6. Regulation of the German Financial System

The regulatory regime in Germany from the 1930s up to the 1990s could be characterised as a stakeholder-oriented and bank-based model. Regulations stabilised the widespread system of house-banks and the extensive cross-holdings of shares between big financial and industrial companies. Formally, a universal banking system existed, but investment banking was in practice unimportant. This started to change in the 1990s, gained speed following the election in 1998, and triggered a transition to a regime where shareholders’ interests began to gain importance in regulations. From 1995, Germany initiated changes that aimed to move the financial system in the direction of a more Anglo-Saxon type system. Regulatory changes aimed at strengthening the power of shareholders, and at limiting the influence of banks. This has led to a threefold decline in banks’ direct involvement in corporate governance: in the number of bank representatives on company supervisory boards; in banks’ majority ownership in large firms; and in banks’ role in proxy voting. The regulatory changes were promoted by German governments in an attempt to strengthen the position of Germany as a host for international financial markets, and by the European Commission, which pushed for financial market harmonisation in Europe as part of a neo-liberal agenda. However, the German financial system has not changed substantially. Although Germany has clearly been moving away from a purely bank-based model, it has not adopted a market-based one.