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Germany Banking and Financial System Overview

by Suleman

The country of Germany reflects almost perfectly the structural and operational stature characteristic to an open economy with a strong reliable foundation of industrial prospects, and an enviable production capacity in the export sector that adds a lump sum approximately one third of its gross domestic product (Seibert, 2005). Germany’s economy is also, without any speck of doubt, an economy with substantial social protection with the state playing dominant roles. The basic interpretation of the nature of openness of the German economy is simple, which is prevalence of free markets for the different goods and services. Few exceptions occur, such as the unique agricultural and coal mining industries, which are limited and explicitly subsidised. Germany’s gross domestic product (purchasing power parity) was $2,863 trillion (CIA, World Factbook, 2009) in 2008, with the euro becoming the official currency.

It is imperative to be informed of the basic characteristics and systemic aspects of the banking and financial structure of Germany in order to seriously consider the economic context under which Germany exists. The financial network consists of numerous private and public credit entities in Germany (Banks and Banking, n.d.). While there are no limitations on the kinds of practises approved by any variety of credit agencies, there are also unique differences in the characteristic spectrum of bank customers or transactions (Baums and Gruson, 1993, p.4). (1) commercial banks belonging to the corporate sector (private Geschaftsbanken); (2) banks operating exclusively with deposits (Sparkssen) and associated credit activities with their central institutions (Landesbanken und Girozentralen); and (3) agricultural and manufacturing credit cooperatives (Raiffeiseibanken and Volksbanken), federal credit cooperatives (Raiffeiseibanken and Volksbanken) The savings banks, which had traditionally concentrated exclusively on the quantity of savings deposits and long-term loans, have more prolifically diversified their operations and along with their central organisations, the regional Landesbank, operate in the fields of large-scale leasing, corporate finance and resource utilisation in the securities market. With a parallel context, the club of commercial banks has penetrated the field of business in the aspect of savings deposits, which was dominated formerly by various savings banks. From a substantial point of view, all of the savings banks in Germany are properly organized under set public law exercised by municipalities, counties, or the associations of such governmental bodies (Baums and Gruson, 1993, p.5). Moreover, the bank Landesbanken is also well established under definite public law and legally owned either by the concerned states, or the savings banks of the states, by the set associations of the different savings banks, or a close knit combination thereof (Baums and Gruson, 1993, p.5). From an authentic economic perspective, German banks are universal in a typical sense. A universal bank is a bank that provides an absolute range of banking services in the arenas of commercial activities and for investment purposes (German Banking System, 2002). The exclusive German Banking Act with an implicit dimension provides a proper legal definition of a well-structured universal bank in a much wider sense, calling them enterprises that functionally conduct banking business in every possible commercial field (German Banking Act, 2009). As per the basic formatted regulations of the Banking Act, the major elements that are comprised within the framework of the banking business are:

  1. The provision for accepting funds from other sources as specific forms of deposits irrespective of payment of the interest amount (the deposit business).
  2. The facilities via which banks have the power to grant monetary loans and also accept credits (lending business).
  3. The measure that allows the banks to purchase particularly bills of exchange and cheques (the discount business).
  4. The provision that allows the banks to freely purchase and also involve in selling of securities considering the account of others (the securities business).
  5. The provision that responsibly provides safe custody of the securities and also renders the power to banks to comprehensively administer the flow of securities and manage the transactions related to it.
  6. The important measure that allows the banks to create funds for the exclusive purposes of funding the businesses to establish and/or improve their performance and hence grow at an accelerated rate, and manage , and apply policies in the corresponding sectors of commercial activities.
  7. The Banking Act also stipulates certain essential assumptions of guarantees and particular warranties on behalf of the people involved in this sector with the objective to safeguard the system from any sort of unforeseen element of risk (the guarantee business).
  8. The measure that permits the banks to properly assess the performances of the cashless payments (for instances those payments involving payments based on equity) and the facilities to aid the process of clearing operations (the gyro business).

