The German Financial System

Full text

This project is funded by the European Union under
the 7th Research Framework programme (the
me SSH)
Grant Agreement nr 266800
FESSUD
FINANCIALISATION, ECONOMY, SOCIETY AND SUSTAINABLE
DEVELOPMENT
Studies in Financial Systems
No 3
The German Financial System
Daniel Detzer, Nina Dodig,
Trevor Evans, Eckhard Hein,
Hansjörg Herr
ISSN: 2052-8027

2
The German Financial System
Daniel Detzer, Nina Dodig, Trevor Evans, Eckhard Hein, Hansjörg Herr
Affiliations of authors: Institute for International Political Economy, Berlin School of
Economics and Law (www.ipe-berlin.org)
Key words: Germany, financialisation, financial sector, banking, inequality, financial and
economic crisis, competition, efficiency, finance, capital flows, history, real estate, regulation
of banking and finance
Journal of Economic Literature classification: E44, E50, G01, G28, G35, G38, N24
Contact details: Daniel Detzer, Berlin School of Economics and Law, Badensche Str. 50-51,
10825 Berlin, Germany
e-mail: daniel.detzer@hwr-berlin.de
Acknowledgments:
The research leading to these results has received funding from the European Union Seventh
Framework Programme (FP7/2007-2013) under grant agreement n° 266800.
Website: www.fessud.eu

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Preface
This report on the German financial system is one of 15 studies of national financial systems
undertaken as part of the research project Financialisation, Economy, Society and Sustainable
Development (FESSUD) financed by the European Commission under the Seventh Framework
Programme. The report attempts to present a summary of the existing research and the most recent
available data on the German financial system within in a framework that is broadly compatible with
the studies undertaken in the other participating countries. The results of the study were first
presented at the annual conference of the FESSUD project held in Berlin in October 2012, and were
revised in February 2013. The authors are greatly indebted to Tatjana Kulp, Gayane Oganesyan and
Christian Raffer, who, as student assistants, provided invaluable research support for the study.

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Table of contents
Preface .............................................................................................................................................. 3
List of abbreviations.......................................................................................................................... 9
List of figures................................................................................................................................... 12
List of tables.................................................................................................................................... 16
Summary......................................................................................................................................... 19
I. Development and structure of the German financial system
1.
The historical development of the German financial system......................................................... 33
1.1.
Introduction ......................................................................................................................... 33
1.2.
German industrialisation ..................................................................................................... 33
1.3.
The inter-war period............................................................................................................ 37
1.4.
The post-war period in West Germany................................................................................ 39
References ...................................................................................................................................... 42
2.
The growth in finance and its role in the decades of financialisation............................................ 45
2.1.
Introduction ......................................................................................................................... 45
2.2.
Financial assets in the German economy ............................................................................ 46
2.3.
Size and activity of banking and financial markets in an international comparison ........... 48
2.4.
Increased financial activity in the German economy........................................................... 55
2.5.
Financial activities of non-financial corporations................................................................ 57
2.6.
Changes in household behaviour and balance sheets......................................................... 62
2.7.
The rise of institutional investors ........................................................................................ 65
2.8.
Conclusion............................................................................................................................ 68
References ...................................................................................................................................... 70
Data Sources ................................................................................................................................... 70
3.
The structure of the German financial system............................................................................... 73
3.1.
Introduction ......................................................................................................................... 73
3.2.
Banks.................................................................................................................................... 73
3.3.
Securities markets................................................................................................................ 83
3.4.
Shadow banks ...................................................................................................................... 85
3.5.
Conclusion............................................................................................................................ 88
References ...................................................................................................................................... 90
Data Sources ................................................................................................................................... 91

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4.
Germany’s integration into international financial markets.......................................................... 93
4.1.
Introduction ......................................................................................................................... 93
4.2.
Current account developments and net capital flows......................................................... 93
4.3.
Capital outflows and capital inflows.................................................................................... 95
4.4.
International investment position....................................................................................... 98
4.5.
International indebtedness.................................................................................................. 99
4.6.
International bank lending................................................................................................. 100
4.7.
Conclusion.......................................................................................................................... 102
References .................................................................................................................................... 103
Data Sources ................................................................................................................................. 103
5.
European financial integration ..................................................................................................... 105
5.1.
Introduction ....................................................................................................................... 105
5.2.
Key steps towards financial integration in Europe............................................................ 105
5.3.
The growth of bank lending in Europe............................................................................... 107
5.4.
Bank lending to Euro Area countries ................................................................................. 109
5.5.
Target 2 balances............................................................................................................... 111
5.6.
Conclusion.......................................................................................................................... 113
References .................................................................................................................................... 114
Data Sources ................................................................................................................................. 114
6.
Regulatory framework: financial market regulation in Germany.................................................115
6.1.
Introduction ....................................................................................................................... 115
6.2.
History of German financial market regulation................................................................. 115
6.3.
Movement towards a more market-based and deregulated financial system ................. 118
6.4.
Conclusion.......................................................................................................................... 124
References .................................................................................................................................... 134
II. Competition, profitability and efficiency
7.
The nature and degree of competition......................................................................................... 139
7.1.
Introduction ....................................................................................................................... 139
7.2.
Concentration on the national level and international comparison ................................. 139
7.3.
Retail banking and regional markets ................................................................................. 142
7.4.
Interest rate spreads in Germany and in international comparison ................................. 143
7.5.
Competition in investment banking .................................................................................. 146
7.6.
Conclusion.......................................................................................................................... 148

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References .................................................................................................................................... 150
Data Sources ................................................................................................................................. 150
8.
Profitability of the financial sector and sub-sectors..................................................................... 151
8.1.
Introduction ....................................................................................................................... 151
8.2.
Profitability of the German banking sector in international comparison.......................... 151
8.3.
Internal comparison of the profitability of the German banking sector ........................... 153
8.4.
Comparison of the profitability of the financial corporate sector with the non-financial
corporate sector ........................................................................................................................... 159
8.5.
Conclusion.......................................................................................................................... 161
References .................................................................................................................................... 163
Data Sources ................................................................................................................................. 163
9.
Efficiency of the financial sector................................................................................................... 165
9.1.
Introduction ....................................................................................................................... 165
9.2.
Approaches towards efficiency.......................................................................................... 165
9.3.
Efficiency of the German banking sector in international comparison ............................. 167
9.4.
Efficiency of different segments of the German banking sector....................................... 170
9.5.
The effect of mergers on efficiency of the banking sector................................................ 173
9.6.
Conclusion.......................................................................................................................... 174
References .................................................................................................................................... 176
Data Sources ................................................................................................................................. 177
III. Finance and the non-financial sector
10.
The changing roles of availability and sources of funds............................................................... 181
10.1.
Introduction ....................................................................................................................... 181
10.2.
Financial balances of different sectors .............................................................................. 181
10.3.
Portfolio decisions of private households ......................................................................... 183
10.4.
Ownership of the German corporate sector ..................................................................... 184
10.5.
Conclusion.......................................................................................................................... 187
References .................................................................................................................................... 188
Data Sources ................................................................................................................................. 188
11.
Sources of funds for business investments: non-financial corporate sector and small and
medium-sized enterprises (SMEs)....................................................................................................... 189
11.1.
Introduction ....................................................................................................................... 189
11.2.
Sectoral composition, profit shares and real investment.................................................. 190

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11.3.
Sources and uses of profits of non-financial corporations................................................ 193
11.4.
Real investment finance of non-financial corporations..................................................... 195
11.5.
Real investment finance of small and medium-sized enterprises (SMEs)......................... 198
11.6.
Conclusion.......................................................................................................................... 202
References .................................................................................................................................... 203
Data sources ................................................................................................................................. 204
12.
The involvement of the financial sector in the restructuring of the economy............................. 207
12.1.
Introduction ....................................................................................................................... 207
12.2.
Changes in German corporate governance since the 1990s............................................. 207
12.3.
Empirical development of M&A activity in Germany........................................................ 210
12.4.
The character of M&A in Germany.................................................................................... 213
12.5.
Involvement of financial institutions in corporate restructuring ...................................... 215
12.6.
Conclusion.......................................................................................................................... 217
References .................................................................................................................................... 219
Data Sources ................................................................................................................................. 220
13.
Privatisation and the financial sector ........................................................................................... 221
13.1.
Introduction ....................................................................................................................... 221
13.2.
Privatisations in the German banking sector..................................................................... 221
13.3.
Privatisation programmes in Germany: relation to the financial sector ........................... 222
13.4.
Financial institutions and the government during the financial crisis............................... 228
13.5.
Conclusion.......................................................................................................................... 233
References .................................................................................................................................... 236
Data sources ................................................................................................................................. 237
14.
The financial sector and private households - culture and norms of the financial system.......... 239
14.1.
Introduction ....................................................................................................................... 239
14.2.
The development of income distribution and the components of private household sector
income .......................................................................................................................................... 239
14.3.
Consumption and saving of private households................................................................ 240
14.4.
Household wealth and indebtedness ................................................................................ 244
14.5.
Conclusion.......................................................................................................................... 249
References .................................................................................................................................... 253
Data sources ................................................................................................................................. 254
15.
The real estate sector and its relation to the financial sector...................................................... 257
15.1.
Introduction ....................................................................................................................... 257
15.2.
Historical background and institutional framework.......................................................... 258

