations and selling said consolidated debt as bonds, pass-through securities, or Collateralized mortgage obligation , to...
before this market collapsed during the subprime mortgage crisis
Subprime mortgage crisis
The U.S. subprime mortgage crisis was one of the first indicators of the late-2000s financial crisis, characterized by a rise in subprime mortgage delinquencies and foreclosures, and the resulting decline of securities backed by said mortgages....
. Through securitization it helped commercial banks to transfer risks from their housing and SME portfolios to the capital market. KfW also provides loans to European commercial banks to help them finance small and medium enterprises, housing and infrastructure (so-called global loans).
Development aid. KfW Entwicklungsbank (KfW Development Bank) provides financing to governments, public enterprises and commercial banks engaged in microfinance and SME promotion in developing countries. It does so through loans close to market terms using its own resources (so-called promotional loans), soft loans that blend KfW resources with support from the federal government’s aid budget (so-called development loans), as well as highly subsidized loans and grants, the latter two coming entirely from the federal aid budget. Different country groups are offered different financing conditions depending mainly on their per capita income. All these financing instruments are part of what is officially called development cooperation and is more commonly called development aid
Development aid
Development aid or development cooperation is aid given by governments and other agencies to support the economic, environmental, social and political development of developing countries.It is distinguished...
. In German aid, the work of KfW Development Bank is called “financial cooperation” which is complemented by “technical cooperation” by GIZ and other public agencies. The main sectors of financial cooperation are water supply and sanitation, renewable energy and energy efficiency, as well as the development of the financial sector. KfW development bank also works, among other sectors, in health, education, agriculture, forestry, solid waste management. It provided Euro 3.7bn in loans and grants in 2008.
Export and import finance. The largest subsidiary of KfW banking group is the IPEX Bank. IPEX Bank is active in project finance
Project finance
Project finance is the long term financing of infrastructure and industrial projects based upon the projected cash flows of the project rather than the balance sheets of the project sponsors...
and corporate finance
Corporate finance
Corporate finance is the area of finance dealing with monetary decisions that business enterprises make and the tools and analysis used to make these decisions. The primary goal of corporate finance is to maximize shareholder value while managing the firm's financial risks...
related to German or European exports. It also promotes foreign investments in Germany. Unlike KfW banking group itself, it is in direct competition with commercial banks. Therefore, and in response to concerns voiced by the European Commission concerning unfair competition, IPEX Bank has become legally and financially independent in 2008. Thus it no longer benefits from the federal loan guarantees that allow the KfW banking group to refinance itself at advantageous rates. IPEX Bank’s main sectors of activity are ports, airports, toll roads, bridges and tunnels, railways, ships, planes, telecommunications, energy and manufacturing. IPEX Bank had a lending volume of Euro 17.6bn in 2008.
Another subsidiary of KfW banking group, the German Investment Corporation
German Investment Corporation
Deutsche Investitions- und Entwicklungsgesellschaft translates into German Investment Corporation. DEG is a member of KfW Bank Group , an arm of the government of the Federal Republic of Germany....
(DEG), takes minority equity stakes and provides loans to private companies investing in developing countries. It pursues a business model broadly similar to that of the International Finance Corporation
International Finance Corporation
The International Finance Corporation promotes sustainable private sector investment in developing countries.IFC is a member of the World Bank Group and is headquartered in Washington, D.C., United States....
of the World Bank Group. Its main sectors of activity are banking, agro-business, renewable energy, telecommunications and manufacturing. It lent 1.2bn. in 2008.
Awards
The magazine Global FinanceGlobal Finance (magazine)
Global Finance is an English-language monthly financial magazine.Joseph D. Giarraputo, the founder and former publisher of Venture, the magazine for entrepreneurs, in 1987 joined forces with Carl G. Burgen, Stephan Spahn, H. Allen Fernald, and Paolo Panerai to start a magazine on financial...
rated KfW as the safest bank in the world in its "World’s 50 Safest Banks 2009" rating. The rating is based on long-term foreign currency ratings from Fitch Ratings
Fitch Ratings
The Fitch Group is a majority-owned subsidiary of FIMALAC, headquartered in Paris. Fitch Ratings, Fitch Solutions and Algorithmics, are part of the Fitch Group....
and Standard and Poor’s and the long-term bank deposit ratings from Moody’s Investors Service.