Germany Banking and Financial System Overview

Before moving further to understand the aspects of the banking system in Germany, a brief account of the conventional varieties of banks that exist in the country is required. First of all, let the sector of commercial banks be considered. In Germany, the sphere of commercial banks, from an overall perspective, accounted for approximately one fourth of the market share in the total volume of the whole banking business (Commercial Banking Sector, 2002). There are prominent sub-categories of the commercial banks, which are important to know the varieties that exist in this particular sector. The foremost sub category includes the big banks that have heavyweights such as the Deutsche Bank, the Commerzbank, the Dresdner Bank and their several subsidiaries in the city of Berlin that function nationally in tandem through an extensive network of local branch offices. Though the banks mentioned here are undoubtedly huge banks in terms of the volume depicted by their balance sheets, yet, their market share is not so significant when the volume involved in the overall banking business is considered. The second sub category of the commercial banks comprises of the list that mainly entails the regional banks. They do not fall under the club of the big commercial banks that have been mentioned previously. A few of them eventually expand and strengthen their network that allow them to function in a wider market, on an interregional, or even on a national basis. Two such regional banks, which have expanded their business at the context said just now, are the Bayerisch Vereinsbank and the Hypo-bank. They are also operational in the sector of mortgage business. The next and last prominent sub category in the arena of the commercial banks in Germany is the foreign and the private banks. The businesses, which are allowed to be conducted by the foreign banks, bear similarities with those that are permitted to the domestic or regional banks in the country. The private banks have a feature that consists of the rule that stipulates limited partnership. The different private banks in the country of Germany are involved in conducting all sorts of conventional banking activities, but in addition they also concentrate in the fields of export finance, industrial finance, housing finance, and export finance and property management. The next crucial segment in the banking sector of Germany is the savings bank sector. From the angle of domestic volume in the businesses, it has got the largest market share. The savings banks are primarily conceived as concerns that do not stress on commercial profit making, but instead concentrate on those members of the society who are to an extent deprived of proper welfare. They provide necessary credit on regulated terms to public organizations. There are specifically 3 tiers in the sector of the savings bank that are- the local saving banks, which are mainly the municipal bodies or the district institutions suitably, incorporated under set public law as functionally independent legal entities. Each of the states has a particular Savings Bank Act, which directs and formulates the structure and the overall organization of the savings bank in that state. The local savings bank are generally allowed to run their operations in their own regions, and their implementation of certain policies in the realm of investment in securities and other corresponding assets are to a good extent subject to legal restrictions. The next category includes the state savings banks that are also known as Central Giro Institutions. These banks function as clearing bodies, which do work for their members that are the local saving banks. They are permitted to operate on interregional and international basis. In Germany, the largest of the state savings bank is the Westdeustche Landesbank Girozentrale (Saving Bank Sector, 2002), which is approximately comparable to the purely commercial bank Commerzbank in terms of the volume of assets as depicted by the figures in the balance sheet. The last important sub category at the present context consists of the central saving banks. The Deustche Girozentrale (DGZ) renders service as the main and the central clearing bank on behalf of the savings bank system and responsibly holds the liquidity reserves considering the books of the state savings banks. Though it bears similarity with the state savings banks in terms of the nature of business, but in terms of size it is smaller than many of those state savings banks. Although the stamp of universal banks can be given to the local savings banks and the state savings banks in terms of functionality, but there are certain activities like the underwriting of the securities trading and international business proceedings that are more important for the operational radar of the state savings banks (Saving Bank Sector, 2002). The next segment of the banking sector in the economic framework of the Germany, which demands significance, is the sector of the cooperative banks. It has mainly got three varieties, the first one being the local cooperative banks. The local banks are organized as cooperatives that have local businesses and individuals as members. Another sub category at this context comprises of the regional central cooperative banks. These banks, which primarily function as regional central cooperative credit bodies are either registered cooperatives under the supervision of the local credit cooperatives, or proper stock corporations (Credit Cooperative Bank Sector, 2002). The last of the important sub part in this category is the federal clearinghouse institution. It is a stock corporation and the bodies of regional credit cooperatives own it. With respect to the flow of the volume of business, this particular category is, without a speck of doubt, the most important segment of credit cooperative banks (Credit Cooperative Bank Sector, 2002). The last of the broad categorization of the banks in the economic framework of the country of Germany includes the mortgage banks that specifically provide an exclusive domain of intensive banking services that are different in characteristics of the banking services provided by the universal banks. The ownership factor of the mortgage banks has an element of flexibility, as either private or public sector can own them. The legal peripheral limits under the German legislation, in general, restrict these mortgage banks to make mortgage loans that are long term in nature and also limit the provision of giving loans to municipalities and other public authorities. These mortgage banks normally finance through the credit flows generated through bonds and deposits that are long term in nature. A large number of private mortgage banks are conventionally owned by the commercial banks that always seek for potential opportunities to enter and expand in the promising mortgage market. They also engage in providing some specialized services in relation to commercial business activities. The combined share in the total volume in the field of banking business in Germany is to the tune of 10% to 12% (Mortgage Bank Sector, 2002). They usually makes provisions to provide loans to finance the growth and diversification of export sector, the areas that include development projects in economically weak countries, extensive environmental programs and financial support to small and medium sized German enterprises. These mortgage banks take policies via funds of the governmental authorities, definite bank loans, and also other relevant sources like the method of bond issues.