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15.3.
Size and composition of the German real estate stock..................................................... 263
15.4.
Relevance of the real estate sector for German economic activity .................................. 264
15.5.
Investment in real estate................................................................................................... 267
15.6.
Real estate prices and rents............................................................................................... 270
15.7.
The relation of the real estate sector with the financial sector ........................................ 273
15.8.
Institutional investors in the real estate sector................................................................. 278
15.9.
Conclusion.......................................................................................................................... 280
References .................................................................................................................................... 282
Data Sources ................................................................................................................................. 284
IV. Finance, distribution and crisis
16.
Inequality and the financial system in Germany .......................................................................... 289
16.1.
Introduction ....................................................................................................................... 289
16.2.
Functional income distribution.......................................................................................... 289
16.3.
Personal income distribution............................................................................................. 293
16.4.
Effects of financialisation on income distribution in Germany ......................................... 298
16.5.
Conclusion.......................................................................................................................... 301
References .................................................................................................................................... 302
Data sources: ................................................................................................................................ 303
17.
Crisis and macroeconomic policies............................................................................................... 305
17.1.
Introduction ....................................................................................................................... 305
17.2.
The German macroeconomic policy regime in the era of finance-dominated capitalism 305
17.3.
The crisis 2008/09 and economic policy responses........................................................... 310
17.4.
Conclusion.......................................................................................................................... 320
References .................................................................................................................................... 322
Data Sources ................................................................................................................................. 325

9
List of abbreviations
AG Aktiengesellschaft (Joint-stock corporation)
AnSVG Anlegerschutzverbesserungsgesetz (The Law on the Improvement of
Investor Protection)
BaFin Bundesanstalt für Finanzdienstleistungsaufsicht (Federal Financial
Supervisory Authority)
BAWe Bundesaufsichtsamt für den Wertpapierhandel
BBankG Bundesbankgesetz (Bundesbank Act)
BCCI Bank of Credit and Commerce International
BdL Bank Deutscher Länder
BEA Bureau of Economic Analysis
BilKoG Bilanzkontrollgesetz (The Law on Control of Financial Statements)
BilReG Bilanzreformgesetz (The Law on the Introduction of International
Accounting Standards and on the Protection of the Quality of Audits)
BIS Bank for International Settlements
CR Concentration ratio
DAI Deutsche Aktieninstitut (German Institute for Stocks)
DB Deutsche Bahn
DBP Deutsche Bundespost
DCGK Deutscher Corporate Governance Kodex (German Corporate Governance
Code)
DEA Data envelope analysis
DFA Distribution free approach
DGB Deutscher Gewerkschaftsbund (Federation of German Trade Unions)
DM Deutsche Mark (German mark)
DSGV Deutscher Sparkassen- und Giroverband (German Savings Banks
Association)
DTB Deutsche Terminbörse (German Derivatives Exchange)
EAA Erste Abwicklungsanstalt
EAEG Einlagensicherungs- und Anlegerentschädigungsgesetz (Directive on
Depositor Guarantee and Investor Protection)
ECB European Central Bank
ECU European Currency Unit
EMS European Monetary System
EMU European Monetary Union
EU European Union

10
FBSO Federal Banking Supervisory Office
FDI Foreign direct investment
FFEP Financial Reporting Enforcement Panel
FI Financial Index
FMSA Bundesanstalt für Finanzmarktstabilisierung (Federal Agency for Financial
Market Stabilization)
FMStErgG Finanzmarktstabilisierungsergänzungsgesetz (Supplementary Act to
Stabilize the Financial Market)
FMStG Finanzmarktstabilisierungsgesetz (Financial Market Stabilisation Act)
FT Financial Times
GDP Gross domestic product
GDR German Democratic Republic
Gov. Government
G-REIT German Real Estate Investment Trust
GSOEP German Socio Economic Panel
HH Households
HICP Harmonised Index of Consumer Prices
HRE Hypo Real Estate Holding AG
IG BCE Industriegewerkschaft Bergbau, Chemie, Energie
IKB Industriekreditbank (Deutsche Industriebank) (German Industrial Bank)
IMF International Monetary Fund
Ins. Insurance company
IPO Initial Public Offerings
KAGG Gesetz über Kapitalanlagegesellschaften (Revision of the Investment
Companies Act)
KapMuG Kapitalanleger-Musterverfahrensgesetz
KfW Kreditanstalt für Wiederaufbau
KonTraG Gesetz zur Kontrolle und Transparenz im Unternehmensbereich (Law on
Control and Transparency in Enterprises)
KWG Kreditwesengesetz
LBB Landesbank Berlin
LBBW Landesbank Baden-Württemberg
LTV Loan to value ratio
M&A Mergers and acquisitions
MaRisk The Minimum Requirements for Risk Management
MBCB Mortgaged-backed covered bonds
MFI Monetary financial institution

11
MMMF Money market mutual fund
NFC Non-financial corporation
NIPA National Income and Product Accounts
NPISH Non-profit institutions serving households
NUTS Nomenclature of Units for Territorial Statistics
OECD Organisation for Economic Co-operation and Development
OFI Other financial institution
REIT Real Estate Investment Trust
ROW Rest of the world
RRE Risk-return efficiency
SFA Stochastic frontier analysis
SMEs Small and medium enterprises
SoFFin Sonderfonds Finanzmarktstabilisierung (Financial Market Stabilisation
Fund)
SPV Special purpose vehicle
TFA Thick frontier approach
THA Treuhandanstalt
TUG The Transparency Directive Implementation Law
UMAG Gesetz zur Unternehmensintegrität und Modernisierung des
Anfechtungsrechts
UMTS Universal Mobile Telecommunications System
ver.di Vereinigte Dienstleistunggewerkschaft
VorstOG Vorstandsvergütungs-Offenlegungsgesetz (Law on the Disclosure of
Management Compensation)
WGCB West German Central Bank
WGZ Westdeutsche Genossenschafts-Zentrale (Bank)
WoBauG Wohnungsbaugesetz (Law for the promotion of housing construction)
WpÜG Wertpapiererwerbs- und Übernahmegesetz (Securities Acquisition and
Takeover Act)

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List of figures
Figure 2.1: Financial assets held by domestic sectors, Germany, 1983 – 2011.................................... 46
Figure 2.2: Financial assets by sector, Germany, 1991 – 2011 ............................................................. 47
Figure 2.3: Financial liabilities by sector, Germany, 1991 – 2011......................................................... 47
Figure 2.4: Net-financial wealth, Germany, 1991 – 2011 ..................................................................... 48
Figure 2.5: Balance sheet size of banking sector, 1979 – 2009............................................................. 49
Figure 2.6: Bank deposits, 1960 – 2009 ................................................................................................ 49
Figure 2.7: Bank loans, 1960 – 2009...................................................................................................... 50
Figure 2.8: Securities held by banks, 1979 – 2009................................................................................50
Figure 2.9: Domestic public bond market capitalisation, 1990 – 2009................................................. 52
Figure 2.10: Domestic private bond market capitalisation, 1990 – 2009 ............................................. 52
Figure 2.11: Outstanding public debt securities, Germany, 1989 – 2012............................................. 53
Figure 2.12: Outstanding private debt securities, Germany, 1989 – 2011 ........................................... 53
Figure 2.13: Number of listed companies per 10,000 population, 1988 - 2009 ................................... 54
Figure 2.14: Stock market capitalisation, 1989 – 2009......................................................................... 54
Figure 2.15: Stock market total value trade, 1988 – 2009.................................................................... 54
Figure 2.16: Stock market turnover ratio, 1988 – 2009........................................................................ 55
Figure 2.17: Gross value added of the financial sector, Germany, 1970 – 2010 .................................. 56
Figure 2.18: Employment in the financial sector, Germany, 1970 - 2010............................................. 56
Figure 2.19: Asset composition of non-financial corporations, Germany, 1992 – 2009....................... 58
Figure 2.20: Portfolio income and profits of non-financial corporations, Germany, 1980 – 2011....... 58
Figure 2.21: Portfolio income of non-financial corporations, Germany, 1980 – 2011 ......................... 58
Figure 2.22: Gross-financial payments of non-financial corporations, Germany, 1980 – 2011 ........... 60
Figure 2.23: Net-financial payments of non-financial corporations, Germany, 1980 – 2011............... 60
Figure 2.24: Liabilities and outstanding equity of non-financial corporations, Germany..................... 61
Figure 2.25: External financing of non-financial corporations, Germany, 1991 – 2010 ....................... 61
Figure 2.26: Liabilities of private households, Germany, 1990 – 2010................................................. 62
Figure 2.27: Loans of private households by type, Germany, 1990 – 2010.......................................... 63
Figure 2.28: Financial assets of households, Germany, 1991 – 2010 ................................................... 64
Figure 2.29: Number of open end funds, Germany, 1950 – 2010 ........................................................ 67
Figure 2.30: Assets under management by open end funds, Germany, 1960 – 2010.......................... 67
Figure 2.31: Wealth held in investment funds per capita, 2010........................................................... 68
Figure 3.1: Lending by private banks to non-banks, 1980-2011........................................................... 77

