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Germany’s banking sector: Facts & Figures

Economic Environment

The economy in Germany is in a moderate upswing with annual growth rates of around 1.5%-1.75%. The growth is driven – among other things – by favourable developments on the labour market (unemployment has fallen to its lowest level for 25 years). A clear weakness in the economic picture is investment. Investment in machinery and equipment, especially, is suffering from comparatively weak performance.

Structure, assets and liabilities

Germany’s banking system comprises three pillars — private commercial banks, public-sector banks, and cooperative banks — distinguished by the legal form and ownership structure.

The private-owned commercial banks represent the largest segment by assets, accounting for 39% of total assets in the banking system. An important feature of the private banks is that they compete keenly not only with banks in other sectors of the industry, but also among themselves. The private banks play a key role for the German export economy, they are involved in 80% of German exports and maintain almost three quarters of the German banking industry’s foreign network.

The public banking sector comprises savings banks (Sparkassen), Landesbanken, and DekaBank which acts as the central asset manager of the Savings Banks Finance Group, representing 27% of total banks’ assets. There are currently 413 savings banks. They are normally organised as publiclaw corporations with local governments as their guarantors/owners. Their business is limited to the area controlled by their local government owners. Other than this regional focus, their business does not differ in any way from that of the private commercial banks. As a result of the so-called regional principle, savings banks do not compete with one another.

Landesbanken were originally designed to act as central banks for the savings banks. In recent years, however, they have been increasingly involved in wholesale funding, investment banking, and international business activities, thus directly competing with commercial banks. The eight Landesbanken at present are owned by the federal states and the regional associations of the savings banks.

In the past, savings banks and Landesbanken were backed by state guarantees (Gewährträgerhaftung and Anstaltslast). The state guarantees were of key importance to Landesbanken since they enabled them to obtain AAA ratings and lower their funding costs. These guarantees were terminated in July 2005. Grandfathering arrangements remain valid until end-2015, however. Current German law does not allow privately owned banks to have stakes in publicly owned banks (like most savings banks). However, some Landesbanken and savings banks have bought private banks. The level of public involvement in the system therefore continues to be much higher than in other countries of the EU.

The cooperative sector consists of around 1,000 cooperative banks (Volks- und Raiffeisenbanken) and one central cooperative bank (DZ Bank AG). It accounts for 52% of institutions by number and 14% of total bank assets. The cooperative banks are owned by their members, who are usually their depositors and borrowers as well. By virtue of their legal form, cooperative banks have a mandate to support their members, who represent about half of their customers. But cooperative banks also provide banking services to the general public. Like the savings banks, cooperative banks have a regional focus and are subject to the regional principle.

Banking activity and performance

The number of banks in Germany has dropped sharply in recent years, and by 48% since 1995. Consolidation to achieve economies of scale has taken place largely within the existing pillars. In most cases in the savings bank and cooperative sectors (contrary to mergers in the private sector), consolidation has been the result of stress rather than proactive business considerations. Pressure to further consolidate in the coming years stems from the low interest rate environment and banking regulation in recent years such as Basel III which increased banks’ capital requirements substantially. German banks fear that especially real estate and corporate finance could be particularly affected and could seriously restrict banks’ lending capacity.

Nevertheless, despite the low interest rates and the overall extraordinarily favourable financing conditions, lending to companies and self-employed has only slightly grown by 1.6% from €839 billion in 2014 €847 billion in 2015. This was because of companies’ strong in-house financing capabilities and their low propensity to invest.

The very low and partly negative interest rates at present decrease profit opportunities for banks, and increase the risk of distortions and price bubbles as well as the danger of zombie banks and firms. For German banks the negative deposit rate of the European Central Bank is a special tax with monthly tax earnings of around €350 million from all European banks. At the present level, further easing of monetary policy cannot lead to positive impulses anymore.

Key initiatives

Paydirekt – new online payment scheme operated by German banks

At the end of 2015, Germany’s private, cooperative, and savings banks launched a new online payment scheme called Paydirekt. Through this industry-wide cooperation, the banks offer consumers and merchants a joint payment scheme enabling those who shop online to pay easily, securely and directly from their own bank account. The scheme provides both protection for buyers and a payment guarantee for merchants and is potentially available to over 50 million bank account holders.

Financial education

In Germany, schools and education policy are the responsibility of the 16 federal states. Therefore, the country has no centrally designed, standardised school curriculum, but 16 different ones. Normally, in schools, financial education is integrated into the syllabus of subjects such as civics, social studies, consumer education or political science and economics. However, starting with the 2016/17 academic year, Baden-Württemberg will be the first federal state to place a subject called economics, careers and studies’ orientation on the curriculum of all non-vocational schools. The Association of German Banks has championed the promotion of economic and financial literacy in German schools for nearly 30 years. It has created an extensive programme called Schul | Bank expressly for this purpose. It consists of a wide range of teaching material for economic and financial education, quizzes on economics, finance and money management, and teaching modules for direct use in the classroom on bank accounts and cards, saving and investing, and loans and financing. Moreover, the Association of German Banks organises the Schul | Banker competition: a bank management game played by over 4,000 students.