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2016 | OriginalPaper | Chapter

21. The German Banking System

Authors : Patrick Behr, Reinhard H. Schmidt

Published in: The Palgrave Handbook of European Banking

Publisher: Palgrave Macmillan UK

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Abstract

This chapter provides a comprehensive overview of the German banking system. In the sections “Structural Features of the German Banking System” and “The Structure of the German Banking System”, we will give a detailed description of the current structure of the German banking system and its recent developments. The consequences of the financial crisis of 2007–8 for the German banking system and other challenges facing German banks are discussed in the section “Challenges Facing German Banks”. In the section “German Banking in an International Comparison”, we provide a brief comparison of the German banking system with other European banking systems to point out the uniqueness of the German banking system. The strong role and involvement of the government in German banking is subject to ongoing debate. We elaborate more on this and discuss the findings of recent empirical research on the German banking system in the section “Results of Recent Research on the German Banking System”. Finally, “Concluding Remarks” draws the chapter to a close and offers an outlook for the future.

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While the term “financial sector” refers to the totality of the financial institutions of a country, we use the term “financial system” in the sense of the interplay between the financial sector as the supplier of financial services and the “real economy” as its customer. Of course, the financial sector is a central element of the financial system. See Schmidt and Tyrell (2004) on the importance of this terminological distinction.

Big banks (Grossbanken) is also the term used in the statistics and publications of the Bundesbank, Germany’s central bank, designating banks with a large network of branches.

A famous example for the latter function is the merger between the two formerly competing car makers Daimler and Benz, which was engineered by Deutsche Bank in 1926.

In an increasing number of cases, the supporting political entities responsible for a local savings bank are by now not merely one municipality or county (Landkreis) but groups of municipalities or counties.

The German term is Träger, a term for which there is no adequate English translation.

Formerly, a supporting entity had the formal responsibility to assure the functioning of ‘its’ savings bank (the so-called maintenance obligation) and also to guarantee all obligations of a savings bank (the so-called guarantee obligation). These public guarantees were abolished in 2005, based on an agreement between the German Government and the EU Commission. This agreement was reached in 2001 after the Association of Private Banks had filed a complaint against the public banks, arguing that these forms of public support were incompatible with the EU rules concerning state aid and EU competition laws; for details see Schmidt (2009). However, as far as savings banks are concerned, these guarantees were never invoked after World War II.

The legal and economic aspects of the promotional mandate are discussed in detail in Brämer et al. (2010).

The German term, for which there is also simply no English translation, is Verbund. The fact that there is no English term that corresponds to Verbund is that in English speaking countries such networks do not exist.

A central financial institution, which serves the cooperative banks in almost all parts of Germany and their clients, is DZ-Bank AG. WGZ-Bank AG is the central hub for the cooperative banks in the German federal state of North-Rhine-Westphalia. It is the only regional central bank that remained after a process of consolidation starting in the 1960s. In the second half of 2015, it was decided that DZ Bank AG and WGZ Bank AG will merge in 2016.

Among them are the Bausparkasse (Building Society) Schwäbisch-Hall and the asset management company Union Investment. Both are among the largest institutions of their kind in Germany.

On the effectiveness of this monitoring role of the associations see Ayadi et al. (2010), p 38.

See Fischer (2005) and Fischer and Pfeil (2004).

The performance indicators of the central financial institutions of the savings bank group and the cooperative bank group, which are not shown in Fig. 21.1., are largely similar to those of the big banks.

See for example, Altunbas et al. (2001) and Ayadi et al. (2009 and 2010). Their empirical findings may appear surprising given that these banks pursue the dual objective of profit and benefit for their customers. Probably less surprising, but equally relevant, is the empirical evidence that savings banks and cooperative banks are on average less risky than privately owned commercial banks (Beck et al. 2009).

One cooperative bank, Apo Bank, also reported a loss in 2008. Interestingly, it is an atypical cooperative bank since it is not regionally focused and instead serves two professions, those of doctors and pharmacists, as its clientele.

The list of new regulations and reporting requirements increases continuously. A nearly complete list as of the time of writing and an assessment of their cost implications for German banks is provided in Hönig (2014).

Germany has already implemented core elements of the separation concept in a national law, informally called Trennbankengesetz. The plans of the EU Commission, which are based on the recommendations of the High Level Expert Group (HLEG 2012), go even further than the German law (KPMG 2014).

Most of the converted building societies or the private banks that had bought them ran into problems during the financial crisis. The best-known examples are Northern Rock, a converted former building society, and HBOS which was formed by the merger of Bank of Scotland with the former converted building society Halifax in 2001. HBOS was eventually taken over by Lloyds TSB in the midst of the financial crisis.

An exception is the phasing out of public guarantees for Landesbanken and local savings banks since 2005.

A critical assessment of the governance of Spanish savings banks after the reforms—and thus of the half-hearted privatization—can be found in Mai (2004).

The causes and consequences of the problems of the Spanish cajas are investigated in Ilueca et al. (2014).

The mentioned study also includes a comparison of the lending cyclicality between savings and privately owned commercial banks, but this is not the central point of the study.

For comparisons between different banking groups along other performance dimensions and with different methodologies in various European countries and an overview of the relevant literature, see Ayadi et al. (2009) and Ayadi et al. (2010).

“Indirect” because in those cases where savings banks hold equity participations in a Landesbank this typically takes the form of a participation of the respective regional associations of local savings banks and not of the savings banks themselves.

For this argument, see Schmidt et al. (2014).

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Title: The German Banking System
Authors: Patrick Behr
Reinhard H. Schmidt
Publisher: Palgrave Macmillan UK
Book: The Palgrave Handbook of European Banking
Print ISBN: 978-1-137-52143-9

Electronic ISBN: 978-1-137-52144-6

Copyright Year: 2016
DOI: https://doi.org/10.1057/978-1-137-52144-6_21