13
Figure 3.2: Ownership networks between financial and non-financial capital, Germany.................... 78
Figure 3.3: Lending by savings and cooperative banks to non-banks, 1980-2011 ............................... 80
Figure 3.4: Eurex.................................................................................................................................... 84
Figure 3.5: Assets held under management by open-end mutual funds in Germany.......................... 86
Figure 4.1: Current account balance, Germany, 1980 – 2011 .............................................................. 94
Figure 4.2: Balance on current account and capital account, Germany, 1980 - 2011.......................... 94
Figure 4.3: Net capital inflows, Germany, 1980 - 2011......................................................................... 94
Figure 4.4: Capital outflows, Germany, 1980 – 2011............................................................................ 95
Figure 4.5: Capital inflows, Germany, 1980 – 2011 .............................................................................. 96
Figure 4.6: Outflows and inflows of portfolio investment, Germany, 1980 – 2011 .............................97
Figure 4.7: Inflows of foreign capital into public and private bonds, Germany, 1980 – 2012.............. 97
Figure 4.8: Net international investment position, Germany, 1980 – 2011 ......................................... 98
Figure 4.9: Net international investment position, Germany, 1980 – 2011 ......................................... 99
Figure 4.10: Gross external indebtedness, Germany, 1980 – 2011 ...................................................... 99
Figure 4.11: Gross external indebtedness, Germany, 1980 – 2011 .................................................... 100
Figure 4.12: International bank lending, Germany, 1980 – 2012 ....................................................... 101
Figure 4.13: International bank lending by currency, Germany, 1980 – 2012.................................... 102
Figure 5.1: Lending by banks based in Germany to core Euro Area countries, 1982 - 2012 .............. 109
Figure 5.2: Liabilities of banks based in Germany to core Euro Area countries, 1980 - 2012 ............ 110
Figure 5.3: Lending by banks based in Germany to peripheral Euro Area countries, 1982 - 2012..... 110
Figure 5.4: Liabilities of banks in Germany to peripheral Euro Area countries, 1980 – 2012............. 111
Figure 5.5: Net balances of national central banks with the Eurosystem - Target .............................112
Figure 7.1: Balance sheet size of banks, Germany, 2010.................................................................... 141
Figure 7.2: Interest rate spreads, 1979 - 2009.................................................................................... 144
Figure 8.1: Return on assets (before tax) of the banking sector, 1979 – 2009................................... 152
Figure 8.2: Return on assets (after tax) of the banking sector, 1979 – 2009...................................... 152
Figure 8.3: Return on equity (before tax) of the banking sector, 1979 – 2009................................... 153
Figure 8.4: Return on equity (after tax) of the banking sector, 1979 – 2009 ..................................... 153
Figure 8.5: Return on assets (before taxes) by banking group, Germany, 1968 – 2010..................... 154
Figure 8.6: Return on assets (after taxes) by banking group, Germany, 1968 – 2010........................ 155
Figure 8.7: Return on equity (before taxes) by banking group, Germany, 1994 – 2010..................... 155
Figure 8.8: Return on equity (after taxes) by banking group, Germany, 1994 – 2010 ....................... 155
Figure 8.9: Return on assets (before taxes) by banking group, Germany, 1968 – 2010..................... 156
Figure 8.10: Return on assets (after taxes) by banking group, Germany, 1968 – 2010...................... 156
Figure 8.11: Return on equity (before taxes) by banking group, Germany, 1968 – 2010 ..................157

14
Figure 8.12: Return on equity (after taxes) by banking group, Germany, 1968 – 2010 ..................... 157
Figure 8.13: Return on assets (before taxes) for big banks, Germany, 1968 – 2010.......................... 158
Figure 8.14: Return on assets (after taxes) for big banks, Germany, 1968 – 2010 ............................ 158
Figure 8.15: Return on equity (before taxes) for big banks, Germany, 1968 – 2010.......................... 158
Figure 8.16: Return on equity (after taxes) for big banks, Germany, 1968 – 2010............................. 159
Figure 8.17: Sectoral net operating surplus, Germany, 1980-2011 .................................................... 160
Figure 8.18: Sectoral returns on equity, Germany, 1992 – 2009 ........................................................ 161
Figure 10.1: Sectoral net-financial flows, Germany, 1991 – 2012 ...................................................... 182
Figure 10.2: Sectoral net-financial position, Germany, 1991 – 2012.................................................. 183
Figure 10.3: Financial flows of the household sector, Germany, 1991 – 2010................................... 184
Figure 10.4: Ownership of domestic joint stock corporations, Germany, 1991 – 2012 ..................... 185
Figure 10.5: Ownership of non-stock corporate enterprises, Germany, 1991 – 2012 ....................... 185
Figure 11.1: Sectoral shares in nominal gross value added, Germany, 1991-2011 ............................ 191
Figure 11.2: Sectoral shares in gross operating surplus and mixed income, Germany, 1991-2011... 191
Figure 11.3: Sector gross operating surplus, Germany, 1991-2011.................................................... 192
Figure 11.4: Gross fixed capital formation of the private sector, Germany, 1960 – 2011.................. 192
Figure 11.5: Real GDP growth contribution of fixed capital formation, Germany, 1961 – 2011........ 193
Figure 11.6: Sources of operating surplus of non-financial corporations, Germany, 1991-2011....... 194
Figure 11.7: Uses of operating surplus of non-financial corporations, Germany, 1991-2011............ 195
Figure 11.8: Finance of investment in gross capital stock, Germany, 1991 – 2010............................ 197
Figure 11.09: Gross indebtedness of non-financial corporate sector, Germany, 1992 – 2008/9....... 198
Figure 11.10: Credit stock of non-corporate business, Germany, 1990 – 2010.................................. 201
Figure 11.11: Gross investment of non-corporate business, Germany, 1991 – 2011 ........................ 201
Figure 11.12: Commercial credit stock of non-corporate business, 1992 - 2010, Germany .............. 201
Figure 12.1: Number and transaction value of M&As, Germany, 1990-2010 .................................... 211
Figure 12.2: M&A, 1990-2010............................................................................................................. 213
Figure 12.3: Top 10 investment banks, ranked by accompanied M&A deals, Germany .................... 216
Figure 13.1: Central government’s revenues from privatisation, Germany, 1984 – 2001 ................. 222
Figure 13.2: Guarantees by SoFFin, Germany, 2008-2010.................................................................. 229
Figure 14.1: Primary gross income of the household sector by type, Germany, 1980 – 2011........... 240
Figure 14.2: Net saving of the household sector, Germany, 1980 – 2011.......................................... 241
Figure 14.3: Propensity to save out of monthly disposable income by income group, Germany...... 242
Figure 14.4: Real GDP growth contribution of private consumption, Germany, 1961 – 2011........... 244
Figure 14.5: Net-acquisition of financial assets by the households sector, Germany, 1991 – 2010 .. 245
Figure 14.6: Financial assets of private households, Germany, 1991 – 2010..................................... 246

15
Figure 14.7: Assets and liabilities of households, Germany, 1992 - 2008........................................... 247
Figure 14.8: Residential property prices, 1995 - 2010........................................................................ 248
Figure 14.9: Loans to households by type, Germany, 1990 – 2011 .................................................... 249
Figure A14.1: DAX, Germany, 1988 - 2012.......................................................................................... 252
Figure 15.1: Ownership structure of the housing stock, Germany, 2006 ........................................... 264
Figure 15.2: Gross value added by sector, Germany, 1970 – 2011..................................................... 265
Figure 15.3: Employment by sector, Germany, 1970 – 2011.............................................................. 266
Figure 15.4: Real estate construction, Germany, 1970 – 2011........................................................... 268
Figure 15.5: Contribution of real estate construction to the growth of nominal GDP, Germany ......268
Figure 15.6: Mortgage loans outstanding to dom. enterprises and households, Germany............... 269
Figure 15.7: Total private investment in construction, in machinery and equipment and in other
products, Germany, 1970 – 2011........................................................................................................ 269
Figure 15.8: BulwienGesa property market index, Germany, 1975 – 2011........................................ 271
Figure 15.9: BulwienGesa commercial/residential property market index, Germany, 1975 - 2011.. 271
Figure 15.10: Housing loans to dom. enterprises and resident individuals from banks, Germany.... 275
Figure 15.11: Total equity and net-equity acquisition of open public real estate funds, Germany ... 279
Figure 16.1: Income shares, Germany, 1980-2008 ............................................................................. 290
Figure 16.2a: Income shares in the non-financial corporate sector, Germany, 1980-2008 ............... 291
Figure 16.2b: Income shares in the financial corporate sector, Germany, 1980-2008....................... 291
Figure 16.3: Net value added of non-financial corporations, US and Germany, 1970 – 2008 ........... 292
Figure 16.4: Gini coefficients for market and disposable income, Germany, 1983-2007................... 295
Figure 16.5: Growth of mean real income across different income deciles, Germany ...................... 296
Figure 16.6: The top decile income share, Germany, 1907-2007 ....................................................... 296
Figure 16.7: The top 1 per cent income share in market income and its composition, Germany,..... 297
Figure 17.1: Investment, profits, and share prices, Germany, 1960 – 2012....................................... 306
Figure 17.2: Sectoral financial balances, Germany, 1980 – 2013 ....................................................... 309
Figure 17.3: Loans of German banks to foreign banks and non-banks, 1980 – 2009......................... 313
Figure 17.4: Key interest rates, ECB vs. Fed, 1999 – 2012 .................................................................. 315
Figure 17.5: ECB key interest rate and inflation, Euro Area, 1999 - 2012...........................................315
Figure 17.6: ECB key interest rate and real GDP growth, Euro Area, 1999 – 2012............................. 316
Figure 17.7a: Government budget balance and output gap, Germany, 2006 – 2013 ........................318
Figure 17.7b: Government budget balance and output gap, Euro Area (EU-15), 2006 – 2013.......... 318
Figure 17.7c: Government budget balance and output gap, US, 2006 – 2013................................... 319

