German banking market: encrusted and left behind – economy

When it comes to German engineering, “Made in Germany” still has an acceptable sound: halfway successful, and somehow solid. And didn’t we with our Mainz flagship company, Biontech, at least do surprisingly well in the race for the corona vaccine? So it’s not all bad in this country.

The financial sector, on the other hand, is different: Internationally, German financial institutions have been ridiculed for years – and not just since then stupid german money, that is the stupid money from Germany, blindly invested in the US housing market until shortly before the downfall. Or when Deutsche Bank absolutely had to try to conquer Wall Street twenty years ago, an excursion that has so far made its investment bankers richer, but made its shareholders many billions poorer. Or when it became known that the largest German financial institution was always Donald Trump’s most loyal lender. The institute on the other side of the Atlantic was assured of scorn and ridicule again.

But why is it that Germany has always been in a lower league in banking? And is that even bad?

Banks rarely invent something disruptive, something that radically changes the world, and when they do it is often more likely to cause damage, like the derivatives that once sparked the financial crisis. Its primary task is to pump capital into the veins of the economy as the economic heart chambers, but also to store money, to provide companies with debt and equity and to find investors who take on risks that others do not dare to approach. It is of no value in itself for a country to have an internationally successful financial sector; it is not something to strive for at any cost. Foreign banks can also take on these tasks.

The Biontech founders almost failed because of the financing

So it is no drama that the German financial sector is not exactly an export hit. But: It would be very desirable to have domestic banks that are also willing to finance innovative or risky business models. The Biontech founders, for example, almost failed because they had to worry about their funding at the beginning. And more importantly, banks should be stable and never again have to be bailed out by taxpayers, as they did in the financial crisis more than ten years ago. At that time, the federal government had to support several banks – Landesbanken and Commerzbank – with many billions of taxpayers’ money.

The German financial institutions are also safer today. But are they permanently viable? Or are they gradually being pushed aside by stronger foreign institutes and neo-banks? If you take the share prices of Commerzbank and Deutsche Bank as a yardstick – Sparkassen and Volksbanken are not listed – then investors do not yet have too much confidence in the restructuring course of at least the two largest private institutes. This may have other reasons than years of mismanagement. “The reforms that many Western countries have undertaken in recent decades have completely bypassed the German banking system,” wrote the economists of Deutsche Bank recently in a study. In it, they calculated so ruthlessly with the financial center Germany and the local financial supervisory authority that the work promptly disappeared from the bank’s website and CEO Christian Sewing said he had to apologize to the supervisory authorities.

The verdict of the economists spoke from the hearts of many in the financial sector, not only with a view to the lax German supervision, “under whose eyes so many scandals have taken place in the last 15 years, and in which the supervision as a whole was so bad, yes in part has given a dysfunctional image “. The “rigid separation into three pillars” of communal savings banks, cooperative Volksbanks and private banks have also prevented consolidation and privatization. The result: “An unprecedented loss of importance for the German banking industry”. No wonder that more and more customers would turn to foreign banks that had invested more in digitization and often simply made better offers.

At any rate, Germany is now largely alone with its high proportion of state-affiliated banks internationally, the analysts criticized. “In many western countries such as France, Spain or Italy, rigid structures have been broken up, privatized and consolidated in order to make banks more powerful and fit for the growing demands of their customers”.

In fact, the Sparkasse lobby – well networked from the federal government to the municipalities – has managed in the past few decades to prevent any attempt at privatization by savings banks or mergers with cooperative banks or private banks. At least since Commerzbank had to be partially nationalized during the financial crisis, the debate has almost completely fallen silent. And of course, it didn’t help that Deutsche Bank or Commerzbank were always (rightly) suspected of trying to divert attention from their own failure when they criticized the market power of the state-subsidized savings banks, which is to blame for the private banks never gaining a foothold in their home market and were therefore forced to switch to investment banking. But this does not make the debate wrong.

Open detailed view

After all, it is not just a question of whether German banks are still fulfilling customer requirements or whether they are being pushed aside by foreign institutions. With a view to Europe, the Scientific Advisory Board of the Federal Ministry of Economics even provided one Context firmly between the weak European growth of recent years and the fact that Europe failed to clean up after the financial crisis after 2008, that is to say “to reduce the overcapacities caused by the exorbitant growth of the financial sector since 1990 and to sustainably rehabilitate or liquidate the ailing banks to a sufficient extent” . The US had done significantly more to consolidate and reorganize its banks, had stricter capital requirements and had higher economic growth than Germany, not to mention the other members of the euro zone.

The emeritus economics professor and banking critic Martin Hellwig recently wrote that Germany, above all, had missed an active part in banking regulation after the financial crisis. Germany has not only slowed down stricter capital adequacy rules for banks, known as Basel III. In contrast to the USA, Iceland, Great Britain and Switzerland, Germany has never properly dealt with the causes of the financial crisis, never had it investigated by an independent commission, although the black-and-yellow federal government had promised this in the 2009 coalition agreement. That was a missed opportunity to question whether the three-pillar system was really a guarantee of stability, as the Sparkasse and Volksbank lobby like to claim, or, on the contrary, had actually made the German banking system particularly vulnerable. Hellwig is particularly critical of the prominent position of the state Landesbanken belonging to the savings bank sector and the fact that there are simply still so many banks in Germany.

Why not just liquidate ailing banks?

But didn’t the so-called guarantor liability for savings banks and Landesbanken expired in 2005 – that notorious clause that many consider to be the cause of the former excesses of the Landesbanken? Specifically, it was about the liability of the federal states and savings banks, which, as owners, previously fully stood for their Landesbank. Thanks to this guarantee, the latter were able to obtain cheap capital for years as good debtors and grant cheap loans, a privilege that the EU Commission abolished in 2001, but fatally with a transition period until 2005. During this transition period, Landesbanken such as WestLB and BayernLB helped to refinance Many billions and mostly ten years in maturity, invested these under the eyes of supervision and in the absence of sufficient domestic credit demand in the US housing market and infected themselves with the junk papers that shortly afterwards triggered the financial crisis.

Banking expert Hellwig doubts that Germany has really learned from it. It likes one now mechanism give a roadmap on how ailing banks can be wound up without triggering a financial crisis. But why would the states of Lower Saxony and Saxony-Anhalt, for example, not have dared to simply liquidate their Landesbank NordLB, which had messed with ship loans, in 2019? Instead, they saved the bank from bankruptcy with an enormous 3.6 billion euros. The politically responsible did not even shy away from manipulating the public again with horror scenarios, otherwise there could be a financial meltdown. If Brussels hadn’t taken tough action after the financial crisis and ordered privatization or, in the case of WestLB, even the liquidation of Landesbanks. Hellwig is certain that the state share in the German banking market would still be huge.