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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. 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 380 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.
The cooperative sector consists of 842 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. 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 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 consolidate further 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, especially, 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 has with €974 billion in 2019, increased compared to the previous year (+4.3%). 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.
With a negative interest rate and the massive buying-up programmes (especially PEPP), the ECB tries to lower rates across the entire yield curve in order to boost demand for investment and longer-term credit. However, as banks are largely unable to pass on negative rates to customers in the broad deposit business, negative ECB-rates worsen bank profitability. In the longer run, this weakens their lending capacity. In addition, the massive buying-up programmes are causing excess liquidity in the banking system to rise sharply.
Contributor: Ute Schmaltz email@example.com