16
List of tables
Table 1.1: Share of bank business, Germany, 1950 – 1988 .................................................................. 40
Table 2.1: Household gross debt and net wealth, 1995 -2005 ............................................................. 64
Table 3.1: Banks by banking group, Germany, 1980 – 2012................................................................. 75
Table 3.2: The 50 largest banks, Germany, 2010.................................................................................. 76
Table 3.3 German banks’ special purpose vehicles in offshore centres, June 2007............................. 87
Table 3.3: Number of shareholders, Germany, 1988 – 2011................................................................ 89
Table 5.1: Lending by banks in Germany to Europe, 1980 – 2012...................................................... 108
Table A6.1: Bank regulation, Germany, 1899 – 2010.......................................................................... 126
Table 7.1: Herfindahl Indices, 1997 – 2009.........................................................................................140
Table 7.2: CR5, 1997 – 2009................................................................................................................ 140
Table 7.3: Bank margins, Germany, 1980 – 2009................................................................................ 145
Table 7.4: Market structure in IPO underwriting, Germany, 1990 – 2000 ......................................... 146
Table 7.5: Market structure in IPO underwriting with volumes above € 50 million, Germany.......... 147
Table 7.6: Market structure of euro-denominated bond underwriting, Germany, 2001................... 148
Table 11.1: Distribution of profits and financing of gross investment of non-financial corporations 196
Table 11.2: Sources of investment finance of SMEs by number of employees, Germany, 2005-10.. 199
Table 11.3: Average equity ratio of medium-sized companies by number of employees, Germany. 200
Table 11.4: Equity ratios of medium-sized companies (sales: 10 – 50 million euro) in manufacturing
industry in international comparison, 2001 & 2008........................................................................... 200
Table 12.1: Share ownership by sector Germany, 1991-2011 ............................................................ 210
Table 12.2: Biggest M&A-deals, Germany, 1998 - 2011 ..................................................................... 212
Table 12.3: Attempts of hostile takeovers, 1991-2005....................................................................... 214
Table 13.1: SoFFin guarantees, excluding Hypo Real Estate, Germany.............................................. 230
Table 13.2: Earnings and dividends of Landesbanken, Germany, 2007 – 2009.................................. 231
Table 13.3: Measures in response to financial crisis, Germany, 2007 - April 2011 ............................ 232
Table 14.1: Housing status of households, Germany, 1993 – 2008.................................................... 248
Table A14.1: Payment cards issued by function, Germany, 1996 – 2010........................................... 251
Table A14.2: Over-indebtedness of private households, Germany, 1989 – 2006 .............................. 252
Table 15.1: Composition of the real estate stock by type, Germany, 2012........................................ 264
Table 15.2: Employment and value added in the real estate sector, Germany, 2008........................ 265
Table 15.3: Gross value added of real estate related sectors, 1991 & 2008 ...................................... 267
Table 15.4: Employment in real estate related sectors, 1991 & 2008................................................ 267
Table 15.5: Indices and nominal changes of real estate and consumer prices, Germany.................. 271

17
Table 15.6: Institutional differences in nat. mortgage markets and the mortgage market index ..... 273
Table 16.1: Shares of the general government in nom. gross value added, Germany, 1991-2011.... 293
Table 16.2: Gini coefficients for market and disposable income, selected countries ........................ 294
Table 16.3: Financialisation and the gross profit share ...................................................................... 299
Table 17.1: Key macroeconomic variables for France, Germany, Italy, Spain, the UK and the US,
average values for the business cycle from the early 2000s – 2008................................................... 308
Table 17.2: Real GDP growth, 2007 – 2013......................................................................................... 310
Table 17.3: Key macroeconomic variables, Germany......................................................................... 311
Table 17.4: Unemployment rate, 2007 – 2013 ................................................................................... 311
Table 17.5: Stabilisation aid of SoFFin, Germany, 08.10.2009............................................................ 314
Table 17.6: Budgetary effects of fiscal packages and additional measures, Germany, 2009-2010.... 317

18

19
Summary
I. Development and structure of the German financial system
1. The historical development of the German financial system
The development of the German financial system has been characterised by two key features, both
of which have their origin in the country’s pattern of industrialisation in the second half of the
nineteenth century. The first is that Germany is a prime example of a bank based financial system. As
a so-called ‘late developer’ (Gerschenkon), Germany required large amounts of capital in order to
industrialise rapidly, and this was mobilised primarily by banks. A major role was played by large
joint-stock banks which were established in the early 1850s and the early 1870s. The second key
feature is that, in addition to profit-oriented commercial banks, the German financial system has also
included two other sectors that are not primarily motivated by making a profit, namely the publicly-
owned savings banks, and the cooperative banks. By 1913 the German banking system consisted of a
private sector, dominated by eight big banks, a large public savings bank sector, and a somewhat
smaller cooperative sector. In the 1920s, the big private banks faced major challenges from inflation
and competition from foreign banks, and three big banks emerged as a result of mergers and failures.
At the end of the Second World War, the three big private banks were broken up because of their
complicity in German war crimes but, following successful lobbying, were allowed to re-establish
themselves as unified institutions in the 1950s. The big banks played a major role in financing larger
firms during Germany’s post-war reconstruction, while the savings banks and the cooperative banks
contributed significantly to the growth of Germany’s very successful small and medium sized
enterprises.
2. The growth in finance and its role in the decades of financialisation
The value of financial assets in the German economy grew rapidly in the 1990s, both in absolute
terms as well as relative to GDP. While in the 1980s the ratio of financial assets to GDP grew on
average by 1.6% a year, this increased in the period from 1991 – 2000 to 6% a year. The activity of
banks, as measured by the ratio of deposits, bank loans and securities held by banks to GDP, also
grew strongly in the later period. At the same time the size and activity of financial markets has
grown, although to a lesser extent. Despite the growth of financial markets, however, they are still
rather underdeveloped by international comparison. The financial sector’s shares in value added and
employment registered modest increases from 1970 to 1980. From 1980 until 2012, however, the

20
share in value added remained relatively stable, but with quite large short-term fluctuations, while
the share in employment declined slightly.
More significant changes can be observed in the non-financial corporate sector. Non-financial
corporations have increased the share of their investments assigned to financial assets; a larger part
of their profits has been generated from financial sources; and the share of their earnings distributed
to financial investors has increased.
The household sector, unlike in many other developed countries, has not shown a tendency towards
increasing indebtedness. Rather, private households have shown a tendency to hold a larger part of
their savings in more risky, marketable assets, substituting investment fund shares, and direct
holdings of shares and bonds for claims against banks and insurance companies.
Institutional investors grew rapidly in the decade from 1990 to 2000. However, their size is still small
by international comparison. Over all, the data and comparisons suggest that the growth of finance is
a quite recent and still relatively modest phenomenon in Germany.
3. The structure of the German financial system
The German financial system has historically been a prime example of a bank-based system although,
in contrast to most other developed capitalist countries, a significant part of the banking system has
consisted of publically-owned savings banks and cooperative banks that are not driven primarily by
the search for profits. By 2012, private banks accounted for 38% of banking assets, the publically
owned savings banks for 29.4% and the cooperative banks for 11.8%.
Big private banks had traditionally functioned as house banks to big industrial companies, but
investment and borrowing by industry declined after the 1970s. In the mid-1980s, the big private
banks responded by promoting the development of securities markets in Germany with the aim of
increasing their earnings from investment banking activities. This has resulted in some strengthening
of the role of securities markets since the 1990s, although banks continue to occupy a predominant
position in the German financial system.
Amongst non-bank financial institutions, insurance companies have historically been the most
significant, although investment funds expanded very rapidly in the 1990s, and are now almost as
large. Pension funds have been much less significant. Highly leveraged financial institutions, such as
hedge funds and private equity funds, have also had a relatively limited presence in Germany.

21
4. Germany’s integration into international financial markets
Germany abolished all controls on international capital flows in 1981 and, in the course of the 1980s,
the country’s international financial integration increased steadily, but from a low base. Between the
late 1990s and 2008, when Germany generated a large current account surplus, international
financial integration increased strongly, with a marked growth of both portfolio investment and bank
lending from Germany to other countries. The bank lending was predominantly to other European
countries, with the largest part going to euro area countries. German banks also extended their
lending in the US during this period and, in addition to funds from Germany, German banks drew
extensively on funds raised in the US itself. As a result, German banks were strongly exposed to the
financial crisis when it broke in the US in 2007. Following the dramatic deepening of the crisis in
September 2008, German international financial integration was partly scaled back and German
banks reduced their lending abroad at the same time that there was an outflow of foreign funds held
in German banks. However, as a result of increased international financial uncertainty following the
outbreak of the financial crisis, there was a large inflow of funds from other countries into German
government bonds, which consequently registered unprecedentedly low interest rates.
5. European financial integration
In the 1980s, lending by banks in Germany to other countries increased but was rather limited, and
less than half the lending was to countries in the EU. From the second half of the 1990s, however,
lending by banks in Germany to other countries increased strongly, above all lending to EU countries,
which rose from 12% of German GDP in 1990 to 78% in 2008. Some two thirds of lending to EU
countries was to euro area countries, and much of the remaining third was to Britain, reflecting the
role of London as an international financial centre, where German banks conduct much of their
international business.
Lending by banks in Germany to other euro area core countries increased strongly from the mid -
1990s to 2008 but, following the deepening of the financial crisis, it ceased to increase further and
remained around the same level until 2012. By contrast, while lending to countries in the euro area
periphery increased even more strongly up to 2008, this was followed by a marked process of
disengagement from 2010, when the debt crisis first broke in the euro area, and by 2012 lending to
the peripheral euro area countries had fallen by almost a half.
Since the onset of the financial crisis, Germany has accumulated large positive balances with the euro
area’s Target 2 clearing system. While small net balances were also built up by Finland, the
Netherlands and Luxemburg, the deficits were at first primarily due to Ireland, Greece and Portugal,

