Essay on The effectiveness of banking system in Germany in “Germany’s banking system: Old-fashioned but in favour”


The authors of the article state that being Europe’s biggest economy, Germany has the most antiquated banking sector. The three-pillar system (savings banks, co-operative banks and private banks), long existing in Germany, seems to be too specialized in their serving households, small and Mittelstand companies and should theoretically be ineffective in the contemporary world of internationalization and consolidation. However, the unique business model of German banks basing on the system of joint liability within each sector still showed its withstanding in recent crisis conditions, as well as is demonstrating high performance since 2007 due to the reduction of medium- and long-term lending by private banks and increase in those from the side of savings and co-operative banks (Germany’s banking system).

On the other hand, many of the contemporary savings and co-operative banks, according to the Economist, barely earn money, as they already ended their ability to issue debt under public guarantee back in 2005. Now most of their attempts to expand or invest in the regions or develop natural deposit and customer base are either failing or are found in the bud state. In their turn, German private banks also share a number of vulnerabilities competing with global investors and commercial banks such as decreasing margins and huge government debt. Generally, German banking system is rather small by European standards (with banks’ assets making 160% of GDP, compared with 336% for France and 556% for Britain) and less well capitalized. However, Deutsche Bank is still seen as one of Germany’s and EU’s most reliable institutions. Besides, modern changes in the economy also force other countries to establish public industrial banks, and thus the localized and diversified banking system of Germany, recently viewed as old-fashioned, may soon come into fashion and spread its influence (Germany’s banking system).



In our opinion, the actuality and importance of the banking industry analysis is linked with fact that the current stage of the EU and world economy development is characterized by an increase in the role of banks and banking systems and their impact on integration processes. The competitiveness of a banking system becomes now one of the determining factors of the economic development, as its high level of effectiveness allows making full use of opportunities on attracting investment, capital and technology to country’s economy.

In this regards, intense competition, non-desire to become a part of the wider European banking union and low interest rates generally have a negative impact on the performance of financial institutions of Germany. In short-term perspectives, business recession and debt crisis may impact negatively on many German savings and co-operative banks, while their ability to overcome risks and get out of the crisis may be seen as limited. In this stressful EU-zone situation, some German banks could face serious problems. In spite of this, it is difficult to argue with the fact that German banking system is one of the most stable and well-organized systems in the world, and in the medium and long terms, the prospects of their stock market value is factually positive. In particular, a good sign is that the banking market does not currently look overvalued. It should also be kept in mind that Germany is the largest exporter of manufacturing industries in the developed world and the second in world exporter of science-based production after the U.S.

On a whole, in recent years, the development of the banking sector in European countries occurred in the conditions of the rapid liberalization of financial markets, increased international competition, dull business trends, unprecedentedly low interest rates and sharp fluctuations in the stock market (United States National Monetary Commission 217-19). The need for immediate reforms to improve the efficiency of banking institutions was realized in most countries of the EU, forcing them to make quick and radical implementation of changes. At the same time, in Germany, the improvement of banking industry underwent evolutionary path of its development, being based upon the existing banking traditions going back into ages, as well as upon the specific mentality of the population, traditionally focused on hoarding (United States National Monetary Commission 345-47). In addition, the effectiveness of German banking system business model is relying on the successful choice of the model of managing the functions and activities of the German Central Bank (Bundesbank), sharing a very high degree of independence and well-deserved reputation both in financial and industrial circles and in the society (Bundesbank profits do not remain at bank’s disposal, but is owned by the state and transferred to the state budget) (Brunner 14). Traditionally strong competition between financial institutions provided by the oversaturation of the banking sector has also always been a push for their development and search for introducing new products and serves.

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