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Germany’s banking sector: Facts & Figures

The economy in Germany is in a comparatively good shape with annual growth rates of around 1.8%. 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. However, there are some indications that investment in machinery and equipment will gain momentum in the course of 2017.

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 40% of total assets in the banking system. 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 26% of total banks’ assets. There are currently 403 savings banks. They are normally organised as public-law 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 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 remained valid until the end of 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 970 cooperative banks (Volks- und Raiffeisenbanken) and one central cooperative bank (DZ Bank AG). It accounts for 52% of institutions by number and 17% 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.

The number of banks in Germany has dropped sharply in recent years, and by 56% 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 real estate and corporate finance could be particularly affected and that this could seriously restrict banks’ lending capacity.

Nevertheless, despite the low interest rates and the overall extraordinarily favourable financing conditions, lending to companies and the self-employed has, at €853 billion in 2016, slightly increased compared to the previous year (+1.3%). This was because of companies’ strong in-house financing capabilities and their low propensity to invest. At the present level, further easing of monetary policy can no longer lead to positive impulses.

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 banks in the euro area the negative deposit rate of the European Central Bank (ECB) is a special tax with monthly tax earnings of around €500 million. In order to limit the side effects of the negative deposit rate, the Association of German Banks proposes an amount of exemption for the excess liquidity, holding at the ECB, by commercial banks.