22
but since 2011 these have been eclipsed by the negative balances accumulated by Italy and
especially Spain.
6. Regulatory framework: Financial market regulation in Germany
The regulatory regime in Germany from the 1930s, when a wide range of new measures were
introduced, up to the 1990s could be characterised as a stakeholder-oriented and bank-based model.
Regulations stabilised the widespread system of house-banks and the extensive cross-holdings of
shares between big financial and industrial companies. Formally, a universal banking system existed,
but investment banking was in practice unimportant. This started to change in the 1990s, gained
speed following the election of the Schröder government in 1998, and triggered a transition to a
regime where shareholders’ interests began to gain importance in regulations.
From 1995, Germany initiated changes that aimed to move the financial system in the direction of a
more Anglo-Saxon type system. Regulatory changes aimed at strengthening the power of
shareholders, and at limiting the influence of banks. This has led to a three fold decline in banks’
direct involvement in corporate governance: in the number of bank representatives on company
supervisory boards; in banks’ majority ownership in large firms; and in banks’ role in proxy voting.
The regulatory changes were promoted by German governments in an attempt to strengthen the
position of Germany as a host for international financial markets, and by the European Commission,
which pushed for financial market harmonisation in Europe as part of a neoliberal agenda. However,
the German financial system has not changed substantially. Although Germany has clearly been
moving away from a purely bank-based model, it has not adopted a market-based one. Although the
legal changes would have permitted the development of a much more capital-market based system,
this has not happened.
II. Competition, profitability and efficiency
7. The nature and degree of competition
At a national level, concentration measures and the number of independent organisations indicate a
very low level of concentration in the German banking sector. However, if the cooperative and the
public sectors are each considered as large, single institutions, concentration ratios are much higher.
The interest margins of German banks are slightly higher than in some other developed capitalist
countries, such as Japan and France, but since 1995 margins have shown a downward trend. This can

23
be related to increased competitive pressure in the deposit market due to the entrance of new
financial institutions, in particular money market funds.
At a regional level, concentration is considerably higher. Focusing on big cities and measuring
competition by the number of branches in a certain area, savings banks and cooperative banks are
the main players in the retail markets, while the big German banks are fringe players.
Before 1995 the market for investment banking services was small, highly concentrated and
dominated by German-owned banks. Since 1995, however, the market has grown, and foreign-
owned banks have become much more important, securing between 45% and 65% of business
during the period from 1995 to 2012. The entrance of these new competitors led to a decline in the
concentration ratios. However, the market for large IPOs today is dominated by a relatively small
number of international investment banks, and only two German banks, Deutsche Bank and
Commerzbank, belong to the big players.
8. The profitability of the financial sector
The profitability of German banks, measured by the rate of return on equity or on assets, has been
low by international comparison since the early 1980. Pre-tax profitability tended to fall from the
early 1980s until the recent crisis, although after-tax profitability did not. The pre-tax profitability of
the cooperative banking sector has been higher than that of the private banking sector, with the
latter being far more volatile. It has also been higher than that of the public savings banks because of
the particularly low profitability of the Landesbanken. After-tax profitability converges and private
banks gain relatively most from government re-distribution.
The profit share of the financial corporate sector has shown no pronounced trend since the early
1980s, but has fluctuated quite widely, with major declines during the crisis in the early 2000s and
the most recent financial and economic crisis. The profit share of the non-financial corporate sector
started from a lower level in the early 1980s, but then showed a tendency to rise until the recent
crisis with only minor fluctuations. Since the early 2000s, it has exceeded the profit share of the
financial corporate sector.
The rate of return of the financial corporate sector has shown a falling trend, as with the case of the
banking sector. Although the financial and the non-financial sectors had similar rates of return on
equity in the early 1990s, in contrast to the financial sector, the rate of return tended to rise in the
non-financial sector until the recent crisis.

24
9. The efficiency of the financial sector
The evidence regarding the efficiency of the German system is mixed. For international comparisons,
it is important to note that a large part of the German system consists of savings and cooperative
banks that do not aim at maximising profits. Hence, profit efficiency may be lower than for countries
which have only profit-oriented banks. Savings banks use part of their surplus to promote community
activities and are also obliged to provide financial services to all customers, regardless of the
profitability of the business relationship. Additionally, it seems that savings banks lend at rates below
those charged by the private and cooperative banks. The primary aim of cooperative banks, in turn, is
to benefit their customers and members.
Studies that compare efficiency among different parts of the banking system at the national level find
that local banks from all groups (private, cooperative and public) seem to be superior to the big
nationally active banks in terms of efficiency. Among local banks, public and cooperative banks are
found to be more efficient than private banks. There is therefore no evidence that opening up the
public sector for private capital would improve the efficiency of the German banking system.
Studies which investigate the possible sources of inefficiency of banks find that the suboptimal size of
German banks is not a significant factor. Furthermore, since the optimal size for banks is not known,
and the threshold where risk-return decisions are found to deteriorate is rather low, there is little
evidence that a consolidation strategy would improve efficiency. There is also no evidence for the
existence of significant economies of scope. This indicates that a separation of investment and
commercial banking would not have a negative effect on efficiency.
III. Finance and the non-financial sector
10. The changing roles of availability and uses of funds
In the 1990s, the main source of funds was derived from households’ financial surplus and these
were used principally to finance the financial deficits of non-financial corporations and the
government. From 2002 until 2008, however, in addition to households, non-financial corporations
also generated financial surpluses, and the surpluses were employed to finance the government
deficit and rising financial investment in the rest of the world. Since 2009, the scale of the financial
flows has declined somewhat, but households and non-financial corporations have continued to
supply funds, while the government and the foreign sector has continued to absorb them.
Households place a large part of their financial surplus with intermediaries, in particular banks and
insurance companies, and to a lesser extent investment companies. It is therefore these
intermediaries who have been primarily responsible for deciding how to allocate the funds between

25
different forms of financial investment, and who may therefore have been in a position to have
exercised an influence over corporate governance.
In the early 1990s, the most important shareholders in companies were non-financial corporations,
but such cross-holdings subsequently declined quite strongly. The second most important
shareholders were households, although their holdings also declined subsequently, partly due to a
shift towards indirect holdings through institutional investors. The most striking increase in share-
holdings has been that by foreign investors, whose holdings increased substantially between 1995
and in 2008.
11. Sources of funds for business investments: the non-financial corporate sector and small and
medium-sized enterprises (SMEs)
The profitability of the non-financial business sector increased considerably from the early 1990s
until the Great Recession, but investment in capital stock has been weak since the mid-1990s
following the end of the German re-unification boom, and was particularly weak in the early 2000s.
There seems to be some evidence that the ‘preference channel’ and the ‘internal means of finance
channel’ constrained investment in capital stock under the conditions of financialisation and the
increasing shareholder value orientation of management. An increasing share of received financial
profits (interest and dividends) in the operating surplus indicates an increasing orientation of the
management of non-financial corporate business towards investment in financial assets, as
compared to investment in capital stock (‘preference channel’). An increasing share of dividends paid
out to shareholders in operating surplus indicates a decrease in internal means of finance available
for fixed investment purposes (‘internal means of finance channel’).
As in other countries, internal means of finance are the most important source of investment finance
for German corporations; the contributions of equity issues have historically been negligible and they
have been negative since the mid 1990s, indicating share buybacks in this period. Bank credit, which
is the major external source of finance in Germany, as well as corporate bond issues, were not
necessary for real investment finance but have been used for the acquisition of financial assets since
the mid 1990s.
SMEs and non-corporate firms also finance investment predominantly from internal sources, albeit
to a lower degree than non-financial corporations. Periods of high investment are associated with
increasing credit and increasing debt-capital ratios and vice versa.

26
12. The involvement of the financial sector in the restructuring of the economy
After World War II the German company network was characterised by strong ties between
management, capital, and labour and by a low level of M&A activity. M&A activity increased in
Germany from the 1990s, mainly as a result of developments associated with German unification,
and continued to rise in the 2000s. The increase was a little smaller than in Europe as a whole, and
much smaller than in the USA or Britain. Although Germany did not adopt an Anglo-US-American
type of M&A regime, changes in the strategy of bigger German banks and enterprises encouraged
M&A from the early 1990s on. This was supported by the policies of the German government and the
European Commission. These developments involved moderate changes rather than a decisive leap
towards a liberal market economic model with easy and frequent takeovers. Hostile takeovers have
not been very common in Germany and, if they take place, they are generally of a more of a
managed type, involving a compromise between all the stakeholders. The German M&A regime can
be judged as a hybrid, combining elements of a market radical approach with a strong non-market
stakeholder orientation. Vodafone’s hostile takeover of Mannesmann in 2000 was a shock for the
traditional German corporate governance model and led to a form of consensus that takeovers
should be possible, but not in a market radical way.
13. Privatisation and the financial sector
The structure of the German banking system, involving private, public and cooperative banks, has not
changed significantly in recent years, despite some pressure for liberalisation and privatisation. In
other sectors of the economy, however, privatisation has had an impact. In quantitative terms, the
post-unification wave of privatisations in East Germany was the most important. It was organised by
the federal agency Treuhandanstalt, whose aims were to save as much as possible of East German
industry. The Treuhandanstalt created supervisory boards for companies, searched for prospective
buyers interested in long-term company growth, and also guaranteed post-privatisation participation
in both funding and restructuring. Whether planned or not, in practice, the Treuhandanstalt’s activity
resulted largely in the takeover of East German enterprises by West German companies. Because of
the Treuhandanstalt’s extensive role, that of financial institutions was quite limited.
Another important field for privatisation concerned public utilities. This was in part motivated by a
desire to either raise revenue or to sell off loss-making units, and in part a response to European
Commission directives. Privatisation has affected former state monopolies such as the postal,
telecommunications and, to some extent, transport sectors. The health-care sector was never a state
monopoly, but public hospitals have been increasingly privatised since the early 1990s. The process

