Financial System of Germany

Term Paper 2010 10 Pages

Economics - Finance



1) Introduction

2) Banking System in Germany
2.1) Private Commercial Banks
2.1.1) Regional Banks
2.1.2) Foreign Banks
2.2) Loan and Saving Associations
2.3) Co-operative Banks

3) Institutional Investors
3.1) Insurance Companies
3.2) Investment Funds
3.2.1) Open-end Funds
3.2.2) Closed-end Funds

4) Stock and Bond Market
4.1) Stock Market
4.2) Bond Market

5) Financial Crisis of 2008 and Basel II

1. Introduction

Germany is a central European country with fourth largest economy in the world after the US, Japan and China. It has 82 million consumers and has a nominal GDP of $ 3.352 trillion[1]. Financial system in Germany is a traditional banks based system. Firms still rely on banks instead of capital markets.

In this paper we will analyze the banking system of Germany, its main institutional investors, the Stock and Bond markets and finally the affects of financial crisis in financial sectors and the implementation of Basel II nationally.

2. Banking System in Germany

Germany has one of the largest banking systems in the world. The whole financial system is dominated by the banks. Other than in the United States, bank credits are very important in financing the firms than other ways. German banks have assets totaling 300% of GDP[2]. Measuring in terms of Balance Sheet, the German private commercial banks only have a small share of market. The top four private banks Deutsche Bank, Commerzbank, Dresdner Bank and Bayersiche Hypo Vereinsbank together only account for 16% of total market.

Deutsche Bundesbank is the central bank of Germany, which, as every other central bank of any country, focuses on maintaining Price stability, managing the financial and monetary system, banking supervision, cash management etc. The European Central Bank (ECB) also plays a very important role, it’s the central bank for Europe’s single currency. Its main task is to maintain the purchasing power of Euro and create price stability in 16 countries which have the common currency.

The German Banking System is structured in three pillar system:

2.1) Private Commercial Banks:

(Example: Deutsche Bank, Commerzbank,

Dresdner Bank etc). In terms of Bank Balance sheet, these are major banks but their market share is not high in overall volume. These banks also have branches in foreign countries. Within private commercial banks, there are again two types:

2.1.1) Regional Banks:

These banks provide banking services in their particular region but some also have branches operating in interregional or national level.

2.1.2) Foreign Banks:

Foreign banks in Germany either have own retailing business and have branch offices in different parts (e.g. Targobank ) or they are a branch office of a foreign bank themselves.

2.2) Loan and Saving Associations:

Sparkassen/Landesbanken. They are publicly owned Banks. These banks provides the middle class with credits so, they are also called the middle class banks and comprise about 45 % of the total market. The profits of publicly governed banks are used for societal causes. The Landesbanken are usually responsible for providing loans to large customers in a particular federal state.

2.3) Co-operative Banks:

They are primary cooperative institutions and are owned by their clients and the profits will be distributed as dividends to its members. The cooperative institutions primarily operate according to regional principle.

Also some specialized banks exist in the market and they are Mortgage banks, building and loan associations and Banks with special functions. This group of banks is extremely heterogeneous[3].

Overall, the largest market shares are taken by loan and saving associations accounting roughly 45% followed by privately owned banks including specialized banks accounting roughly 42% and the cooperative sector covering roughly 13%. Table 1 shows the number of Banks operating within the country[4].

Table 1: Number of Banks operating in Germany

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Germany, despite being a social market-economy, has got a banking system which is heavily controlled by public sector. Landesbanken/Sparkassen are privileged in competing with commercial banks which could eventually drive down the rate of return. Commercial banks and cooperatives also can’t take over the Landesbanken/Sparkassen. If the publicly-owned banks fail, the municipality should bail them out by tax-payers money. Competition is generally distorted. Consequently, German Banking system is inefficient in international level.

But the positive side of this system is that the customers enjoy lower rates of interest and lower banking fees which results in higher rates of deposit.

3. Institutional investors

Institutional investors are financial mediators who are specialized in collecting and managing assets. In Germany, the major institutional investors are the investment funds and the insurance companies. These institutions pose large volume of fund which could be used by the state and companies in the capital market. Usually they use stocks, bonds, and other money market instruments that are available on large liquid capital markets in national and international level.

3.1) Insurance Companies:

Insurance companies are regarded as risk a bearer that means they bear the risk of negative financial consequences. They hold assets to backup the liabilities that are issued by insurance contracts. After the US, Japan and the United Kingdom, German insurance market is fourth largest in the world comprising 6% of world’s volume[5]. Table 2 shows the German Market for direct insurance in comparison with other G7 countries[6].


[1] https://www.cia.gov/library/publications/the-world-factbook/geos/gm.html

[2] http://www.jura.uni-frankfurt.de/ifawz1/baums/Bilder_und_Daten/Arbeitspapiere/paper7.pdf

[3] http://fhdd.opus.hbz-nrw.de/volltexte/2009/511/pdf/FHD_FB7_Ausgabe8.pdf

[4] At the end of 2000, In July 2003

[5] https://www.econstor.eu/dspace/bitstream/10419/25391/1/373432305.PDF

[6] https://www.econstor.eu/dspace/bitstream/10419/25391/1/373432305.PDF


ISBN (eBook)
ISBN (Book)
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Institution / College
University of East London
Financial System German Financial System Deutsche Finanzsystem



Title: Financial System of Germany