The German Banking System Essay, Research Paper
The German banking system has a particular characteristic which distinguishes it from most other industrialised states. Modern Germany is place of Allfinz, the system of universal banking which allows all sorts of fiscal services to be under one roof, from retail banking to mortgages, from amalgamations and acquisitions to investing banking. This contrasts with the US banking system which separates retail from investing banking and grants licences for merely one activity or the other ( though this has been altering in recent old ages ) . The development of the German universal banking system was mostly due to Germany & # 8217 ; s unequal capital formation installations and deficiency of needed securities merchandising set-up at the clip of its industrialisation. The impact of the system on Germany can be mostly debated.Some believe that a cosmopolitan bank is far better equipped to run into the challenges of planetary banking in the 90 & # 8217 ; s. The advantages that universal banking has brought upon the banking industry are the stableness created by its variegation attempts and the ensuing higher degree of sedimentation security. It is by and large less vulnerable to market alterations because it is normally either the retail or investing banking sector entirely which suffers a downswing at one clip, and seldom at the same time. Divisional cross subsidising besides allows Bankss to offer services more cost efficaciously, which is peculiarly good to little and mid-sized clients. In add-on, corporations are able to seek full-service activities from a individual beginning, the impression of one-stop shopping. As cosmopolitan Bankss have a broad scope of services available, they are besides able to supply clients the best merchandises needed for their jobs as opposed to the best merchandises within a bound of say commercial banking activities entirely. Critics of the cosmopolitan banking system point mostly at the possible struggles of involvement which may originate, peculiarly as German Bankss are allowed to keep securities of other corporations. Banks retain strong influence over industries due to their shareholdings, board authorizations, and proxy vote. How strong of an influence can be seen by detecting the composing of corporate supervisory boards. For illustration, the caput of Deutsche Bank chairs the board of Daimler-Benz AG ( now Daimler Chrysler ) . Harmonizing to Dieter Kauffmann, president of a anteroom group for little stockholders, & # 8220 ; German industry is owned by German industry, or, more exactly, by German Bankss. Because the Bankss control important, frequently veto-yielding minorities in virtually all large industrial groups, it is impossible [ for independent stockholders ] to put an effectual cheque on management. & # 8221 ; ( Wadhwa, pgs. 33,34 ) Structure OF THE BANKING INDUSTRY The concern of banking in Germany is defined in the Banking Act of 1961 which defines a recognition establishment engaged in banking as any endeavor engaged in the undermentioned activities: 1 ) accepting sedimentations ; 2 ) devising loans ; 3 ) discounting measures ; 4 ) supplying securities securities firm services ; 5 ) supplying trust services ; 6 ) operating investing financess ; 7 ) factorization ; 8 ) supplying fiscal warrants ; 9 ) supplying financess transportation ( giro ) services. ( Kaufman, pg. 556 ) There are besides general regulations for every bank in Germany. There are four chief parts which consist of the Central Bank Law ( regulations about minimal modesty ) , the Banking Business Law ( rudimentss of capital resources and liquidness ) , the Stock Exchange Law ( monetary value repair and future concern ) , and Deposit Law. In add-on, there are besides Torahs refering to certain bank groups. They include the Savings Bank Laws of the federal provinces, Mortgage Banks Law, Security Law, Shipbank Law, Building Society Law, Law of Investment Companies, and Law of banking foundations with particular undertakings. ( http: //iaix7/informatik/htw-dresden.de/htw7953/hp98/gbs.htm ) There are over 3,500 lawfully independent banking establishments in Germany, with over 65,000 subdivisions combined. Give a population of over 81 million, there averages about one bank office for every 1,200 people in Germany. Germany is one of the most to a great extent & # 8220 ; banked & # 8221 ; economic systems in the universe. Germany & # 8217 ; s commercial Bankss can be grouped into three wide classs: private commercial Bankss, public nest eggs Bankss and their cardinal Bankss, and recognition co-ops. Although the 3 groups have different concern involvements and focal points, there is really no division of activities between them lawfully. In add-on, there are besides specialty Bankss which act more as niche participants within the industry. The private commercial banking sector consists of around 330+ cosmopolitan Bankss. This includes the 3 dominant Bankss in Germany ( Deutsche Bank, Dresdner Bank, and Commerzbank ) , regional and other commercial Bankss, and foreign Bankss. The most of import common characteristic of private commercial Bankss is the predomination of their short-run loaning concern. A