27
of privatisation has created new markets where financial institutions have been able to expand their
activities.
The process of privatisation has been partially reversed since the onset of the most recent crisis, as
several privately-owned financial institutions were either partly or completely nationalised. The Hypo
Real Estate Holding AG was completely nationalised, while Commerzbank was partially nationalised.
Several Landesbanken also required considerable government support.
14. The financial sector and private households – culture and norms of the financial system
After a decline in the private saving rate during the 1990s, the average propensity to save out of
disposable income has increased since the new economy crisis. The main reasons for this increase
were as follows: first, the redistribution of income at the expense of the labour share of income and
of low-income households; second, an increase in precautionary saving since the early 2000s in the
face of weak growth, high unemployment and ‘reform policies’ aimed at the deregulation of the
labour market and reduced social benefits; and third the absence of wealth effects on consumption.
The savings of private households are directed mainly to deposit and saving accounts with banks, and
to policies with private insurance and pension funds. The significance of shares and investment funds
increased during the new economy boom in the second half of the 1990s, but has since returned to
the level of the early 1990s. The attractiveness of stock markets and the rise of a ‘stock market
culture’ in Germany were, therefore, very short-lived. The relationship of the total financial assets
held by private households to nominal GDP has seen a tendency to increase since the early 1990, as
has the relationship of real estate wealth to GDP. However, financial and real estate wealth are
extremely unequally distributed and inequality increased in the early 2000s.
Financial liabilities tended to increase slightly in relation to disposable income in the course of the
1990s, but then declined somewhat between the new economy crisis and the Great Recession, and
are still low by international comparison. However, low income households are increasingly facing
serious problems of over-indebtedness. While the main component of household debt is housing
loans, loans for consumption are of minor importance in the aggregate.
15. The real estate sector and its relation to the financial sector
In Germany, unlike many other countries, a real estate bubble did not develop in the 2000s. The
stability of the German real estate market is the result of a combination of specific institutional
features. Firstly, government intervention in the real estate sector led to a diversified supply of

28
housing in all housing segments. Although the government has reduced its active role in the sector in
recent decades, the established structures continue to prevail. There was a sufficient supply of rental
dwellings, so that households only decided to purchase their own homes when it appeared
beneficial. Secondly, a relatively conservative system of real estate financing has contributed to the
stable development of the real estate market. Those factors appear to have reinforced each other
and to be beneficial for the system as a whole. The most important financial investors in the real
estate market are open or closed real state funds. These have, until now, been relatively unattractive
for international investors due to a lack of transparency and the way they are taxed. While this has
meant that less capital has been available, it may have sheltered the German market from foreign
capital inflows that could have led to Germany also developing a real estate bubble. Since the Great
Recession there have been signs that a real estate bubble could develop in Germany in the future
due to very low interest rates, a distrust of monetary forms of wealth and the limited supply of
appropriate property in bigger cities.
IV. Finance, distribution and crisis
16. Inequality and the financial system in Germany
Inequality of market incomes as measured by the Gini coefficient started rising following German
unification in 1990. Since the early 2000s there has also been an increase in inequality in disposable
income due to a decline in the real disposable income of the bottom half of the distribution. Top
income shares increased substantially during the 1990s, with a significant contribution of salaried
income. High unemployment and low economic growth in Germany during the first half of the 2000s
were accompanied by excessive wage moderation, which had major consequences for the low-skilled
workforce in particular. This was accentuated by the introduction of measures to deregulate the
labour market and the absence of a legal minimum wage. As a result, since the early 2000s, income
dispersion has become very pronounced in Germany.
With regard to the functional income distribution, the wage share began to decrease in the mid-
1990s and the decline was especially marked in the early 2000s. This was due, on the one hand, to
the shrinking of the government sector where the profit share is, by definition, zero, and, on the
other hand, to the falling wage share in the non-financial corporate sector, while retained earnings
and the rentier share increased. The non-financial sector employs the bulk of the low-skilled
workforce, and has been able to increase the share of profits at the expense of wages due to the
diminishing power of trade unions following the deregulation of labour markets, and to the threat of
outsourcing. The wage share has been relatively stable in the financial sector which normally
employs high-skilled staff and where the concentration of the so-called ‘working rich’ is higher,

29
something that is consistent with the observation that the rise in top incomes was driven largely by
salaried income.
17. Crisis and macroeconomic policies
German macroeconomic development prior to the crisis can be characterised as export-led
mercantilist, as compared to the debt-led consumption boom or domestic demand-led types of
developments in other major countries. Against this background the foreign trade and the financial
market channel of transmission of the crisis to Germany were most important. The foreign trade
channel became effective, because the openness of the German economy had rapidly increased
since the mid-1990s, and the growth of aggregate demand had been driven largely by net exports.
Rising current account surpluses meant an increase in net foreign assets which were mainly held by
commercial banks. This made the sector particularly vulnerable to the financial market channel of
transmission of the crisis.
Regarding policy reactions towards the crisis, the immediate bailout of the financial sector detained
the financial crisis in Germany and prevented a financial meltdown. Economic recovery was mainly
driven by German exports in the course of the recovery of the world economy, and it was strongly
supported by expansionary fiscal policies in 2009 and 2010. However, this German type of recovery
suffers from two major drawbacks. First, to the extent that it was driven by net exports, it had to rely
on the neo-mercantilist type of development that had contributed considerably to world and
regional imbalances and to the severity of the impact of the crisis on Germany itself. It therefore laid
the seeds for further imbalances, fragilities and vulnerabilities of the German economy, and it has
contributed significantly to the persistent crisis in the Euro area. Second, as a political precondition
for the German stimulus packages, the so-called ‘debt brake’ was introduced into the German
constitution, which will limit the room for manoeuvre for German fiscal policy in the future. And
since this type of fiscal austerity has also been imposed on the Euro area via a tightened Stability and
Growth Pact and a new Fiscal Compact, it will mean restrictive fiscal policies for the Euro area too,
thereby driving major parts into deflationary stagnation, which will in turn feed back negatively on
German exports and growth.

30

31
I. Development and structure of the
German financial system

32

33
1. The historical development of the German financial
system
1.1. Introduction
The development of the German financial system has been characterised by two key features, both
of which have their origin in the country’s pattern of industrialisation in the nineteenth century. The
first is that external finance for non-financial firms in Germany has been supplied predominantly by
banks – indeed, Germany provides one of the archetypal examples of a bank-based financial system.
The second key feature is that, while a small number of big banks played a dominant role amongst
the privately-owned commercial banks, the German financial system has also included two other
sectors that are not primarily motivated by making a profit, namely the publicly-owned savings banks
and the cooperative banks. The aim of this chapter is to briefly outline the development of the
German financial system prior to the significant transformation which began in the 1980s. To this
end, it is possible to identify three main periods: from the time of industrialisation up to 1914; the
troubled inter-war years; and the post-war period of reconstruction and rapidly rising prosperity.
1.2. German industrialisation
Private banks played a leading role in organising and financing the construction of the German
railways in the 1830s and 1840s (Tilly, 1994, p. 230). Although there was some industrial
development in the 1840s, notably the growth of the textile industry in Saxony, industrialisation was
still quite limited and the decisive shift to industrial capitalism occurred between 1850 and 1870 –
that is, before the establishment of a unified German state (Blackburn, 2003, p. 135). Private banks
based in Cologne played an important role in financing investment in the Ruhr area, but mainly to
entrepreneurs who they knew personally. The most important financial development in the 1850s
was the formation of joint stock banks.
The key role of the joint stock banks in financing industrialisation in Germany was highlighted in the
influential comparative study by Alexander Gerschenkron (1962). In Britain, according to
Gerschenkron, industrialisation had been a gradual process and the accumulation of capital in the
industrial sector was able to draw on the earnings from trade and from capitalist agriculture, and
later from industry itself. While banks also made a contribution in Britain, it was primarily through
providing short-term credits to finance trade. Germany, by contrast, was what Gerschenkron

34
describes as ‘a late developer’. Given Britain’s established industrial dominance, there was a need to
quickly establish large units of production which could benefit from economies of scale. An
important precedent for developments in Germany was the establishment of the Crédit Mobilier in
France in 1852. Although the French initiative soon foundered, it pioneered the notion of providing
long-term bank loans to finance industrial development. This idea was taken up and adapted in
Germany and led to the creation of universal banks which provided long-term finance for
investment.
The first wave of joint stock banks was created in the 1850s and included the Disconto Gesellschaft
(1851), the Darmstädter Bank (1853), and the Berliner Handelsgesellschaft (1853); a second wave
followed in the early 1870s, and included the Deutsche Bank (1870), the Commerz- und Disconto-
Bank (1870), the Deutsche Nationalbank (1871) and the Dresdner Bank (1872). These banks played
an important role in the setting up of joint-stock companies in the industrial sector, often investing a
part of their own capital in the enterprises (Feldenkirchen, 1991, p. 123). By the 1870s, Germany had
established a capitalist economy with a major industrial sector.
Following the creation of a unified German state in 1871, seven existing currencies were
consolidated into a single currency in 1873, and a single central bank, the Reichsbank, was
established in 1876. The Bank Act of 1875 authorised certain banks to issue currency, but by 1905
note issue was restricted to only four regional Notenbanken apart from the Reichsbank. Banks were
generally not subject to regulation other than the general laws applying to all German companies
(Frohlin, 2007, pp. 21-23).
The initial phase of industrialisation was characterised by considerable financial instability and crises
in 1847-48, 1857-58 and 1873-76 brought down many firms and especially banks (Tilly, 1988, p. 283).
The crisis which broke in 1873 was especially severe and marked the end of an investment boom
which had begun in 1869, and which was fuelled by the influx of five billion francs (equal to a quarter
of German GDP) which France was required to pay as an indemnity following its military defeat by
Germany in 1871. When the bubble burst in May 1873 it had an impact throughout western Europe
and the US. In Germany it led to the widespread failure of firms, a fall in wages, in profits and in
prices, and inaugurated a period of slower growth which continued, with some cyclical variation,
until 1896 (Blackburn, 2003, pp. 144-45).
The second phase of industrial expansion in Germany took place between the 1880s and 1914.
During this time Germany developed, in the words of Blackburn, from ‘a respectable European
industrial nation to a major world power’ (Blackburn, 2003, p. 237). In 1880 Britain produced twice as
much steel as Germany; by 1913 the position was reversed. It was in this period that the banks really
came into their own: ‘in general reinvested profits, reserves and share issues hardly covered the high

