Financial Institution Statement for the Shareholders

Several events have occurred over the past few months that will have an impact on our commercial and investment activities in Germany and the United States. We will discuss each of the events and the likely result on the bank's profitability, strategic business direction, and asset and liability consequences. The events to be analyzed are the raising of short-term rates by the European Central Bank, the United States Securities and Exchange Commission (SEC) requiring separation of underwriting services and stock research, declining reserves held at the United States Federal Reserve, the downgrading of credit ratings for corporate clients, and Berlin searching for an underwriter of municipal bonds.

The latest price indices from Europe indicate an acceleration of inflation in the European Union countries. To address the inflationary pressures the European Central Bank recently increased the equivalent of the United States discount rate. In the United States little inflationary pressure allows the U.S. To maintain its short-term rates at historically low levels. It appears that short-term rates will remain at their current levels. Such changes in European short-term rates will have minimal impact on the bank's profitability as most of the bank's assets are denominated in U.S. dollars. If the European Central Bank continues to raise rates, the situation requires reevaluation as currency risk increases. We can further lessen the impact of interest rate relationship changes by currency hedging. Purchasing currencies that we have assets valued in should minimize our currency risk. We will also be looking to make strategic acquisitions to gain a presence in other geographic markets lessening...

We expect that there will be fluctuation in our earnings as reduce the effects of currency changes. Increasing United States short-term rates have much more potential impact than rising European short-term rates, but as the United States economy improves there will be more pressure on United States rates. Our view is that the United States economy will recover sooner than the economies in the rest of the world including Europe.
The SEC's new regulations requiring the separation of underwriting and stock research functions have a significant impact on our investment banking. Our visibility into equity markets in any situation where the right solution for a company may be an equity offering of one kind or another will be severely restricted. However we believe that we can separate our stock research and underwriting organizations into separate companies under our corporation and meet the new regulations. The ultimate impact of the new regulations is still to be seen. At this point we feel that a conservative view is the appropriate view. We will set aside some capital in a contingency fund until the implementation of the new regulations gives us a clearer picture of what we can do and what we cannot do. This action will impact the amount of assets that we have available for lending activities, but we think that the potential liability for not adhering to the new regulations, although they are undefined, should be planned for in case an actual liability occurs. Short-term this will influence some of our strategic decisions, but we expect the situation to be clarified later this year.

Our reserve situation at the Federal Reserve has impacted our ability to make as many high quality…