particular focal point is besides on securities-based economy, investing guidance, and plus direction. The & # 8220 ; Big Three & # 8221 ; ( Deutsche Bank, Dresdner Bank, and Commerzbank ) are all public limited companies. In footings of apt capital, they rank amongst the largest Bankss in the universe. Their dominant place is peculiarly in the funding of foreign trade, publishing concern, and pull offing client securities portfolios. The public sector commercial Bankss consists of about 607 nest eggs Bankss and 13 cardinal giro establishments and histories for about half of the combined volume of concern of all commercial Bankss. Originally, nest eggs Bankss engaged in lone nest eggs and loaning activities and existent estate loaning. Today, their activities are more like those of cosmopolitan Bankss, although their traditional maps still remain their chief line of concern. The concerted banking sector consist of over 2500 recognition co-ops. Some are really little and the figure has been steadily diminishing due to the recent addition of amalgamation activity within the banking industry in the past few old ages. The activities of co-ops has traditionally been centered around the impression of & # 8220 ; assist through self-help & # 8221 ; ( rules of self-responsibility and joint liability ) and today offer the full scope of banking services, though concentrated peculiarly on taking sedimentations, imparting to their ain members, and long-run loans. Specialist Bankss besides play an of import function in the German banking industry. The most important specialist Bankss are the 35 or so private and public mortgage Bankss, which specialize in loaning on existent estate and to public governments. These Bankss raise the financess needed to finance their loaning by puting mortgage bonds and municipal bonds on the capital market. There are besides private and public edifice and loan associations which engage in the funding of owner-occupied places and flats. The attraction of salvaging through these associations lies in the right acquired by the rescuer. Once the rescuer has paid a certain per centum of the contract sum, the balance of the edifice loan remains at a comparatively low involvement rate which is fixed over the life of the loan. Approximately 20 warrant Bankss and recognition warrant associations besides exist which service largely little and average sized companies by supplying insurance bonds on behalf of endeavors in the skilled trades, industry, and commercialism. In add-on, there are besides two cardinal securities depositories responsible for the efficient colony of the Bankss & # 8217 ; securities concern every bit good as others niche Bankss. The big figure of Bankss has led to an progressively competitory banking environment which is going progressively consolidated every bit good as effected by globalisation ( i.e. infiltration by foreign rivals ) . German CENTRAL BANK & # 8211 ; BUNDESBANKEstablished in 1957 via The Bundesbank Act of 1957, the Deutsche Bundesbank is the cardinal bank of the Federal Republic of Germany. It has the duty of moving as a currency bank ( do sure that the currency remains stable ) , a note bank ( has the right to publish bank notes ) , the bank of Bankss ( Acts of the Apostless as loaner of last resort ) , and the bank of the province ( offering recognition and assisting with refinancing by securities ) . ( http: //iaix7/informatik.htw-dresden.de.htw7953/hp98/gbs.htm ) In add-on to its duties as the cardinal bank, & # 8220 ; it besides acts as a province bank for the Federal Government and the Lander Governments. & # 8221 ; ( KPMG pg. 45 ) With its caput office located in Frankfurt, the cardinal bank is comprised of the Central Bank Council, the Directorate, and the nine Land Central Banks. The Central Bank Council is composed of the President and Vice-President of the Bundesbank, the other members of the Directorate, and the Presidents of the Land Central Banks. It has the backbreaking undertaking of make up one’s minding the pecuniary policy of the Bundesbank. The Directorate, the cardinal executive organic structure of the Bundesbank, is an eight-member group that acts out the Bundesbank & # 8217 ; s pecuniary policy through unfastened market operations. Finally, the Land Central Banks, located in Stuttgart, Munich, Berlin, Hanover, Hamburg, Frankfurt am Main, Dusseldorf, Mainz, and Leipzig, & # 8220 ; carry on the Bundesbank & # 8217 ; s minutess with recognition establishments and public authorities. & # 8221 ; ( www.bundesbank.de.htm ) Through the interactions of these three groups, the Bundesbank carries out its responsibilities to modulate the money and recognition supply, safeguard the Deutsche Mark, and & # 8220 ; to supply for bank-based executing of domestic and foreign payments. & # 8221 ; ( KPMG pg. 45 ) In order to modulate the money supply, the Bundesbank has at is disposal the usage of the Lombard loans, price reduction concern, unfastened market operations, and minimal modesty demands. The Lombard loans are & # 8220 ; loans against the collateral of specific securities and debt registry claims. & # 8221 ; ( www.bundesbank.de.htm ) In the price reduction concern, & # 8220 ; the Bundesbank buys measure of exchange from Bankss at the price reduction rat