35
investment requirements of German industry. The role of banks was therefore decisive, much more
so than it had been in the first phase of industrialisation up to the 1870s.’ (Blackburn, 2003, p. 244)
By 1913, eight German banks had grown into big banks; the three largest enterprises by balance
sheet were banks; and of the 25 largest enterprises 17 were banks (Feldenkirchen, 1991, p. 116).
The big banks’ business was concentrated primarily on large firms in specific branches of the
economy: mining and metal production, mechanical engineering, and the chemical and electrical
industries. Banks provided firms in these sectors with long-term loans, but they did so through short-
term loans which could be rolled over. The banks, in turn, could if necessary refinance loans by
issuing securities on the capital market. The big banks also played an important role in underwriting
shares issued by industrial concerns. In all this they benefited from a close relation with the state.
The Reichsbank provided a very reliable source of liquidity, with virtually unlimited discounting
facilities. As a result, German banks could get by with much less liquidity than British banks, as bills of
exchange could be seen as close substitutes for central bank notes (Tilly, 1988, p. 284).
The banks consciously took advantage of their position as creditors to increase their influence over
companies that were faced with financial difficulties. Feldenkirchen (1991, p. 126) cites the example
of Krupp where, following payment difficulties, a short-term loan to finance a new plant was
replaced by a nine-year loan at a higher interest rate, and the company was obliged to allow a
representative of the bank to join the company board to monitor future developments. In an
attempt to prevent the banks from gaining influence, companies such as Siemens consciously
restricted their growth so as to avoid requiring external finance.
In contrast to the first phase of industrialisation, by the 1880s banks tried to avoid direct
shareholdings in companies so that they would not suffer losses when the value of shares fell in the
event of a company facing difficulties (Feldenkirchen, 1991, p. 129). However, when companies were
faced with financial difficulties, banks would convert loans into share holdings and, in this way, the
banks obtained seats on company supervisory boards. A further important development was that, in
response to the intensified competition and declining profitability which set in following the onset of
the 1873 financial crisis, the big banks promoted the formation of cartels to prevent competition
between firms in which they had an interest. By insulating large firms from competition, they
provided them with planning security and in this way bolstered their profitability.
The powerful position which the German big banks built up has been highlighted by a number of
writers who have pointed to the big banks’ takeover of smaller banks, their rising shareholdings in
big industrial companies, and their increasingly important position on company supervisory boards.
Perhaps most famously, on the basis of the German experience, Hilferding (1910) argued that
financial capital and industrial capital had come to merge under the dominance of financial capital to

36
create what he termed ‘finance capital’. Subsequent writers have criticised Hilferding, arguing that –
while his analysis might have been valid for the later 19
th
century – by the early 20
th
century
industrial companies had gained greater independence and increased their bargaining power in
relation to the banks: as firms merged, more than one big bank was represented on the supervisory
board; furthermore, the financial needs of giant industrial firms had become so large that share
issues were usually handled by a consortium of banks. But even Hilferding’s critics agree that the
relation between the big banks and big industrial concerns was very close (Tilly, 1988, p. 280; Deeg,
1999, pp. 77-79).
The focus of the big banks on large industrial projects meant that they neglected lending to other
sectors, including agriculture, housing and small businesses. As a result, lending to small businesses
was left to the savings banks, the cooperative banks and to small private banks. The savings banks
(‘Sparkassen’) were set up by city and county governments, and became a significant source of
finance during the period of industrialisation. The first savings bank was founded in Göttingen in
1801 and the number then increased rapidly, especially after 1815 when local authorities were
granted greater autonomy in determining their economic and social policies. The savings banks
provided artisans and, as wages rose in the course of the nineteenth century, industrial workers, as
well as parts of the urban and rural middle class with savings accounts. By 1900 there were 2,700
savings banks in Germany, and one third of the population had an account with them. The money
that was saved in this way was used primarily to finance housing and public investment in utilities
and infrastructure. Because each bank was required to limit its activities to its own local area, the
savings banks ensured that the provision of credit was distributed throughout the country. In
addition to the local savings banks, regional associations or Landesbanken were established to
promote regional economic development and to provide the local savings banks with investment
facilities. The first of these was the Westfälische Provinzialhilfskasse, set up in Münster in 1832.
Between 1851 and 1910, the savings banks are estimated to have supplied some 26 per cent of the
total credit in Germany – exactly the same figure as the profit-oriented commercial banks (DSGV,
2010, p. 7).
The cooperative banking sector originated in the mid-19
th
century with credit cooperatives formed by
self-employed craftsmen and small farmers, many of whom faced great financial difficulties as
industrialisation got underway. The first urban cooperative bank (Volksbank or people’s bank) was
established in 1862 in Darmstadt on the basis of a credit cooperative that had been founded in 1852.
The first rural cooperative bank (Raiffeisenbank, after the movement’s founder, Friederich Wilhem
Raiffeisen) was set up in 1864 (DGRV, p. 1). The cooperative banking sector then grew rapidly and by
1859 there were 80 credit cooperatives with 18,000 members and they created regional associations

37
in order to refinance loans and circulate funds amongst themselves. The 1889 Cooperative Law
allowed credit cooperative to offer current account credits to their members, transforming the
cooperatives from loans associations to more formally organised banks (Deeg, 1999, p. 34-6).
Between 1851 and 1910 cooperative banks are estimated to have accounted for 8 per cent of the
total credit extended in Germany (DSGV, 2010, p. 7).
The rapid growth of the savings banks and the cooperative banks, both of which had established an
extensive network of branches, prompted the big private banks to also set about building up a
network of branches in the 1890s in an attempt to capture a larger part of the country’s savings.
However, according to figures cited by Frohlin (2007, p. 41) this was only partly successful: by 1913,
while the joint stock banks accounted for 27 per cent of the financial system’s assets, the savings
banks accounted for 32.7 per cent.
1.3. The inter-war period
During the interwar period, German big banks were faced with two major challenges: firstly, to
rebuild their balance sheets in the aftermath of the First World War and the onset of inflation; and
secondly, to combat competition from foreign banks in the 1920s and from the savings banks in the
1930s.
1
The big banks’ capital had been eroded by inflation, especially in 1919, and by 1924 the real value of
their capital and reserves had been reduced to just one third of that in 1913. Furthermore, large
depositors had shifted their deposits abroad resulting in extensive capital flight. The big banks
responded by taking over a large number of private banks and smaller joint-stock banks. This process
had actually begun in 1913, prior to the war, but it intensified in the period 1919-23, and continued
more moderately between 1924 and 1929. There were also a number of significant mergers between
big banks. In 1922 the Bank für Handel und Industrie, Darmstadt, merged with the Nationalbank, to
form the Damstädter- und Nationalbank (‘Danat Bank’), which was centrally involved in promoting
industrial restructuring and which was seen as introducing far greater competition between the big
banks. Then in 1929 the Mitteldeutsche Bank merged with the Commerzbank, and the Deutsche
Bank merged with the Disconto Gesellschaft to form a much larger institution than any of the other
German big banks (Balderston, 1991, pp. 562-3).
Monetary stabilisation in 1923-24 was based on establishing the goldmark as a unit of account, and
in the following period the big banks began to expand, but with a smaller capital base than before
1
This section draws largely on Balderston (1991).

