The German Banking System Essay Research Paper

The German Banking System Essay, Research Paper The German banking system has a special feature which distinguishes it from most other industrialized countries. Modern Germany is home of Allfinz, the system of universal banking which allows all kinds of financial services to exist under one roof, from retail banking to mortgages, from mergers and acquisitions to investment banking. This contrasts with the US banking system which separates retail from investment banking and grants licenses for only one activity or the other (though this has been changing in recent years). The evolution of the German universal banking system was largely due to Germany’s inadequate capital formation facilities and lack of required securities trading set-up at the time of its industrialization.

The impact of the system on Germany can be largely debated.Some believe that a universal bank is far better equipped to meet the challenges of global banking in the 90’s. The advantages that universal banking has brought upon the banking industry are the stability created by its diversification efforts and the resulting higher level of deposit security. It is generally less vulnerable to market changes because it is usually either the retail or investment banking sector alone which suffers a downturn at one time, and rarely simultaneously. Divisional cross subsidizing also allows banks to offer services more cost effectively, which is particularly beneficial to small and mid-sized customers. In addition, corporations are able to seek full-service activities from a single

source, the notion of one-stop shopping. As universal banks have a wide range of services available, they are also able to provide customers the best products needed for their problems as opposed to the best products within a limit of say commercial banking activities alone. Critics of the universal banking system point largely at the possible conflicts of interest which may arise, particularly as German banks are allowed to hold securities of other corporations. Banks retain strong influence over industries due to their shareholdings, board mandates, and proxy voting. How strong of an influence can be seen by observing the composition of corporate supervisory boards. For example, the head of Deutsche Bank chairs the board of Daimler-Benz AG (now Daimler Chrysler). According to

Dieter Kauffmann, president of a lobby group for small shareholders, “German industry is owned by German industry, or, more precisely, by German banks. Because the banks control significant, often veto-yielding minorities in virtually all big industrial groups, it is impossible [for independent shareholders] to place an effective check on management.” (Wadhwa, pgs. 33,34) STRUCTURE OF THE BANKING INDUSTRY The business of banking in Germany is defined in the Banking Act of 1961 which defines a credit institution engaged in banking as any enterprise engaged in the following activities: 1) accepting deposits; 2) making loans; 3) discounting bills; 4) providing securities brokerage services; 5) providing trust services; 6) operating investment funds; 7) factoring; 8) providing

financial guarantees; 9) providing funds transfer (giro) services. (Kaufman, pg. 556) There are also general rules for every bank in Germany. There are four main parts which consist of the Central Bank Law (rules about minimum reserve), the Banking Business Law (basics of capital resources and liquidity), the Stock Exchange Law (price fixing and future business), and Deposit Law. In addition, there are also laws pertaining to certain bank groups. They include the Savings Bank Laws of the federal states, Mortgage Banks Law, Security Law, Shipbank Law, Building Society Law, Law of Investment Companies, and Law of banking foundations with special tasks. (http://iaix7/informatik/htw-dresden.de/htw7953/hp98/gbs.htm)There are over 3,500 legally independent banking institutions in