e.” ( www.bundesbank.de.htm ) In its usage of unfastened market minutess, the Bundesbank sets marks for the repo rate. The repo rate is the involvement rate on redemption understandings in Wertpapiere, besides known as securities repos. Finally, “under Section 16 of the Bundesbank Act, the Bundesbank is empowered to repair, from clip to clip, sums of interest-free sedimentations to be maintained by Bankss with the Bundesbank.” ( KPMG pg. 46 )
Although the Bundesbank has such a powerful manus in finding Germany & # 8217 ; s economic destiny, the Bundesbank has full liberty and is well independent from the Federal Cabinet and political force per unit area. As a consequence, the Bundesbank emphasizes exchange rates while the authorities has concentrated on the societal effects of economic policy. As a consequence, there have been several clangs between the two. For illustration in 1973 and once more in 1981, when the authorities hoped to trip economic enlargement, the Bundesbank decided to keep high involvement rates to maintain the rising prices degree low. In add-on to the Bundesbank, there are several fiscal sector governments that work with the Bundesbank to see the quality of Germany & # 8217 ; s Bankss and banking establishments. These governments include the Federal Banking Supervisory Authority, the Federal Securities Trading Supervisory Authority, and the Audit Association of German Banks. The Federal Banking Supervisory Authority ( BAK ) , located in Berlin, is besides & # 8220 ; an independent establishment with ultimate duty to the Ministry of Finance. & # 8221 ; ( KPMG pg. 47 ) Its function is to & # 8220 ; oversee the operations of Bankss, banking groups, fiscal keeping group, and subdivisions of foreign Bankss in Germany in order to protect the populace from unsound banking practices. & # 8221 ; ( KPMG pg. 47 ) In order to transport out this function, the Federal Banking Supervisory Authority has the authorization to publish and revoke banking licences to banking operations. Second, in cooperation with the Bundesbank, the BAK issues regulations on the adequateness of equity capital and liquidness. Third, the BAK collects fiscal information and conducts periodic audits of recognition establishments. ( Kaufman, pg. 578 ) Finally, the BAK has the authorization to step in in the event of a capital insufficiency and hazard of sedimentations. As a consequence, the BAK can carry on surprise audits and coerce the settlement of a bank. The Federal Securities Trading Supervisory Authority, located in Frankfurt am Main and given power via the Securities Trading Act, & # 8220 ; is the cardinal establishment for market supervising of stock exchanges and nonprescription trading in securities and derivatives. & # 8221 ; ( KPMG pg. 55 ) Its cardinal responsibilities are to & # 8220 ; oversee the prohibition to transport out insider trading, oversee the ad-hoc promotion demands for quoted companies, control attachment to coverage and information demands for minutess sing important investings in quoted companies, supervise the coverage demands of Bankss and other entities admitted to stock exchange trading sing all their securities trading minutess, act as a aggregation centre for gross revenues prospectuses, and co-operate internationally in the country of supervising of securities trading. & # 8221 ; ( KPMG pg. 55 ) Similar to the BAK, the Audit Association of German Banks was created to reflect public assurance in the banking system. Created voluntarily by German Bankss in order to supply its clients with a sedimentation protection system, the association has some 300 member Bankss with its primary end to & # 8220 ; extinguish or minimise typical hazard for depositors. & # 8221 ; ( KPMG pg. 57. By imposing an & # 8220 ; one-year charge of 0.3 % of the balance sheet place entitled & # 8216 ; liabilities to client & # 8217 ; & # 8221 ; the association is able to finance its fund. ( KPMG pg. 58 ) This fund will see clients & # 8217 ; sedimentations & # 8220 ; sums to 30 % of the bank & # 8217 ; s nucleus capital plus other apt equity capital, provided the latter does non transcend 25 % of nucleus capital. & # 8221 ; ( KPMG pg. 58 ) Central bank actions since 1993 Since 1993, the Bundesbank has seldom taken action to take down or raise involvement rates. After its initial move to diminish involvement rates from 1993 to 1996, its chief involvement rates have steadied and have seen rare cases of little motion ( Appendix 2 ) . For illustration, after the price reduction rate was bit by bit decreased from 5.8 % in 1993 to 2.5 % in 1996, it has unchanged for about two old ages ( International Financial Statistics p 313 ) . In add-on, the money market rate and interbank sedimentation rate has risen a mere 0.3 % and 0.2 % severally since 1996. Although the Bundesbank & # 8217 ; s actions have been reasonably predictable since 1996, in a surprise move in 1997 the Bundesbank lifted its repo rate 0.3 % to 3.3 % for two hebdomads while maintaining other cardinal involvement rates steady in a preemptive work stoppage against a fright of rising prices ( Investing, Licensing & A ; Trading in Germany p 