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Germany’s banking sector: Facts & Figures

Updated September 2019 – For earlier editions of Facts & Figures click here

The German economy lost momentum considerably in the summer of 2018. Since then it has been stuck in a marked phase of weakness with very low GDP growth. The slowing of the global economy and the high level of uncertainty because of current trade conflicts have hit German industry, which is strongly integrated into global trade and production chains. However, the service sector and very robust domestic demand are supporting economic growth in Germany. In 2019, GDP growth in Germany is expected to be only 0.7% – after around 2% on average over the last five years.

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 commercial banks represent the largest segment by assets, accounting for 40% 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 88% 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 385 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 six Landesbanken at present are owned by the federal states and the regional associations of the savings banks.

2018 saw the first privatisation of a German Landesbank: HSH Nordbank AG (now renamed Hamburg Commercial Bank AG) was taken over by a consortium of private financial investors on 28 November 2018. HSH Nordbank AG has been an extraordinary member of the Association of German Banks since 1 January 2018. The change in ownership also involves the bank leaving the institutional protection scheme to become a member of the Deposit Protection Fund of German private banks. This transition will be completed on 1 January 2022. The solution found for this bank could act as a model for future changeovers from other deposit protection systems to the Deposit Protection Fund.

The cooperative sector consists of 875 cooperative banks (Volks- und Raiffeisenbanken) and one central cooperative bank (DZ Bank AG). It accounts for 50% of institutions by number and 18% 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. However, 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 52% 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 could seriously restrict banks’ lending capacity.

Nevertheless, accompanied by low interest rates and the overall extraordinarily favourable financing conditions, lending to companies and the self-employed increased by 5% in 2018 to €934 billion. Due to the German Energy Transition and the new EU Action Plan “Financing Sustainable Growth”, banks have launched many initiatives in recent years to promote sustainable financing.

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)operates like 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 has proposed an amount of exemption for the excess liquidity holding at the ECB by commercial banks.

Contributor: Ina Brüggemann