Undoubtedly the most significant financial institution in the whole country of Germany, beyond the arena of the central government is the central Bank of Germany, also known as the Deustche Bundesbank (commonly referred to as the Bundesbank). It does appear to be the principal maker of the German economic policy, although a crucial law set in the year of 1957 under the legislative framework of Germany assigns the central bank the responsibility to sincerely preserve the value of the German currency, and in a prominent way to support the economic agendas of the central government from an overall perspective (Bundesbank, German Culture, n.d.). The German government does possess power to influence certain policymaking prospects of the Bundesbank (Haan, 2000). The representatives of the government can attend meetings and present their views within the bank’s governing board. The central government, though not having power to block the decisions of the Bundesbank, but can certainly exercise measures that would delay the implementation of the formulated policies by the Bundesbank in the German economic scenario. The functions of the Bundesbank are variegated and cover a broad canvass from every possible economic perspective. It issues the money and formulates monetary policies by keeping a tab on the short-term interest rates for instance the discount rate for loans to the other banks and the very crucial Lombard rate for short-term funding in various businesses. The other significant aspect about the Bundesbank is its consistent strives for the application of anti-inflationary philosophy. The Bundesbank whole-heartedly endorses that the country of Germany with a stabilized form in the levels of currency will be benefited by lower capital and labor costs incurred in different modes of production due to lower expectations in the inflationary facet of the economy which would eventually reduce the interest rates and make the wages stable (Bundesbank, German Culture, n.d.).

Seeking further in the aspects of the complex financial system at the context of the economic framework of Germany, concentrating briefly on the issue of market capitalization is essential. In case of Germany, the value of the stock market capitalization as percentage of the gross domestic product of Germany is near about 55% (Cohen, 2009). So this particular data clearly indicates that the capital market in the German economy is undervalued, taking into account the stock flow and related transactions in various financial Diasporas across the country. The total market value of the publicly traded shares as recorded at the last day of the year 2007 was US $2.106 trillion (World Factbook, 2009).

At this juncture, it is essential to throw some light, on the sphere of trading activities of Germany. The total exports of Germany, in the international arena in 2008 were US $1.53 trillion freight on board (f.o.b.). France had the leading market share of the total exported goods and services by Germany with 9.7% fraction of the market (World Factbook, 2009). The main commodities that comprise the exports are vehicles, machineries, metals, chemicals and textiles. Germany has been declared the biggest exporter of commodities by the World Trade Organisation and services among all the countries in the world (EconomyWatch, German Stock Exchange, n.d.). For the year-end of 2008, Germany had accounted for a highly substantial trading volume in the import sector too. The volume of imported goods and services in Germany at this context was US $1.202 trillion (f.o.b.) in the year 2008. The Netherlands was the country from which Germany imported most of its goods and services, accounting for a sizeable 12% of the total market share in the import sector (World Factbook, 2009). The chief commodities that are in the imported list are machineries, metals, foodstuffs, textiles and vehicles.