8 ) . In add-on, in an attempt to fix for the reaching of the Euro, Germany, in concurrence with other members of the Euro, lowered its interbank sedimentation rate to 3.0 % in December of 1998.As a consequence, of the Bundesbank & # 8217 ; s actions prior to 1996 and its reluctance to do major moves since, Germany has experienced a low rate of rising prices of about 1.4 % . However, although it seems to hold a strong control over rising prices and the Deutsche Mark has weakened well against the dollar over the past 5 old ages. Due to the low involvement rates, the German Mark hit an all-time depression of 1.80 DM/ $ in July of 1997 from a strong 1.43 DM/ $ in 1995 ( International Financial Statistics p 312 ) . However, there have been marks of a revival as the Deutsche Mark is presently around 1.61DM/ $ . FINANCIAL MARKETS IN GERMANY Germany & # 8217 ; s fiscal markets include stock markets, bond markets, money markets and hereafters and options markets. Capital markets play an of import function in the funding of concern investing, though bank loaning is besides a outstanding method. The fiscal markets of Germany have had a alone development in the early 1990 & # 8217 ; s. In 1993, the Deutsche Borse AG was established. The German fiscal markets are mostly under the control of this organisation which is an administrative organic structure covering the Frankfurt Stock Exchange, Deutsche Terminborse ( the hereafters and options exchange ) , Deutsche Wertpapierdaten-Zentrale ( the systems house of Deutsche Borse ) , and Deutscher Kassenverein AG ( the cardinal keeper for domestic and foreign securities ) . ( They are to the full owned subordinates of the Deutsche Borse. ) ( Wadhwa, pgs.79,80 ) The function of the money market in Germany is slightly uneven. The chances for families, concerns, and public endeavors to flush out their short-run liquidness excesss and shortages are highly limited. The pecuniary policy of the Bundesbank is conducted largely through short-run fixed income instruments. It is felt that new money market instruments and techniques would merely increase competition for financess for Bankss already confronting ferocious competition for loans. ( Dufey, pgs. 66,67 ) The German stock market consists of eight technically independent stock exchanges & # 8211 ; Frankfurt, Dusseldorf, Munich, Hamburg, Berlin, Stuttgart, Hanover, and Bremen & # 8211 ; but they really work closely together amongst themselves along with the DTB ( hereafters and options exchange ) . Three market sections compose the German stock markets: the official market ( Amtlicher Handel ) , the regulated market ( Geregelter Markt ) , and the OTC market ( Freiverkehr ) . These markets are now integrated in the trading of the Deutsche Borse. Stock trading volume for 1997 totaled DM3,717.5 billion, an addition of 43.5 from the old twelvemonth reflecting the turning importance of equity markets in Germany.The German bond market is composed of five major classs, listed in order of highest to lowest fractional constituent. These classs are: communal bonds, direct arrangement of public governments, mortgage bonds, noncommunal and nonmortgage bank bonds, and the bonds of special-purpose Bankss. In add-on, a 6th class, the industrial bond, histories for merely half of one per centum of the full bond market. A really important constituent of the bond market is the Schuldscheine market or the market in & # 8220 ; certifications of indebtedness. & # 8221 ; These can be considered negotiable promissory notes with private arrangement. This market accounts for more than two-thirds of Germany & # 8217 ; s bond market, and with a minimal denomination of DM 1 million, are used chiefly by establishments. The German Financial Futures and Options Exchange ( DTB ) , started in 1990, offers to the full computerized trading of hereafters and options. It has non been every bit influential as the other markets, as trading volume is significantly lower.Of the fiscal markets in Germany, the bond market is most important beginning of funding. It has over eight times the new issue volume than the stock market. This is non to state that equity markets are non of import. The German stock market is the 4th largest equity market in the universe. However, the map of equity has traditionally been more a vehicle of control than raising finance. OVERVIEW Germany possesses a alone banking system that consists of cosmopolitan banking, high liberty of cardinal Bankss, and strong fiscal markets. The Bundesbank has been able to efficaciously cover with pecuniary policy through its unfastened market actions, similar to that of the United States. The challenges that the German banking system will confront will be mostly due to the European Union and efficaciously incorporating it into their system. There is likely to be an addition in the amalgamations and acquisitions of the banking sector as the European Union will convey approximately more of a free motion of goods, services, and capital throughout Europe. The German banking sector will besides happen itself in a good competitory place internationally as they will be able to offer full-service activities in an progressively planetary and amalgamate industry.