Dreaded toxic assets: the general perception is that a lot more is still lurking out there. According to the IMF and its latest “Global Financial Stability Report”, the bill for the world’s financial sector has now swollen to the enormous figure of USD 4,100bn; banks have to shoulder some USD 2,800bn. Although financial firms around the world have already recognized more than USD 1,300bn of losses (USD 950bn by banks), the “reality-gap” has in fact risen. So, with its new estimate the IMF did nothing less than remove the light at the end of the tunnel for banks. The figures sit oddly with the recent stabilization of the financial sector. However, the markets, jaded by an overflow of bad news in the past, seemed to decide simply not to listen and continued with the rally of bank stocks.

The financial crisis marks the beginning of a new era on financial markets. Massive change has set in. This creates the opportunity to rebuild a strong system that operates on a sufficient capital base, where the risks accumulated in financial institutions balance sheets correspond to their risk-bearing capabilities, where corporate behavior is aligned to long-term return incentives instead of short-term leveraging and speculation and where investors and borrowers can count on long-term stability and are advised in their best interest. Business models will have to change, we need better regulation and more effective international supervision, with a holistic view on risks, combining micro- and macro-prudential perspectives.

Both the German financial system in general and SME financing as a key component of this system have been undergoing a considerable structural transformation since the beginning of the 21st century. This process is being driven by several trends simultaneously: the transformation process has recently picked up speed. This development means that markets and valuations in line with market conditions are becoming increasingly important.

The European unification process has suffered major political setbacks this year. Going forward, further integration on the financial and banking markets is likely to be determined more by market forces than by politics.

The optimists had their finest hour in the late 1990s. Euphoria ruled on Finanzplatz Deutschland. The stock market boom, the ascendancy of the “Neuer Markt“, the placement of the “people’s share“ Telekom, introduction of the electronic trading platform Xetra and, last but not least, the arrival of the European Central Bank in Frankfurt fueled the most fabulous dreams of Frankfurt’s role in a uniting Europe.

In recent years the German banking system has shown itself to be stable even under heavy pressure, but its profitability was very poor. The corner has now been turned, above all on the costs side. As the economic backdrop improves, this trend is likely to lead to a sustained catch-up process.