At this juncture, a concise mention of the structure of the German Stock Exchange is relevant indeed in order to grasp the details of the financial framework in the German economy. The complete structure of the vast German Stock Exchange is comprised of 8 stock exchanges that are situated in various parts of the country. The German Stock Exchange is, undoubtedly, one of the largest and the most influential stock exchanges among the numerous countries of the world that have a say in the quintessential spheres of world trade and commerce. It is important to know in depth bout the definite composition of the German Stock Exchange. Probably the foremost element in this regard is the Frankfurt Stock Exchange, which is based in the city of Frankfurt and in Germany more commonly known as FWB Frankfurter Wertpapierborse (Borse Frankfurt, 2009). Deutsche Borse owns the Frankfurt Stock Exchange and it has a lion’s share in turnover that is approximately 85%. It is considered as one of the biggest securities trading centre on the international platform that includes trading in bonds, stocks, corporate participating certificates etc. The Frankfurt Stock Exchange has DAX 30 (In Germany, it is called Deutsche Aktien Xchange 30) as the main trading index (DAX, 2009). The second largest stock exchange in the economic framework of Germany is the Stuttgart Stock Exchange comprising of several powerhouses in the sector of finance like Allianz Life Insurance and LBBW Bank. The other important stock exchanges include the Borse Berlin-Bremen and the Hamburger Borge (the Hamburg Stock Exchange). Another significant stock exchange whose name is required to be mentioned at the current context is the Allegemeine Borse. The Stock Exchange of the Allegemeine Borse is generally utilized by the particular companies that deal with the business of buying and selling properties and also by the real estate agents and corresponding organizations (Property finance in Germany, 2009).

Conclusively, it can be stated, from a rational point of view, that the banking sector in the economic integrity of the country of Germany is strong enough to guide it towards newer dimensions of development, simultaneously concentrating on the welfare of the people from every possible societal perspective. The strong foundation laid by the Bundesbank and the hoard of commercial banks, savings banks, mortgage banks and other related banking institutions have policies clear enough to stress in a full fledged manner the sector wise growth of the German economy on basis of practical prioritization (Deustche Welle, 2009). The banking network and the related dynamics are flexible enough to skillfully monitor and manage the flow of cash and non cash funds across the numerous organizations spread in the country, with a constant tab on important macroeconomic variables such as the inflation rate, the situation of employment, the value of the currency, and the trading volumes to name a few. On a similar note, the financial institutions generally backed by the concepts of free market theories and conveniently liberalized market economy viewpoints have enough potential to take the country of Germany in the path of accelerated growth in all sectors of hardcore monetary and financial dealings (Smith, 1994). The strength of the German Stock Exchange is an added impetus to the corporate sector of the country, which needs capital funds to advance and diversify in the international platform (see Appendix). Despite the current financial crisis, “The German economy is considered relatively immune to crises in individual markets” (Spiegel Staff, 2008). The combined efforts of the banking sector of Germany and its financial sector on the overall economy of the country are, without a speck of doubt, fruitful and can prove even more effective if gets further backing of the concerned governmental authorities that would resultantly take the economy of Germany to establish itself as the strongest and the most stable in the world, when compared to other powerful competitive world economies.


The following table gives the statistics of corporate lending by German banks;

Year Lending amount (in million Euro)
1995 1772760
1996 1852112
1997 1968088
1998 2118593
1999 2272536
2000 2386848
2001 2426914
2002 2411607
2003 2414466

Source: Baier, 2001

(Baier, 2001)

The vertical axis measures the total corporate lending by the banking sector (measured in million Euro) in horizontal axis 1 represents year 1995 and so on, 9 represents year 2003

The change in corporate lending by banks over the period 1995-2003 can be shown by the graph

(Baier, 2001)

The Vertical axis of the above figure represents the percentage change in the amount of lending and in the horizontal axis we represent the years the centre represents the year 1996 and 8 represents the year 2003.


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