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A Different Kind of Bank

November 8, 2011

KfW (Kreditanstalt fur Wiederaufbau) has been named the safest bank in the world for 2011 by Global Finance for the third straight year. Based on results from more than one rating agency, this bank came out on top of all the big banks in the world. These ratings are based on long term outlook, not just for the year. With its base in Frankfurt, Germany, KfW’s reach is global with around 70 offices all over the world.

Unlike other banks, this bank does not have branches accepting deposits, withdrawals. The money it gets to fund its loans is by selling bonds in the financial market. It can get low interest rates and favorable terms because its borrowing is guaranteed by Germany which means it’s a sovereign guarantee. Although government owned, it is run like a private enterprise.

As to the bank’s lending operations, it gives loans that bear interest to accredited financial institutions, who then loan out the money to the intended clients. The accredited banks also add their own interest spread when they give the loans to clients. With two institutions charging interest rates, it may seem that the interest rates would be high. However, the opposite is the case since KfW gets very low interest rates with its bond due to the sovereign guarantee and also because it is known for handling its finances very well. Just like other banks, it experienced some losses during the late-2000 financial crisis, but has since managed to be profitable again.

It was founded in 1948 to help Germany in its reconstruction effort after World War II. The bank’s mission is quite broad. Aside from lending inside Germany, KfW has also gone outside the country and for decades have been lending to projects in less developed countries.

Next time you look at any kind of rankings of global banks try to look deeper. Not all banks are the same.

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