38
1914. In contrast to the pre-war period, the ability of the Reichsbank to provide a liquidity guarantee
was limited by international conditions and the requirement that Germany adhere to the gold
standard. Furthermore, between 1924 and 1929, there was a major influx of foreign capital into
Germany. Some of this was mediated by the big German banks, but there was also a significant
expansion of lending by foreign banks directly to German firms (Balderston, 1991, pp. 565-9). In the
face of intense competition and low profitability, the German big banks engaged in riskier lending
(Tilly, 1996, p. 414). Then in 1927, the collapse of the stock market meant that the big banks could no
longer raise additional capital by issuing shares. Although the big banks continued to have the same
number of seats on company boards as before the war, the influence of the banks was reduced as
many bigger firms bypassed local banks and borrowed directly from abroad (Balderston, 1991, p.
592).
The economic expansion which began in 1924 came to an end with a wave of deposit withdrawals
that began in 1929 and culminated in the banking crisis which broke in 1931. The loss of deposits
began after German intransigence led to a breakdown of reparations negotiations in Paris and
intensified after the Reichstag rejected proposals for fiscal cuts in 1930. At first the withdrawals
affected primarily reichsmark deposits, suggesting that the initial concern involved convertibility, but
by 1931 the withdrawals affected both reichsmark and foreign currency deposits (Balderston, 1991,
pp. 582-4). The crisis was detonated by the failure on 13 July 1931 of the Danat Bank, which
following rapid expansion had become the second largest bank after the Deutsche Bank. To prevent
a collapse of the banking system, the government closed all the banks from 14 July to 5 August 1931
and intervened either directly or through a subsidiary of the Reichsbank to recapitalise the big banks.
The Danat and the Dresdner Bank were merged under the name of the Dresdner, with 91 per cent of
the share capital owned by the state; 69 per cent of the Commerz- and Privatbank and 35 per cent of
the Deutsche Bank-Disconto Gesellschaft were also owned by the state (Balderston, 1991, p. 597).
In the 1930s, the big banks’ business stagnated. There was little industrial investment until 1936, and
bank business was constrained by currency controls introduced at the time of the banking crisis, and
subsequent controls on the capital market introduced by the Nazis. Although elements within the
Nazi party had advocated breaking the power of the banks, the state holdings in the big three banks
that emerged from the banking crisis were privatised in 1937 (Balderston, 1991, pp. 600-02).
During the inter-war period the savings and cooperative banks strengthened their position. Savings
banks had been granted the right to open checking accounts in 1908, and the first clearing system
was established by savings banks in Saxony in 1909, with other regions subsequently following suit.
The decisive development for the savings bank sector occurred in 1918 with the creation of the
Deutsche Girozentrale in Berlin, which created a clearing system which linked the savings banks in all

39
the regions. In some regions, the clearing function was exercised by the regional Landesbanken,
which acted as central banks to the savings banks in their regional state, and, even where separate
clearing houses had been set up, by the end of the 1930s, these had merged with the regional
Landesbanken (DSGV, 2010, p. 8). In this way, an effective national system of public banks was
created. The savings banks were also affected by the banking crisis in 1931, in particular as a result of
illiquid loans to local authorities, and they had to turn to the Reichsbank for support. In response to
the crisis, in 1931 the savings banks – which until then had been part of local government
administrations – were granted legal autonomy, a move designed to ensure that bankrupt local
authorities would not be able to draw on the savings banks’ reserves. The new law also determined
that, with the exception of a few existing independent institutions, in future only publicly-owned
savings banks could call themselves ‘Sparkassen’. In the aftermath of the crisis, the savings banks
grew strongly. Between 1933 and 1938, while deposits at the big private banks increased by 39 per
cent, those at the savings banks increased by 68 per cent and those at the cooperative banks also
rose by 62 per cent. Some two-fifths of the increase in the deposits at the savings banks was used to
fund loans to the government (Balderston, 1991, pp. 600 & 603).
1.4. The post-war period in West Germany
At the end of the Second World War, the three big private banks that had emerged from the crisis in
the early 1930s were each broken up into 10 regional institutions and senior bank executives were
imprisoned for their complicity in German war crimes. Nevertheless, as a result of a successful
political campaign by the banks, the ‘Big Bank Act’ of March 1953 allowed a partial amalgamation of
the regional institutions, and from 1956 the complete reestablishment of the big banks was allowed.
The Deutsche Bank and the Dresdner Bank were re-established as unified institutions in 1957 and the
Commerz Bank followed in 1958 (Tilly, 1996, p. 417).
The big banks continued to have a strong relation with industrial firms and between 1950 and the
early 1970s some 60 per cent of each banks’ lending was directed at manufacturing industry (Tilly,
1996, Figure J2). However, the relative importance of the big banks in the German banking system
declined in the post-war years. In 1950 the big banks accounted for 19 per cent of banks’ assets, but
this fell in the course of the decade, and by the 1960s and 1970s their share had fallen to around 10
per cent, as shown in Table 1.1.

40
Table 1.1: Share of bank business, Germany, 1950 – 1988 (%)
1950
1960
1
970
1977
1988
Universal banks
Private
banks
36.4
24.4
24.9
24.9
23.6
Big banks
19.1
11.3
10.2
10.4
8.9
Regional banks
12.8
10.4
10.7
10.9
11.4
Foreign banks
1.5
1.9
1.8
Other private banks
4.5
2.7
2.5
1.7
1.5
Savings bank s
ector
30.8
35.7
38.4
38.5
37.3
Regional associations
10.8
13.5
15.6
16.5
15.6
Savings banks
20.0
22.2
22.9
22.0
21.7
Credit cooperative sector
12.4
8.6
11.5
14.0
16.9
Regional institutions
3.7
2.8
3.8
4.2
4.6
Credit cooperatives
8.7
5.8
7.7
9.8
12.3
Specialised banks
Mortgage banks
5.9
17.2
13.6
13.0
13.9
Banks with special functions
10.2
8.4
6.5
6.7
Postal banks
2.4
1.9
2.0
1.5
Source: Edwards and Fischer (1993, p. 100)
The small private banks, whose assets were in any case much smaller, also registered a marked
decline in their share of assets in the same period. Together, the share of the big banks, the regional
private banks and the small private banks fell from 36 per cent of total assets in 1950 to around 25
per cent in the 1960s and 70s.
The big banks continued to play an important role in the corporate governance of non-financial
companies, both through owning shares and through smaller investors delegating their voting rights.
According to Bundesbank data for 1964, banks owned 5 per cent of shares and held the proxy votes
for 50.5 per cent of shares, giving them control over 55.5 per cent of shareowners’ votes (Edwards
and Fischer, 1993, p. 112). The ownership of shares by banks was concentrated in the large banks,
and this was reflected in the membership of the supervisory boards of non-financial companies. A
government survey of 425 joint-stock companies in 1960 found that the banks had a total of 795
representatives on company boards, and of these 211 were the chair of the board. According to the
survey, the big private banks accounted for 423 of the representatives (53.2 per cent) and 119 of the
positions as chair of the board (56.4 per cent) (Edwards and Fischer, 1993, p. 115).
The big banks also had a dominant position in underwriting new share issues. By law, only banks
could apply to issue new shares. A syndicate of banks would negotiate a price with the company that
wished to issue shares, and then the banks would offer the shares for sale to the market. A survey of
76 banks in 1976-77 showed that the big banks acted as leader of the syndicates in 60 per cent of the
cases (Edwards and Fischer, 1993, p. 117). Of the big banks, the Deutsche Bank played the most

41
important role, although it should be noted that the new issue market has been rather small in
Germany.
The relative decline in the share of the big banks in bank business is explained by the growing share
of the savings banks and the cooperative banks, as can be seen in Table 1.1. In the case of the savings
banks, the primary savings banks maintained their share of bank assets at around 20 per cent. By
providing finance for local business they contributed significantly to the success of West Germany’s
small and medium enterprises in the post-war period. At the same time, the regional Landesbanken
succeeded in expanding their share of lending, and they began to compete with the big private banks
for business with larger firms. Between 1950 and the 1970s, they increased their share of business
from 10 to over 15 per cent, and by 1975, they accounted for four of the biggest 10 banks in West
Germany. Together, the local and regional savings banks increased their share of business from 30
per cent in 1950 to 38 per cent in the 1970s. There was also an increase in the share of the
cooperative bank sector, notably in the 1970s. In 1974, cooperative banks were allowed to conduct
business with non-members and, in 1976, the cooperatives central organisation was renamed the
Deutsche Genossenschaftsbank, or DG Bank, and most legal limits on its activities were lifted, so that
it was able to conduct large-scale credit operations, providing additional competition for the big
private banks (Deeg, 1999, pp. 54-55).
The position of the big banks faced a further major challenge in the 1970s. The onset of the 1973-75
international recession marked the end of the post-war boom and in West Germany, as in the other
advanced capitalist countries, it led to a marked decline in fixed investment. As a result, the big banks
were hit by a sharp fall in the demand for loans from big manufacturing firms, which now no longer
required significant external financing. One of the reactions of the big banks was to try and compete
with the local savings banks and the cooperative banks by developing their business with small and
medium enterprises, but they had less experience in working with this sector, and it was not a
success (Deeg, 1999, pp. 80-87 and 116-121).
Faced with a decline in their traditional business with big industrial firms, the big banks responded in
the mid-1980s by setting up a consortium to promote the development of what they called
Finanzplatz Deutschland – Germany as a financial centre (Deeg, 1999, p. 87 et seq.). A key feature of
this proposal was to encourage the expansion of securities’ markets, something which, until then,
had played a subordinate role in Germany’s predominantly bank-based financial system. For the big
banks, this offered the prospect of generating income from fees through investment banking activity,
rather than relying on their traditional income from lending.

42
References
Balderston, T. (1991), ‘German banking between the wars: the crisis of the credit banks’, in Business
History Review, Autumn, no. 65, pp. 554-605
Blackburn, D. (2003), History of Germany 1780-1918, 2
nd
edition, Oxford, Blackwell
Deeg, R. (1999), Finance Capitalism Unveiled. Banks and the German Political Economy, Michigan,
Michigan University Press
Deutscher Genossenschafts- und Raiffeisenverband (DGRV), Historie Genossenschaft, available at:
http://www.dgrv.de/de/genossenschaftswesen/historiegenossenschaft.html
Deutsche Sparkassen und Giroverband (DSGV) (2010), ‘Fakten, Analysen, Positionen‘, Finanzgruppe
DSGV Zur Geschichte der Sparkassen in Deutschland, no. 45, Berlin, Finanzgruppe DSGV
Edwards, J. and K. Fischer (1994), Banks, Finance and Investment in Germany, Cambridge, Cambridge
University Press
Feldenkirchen, W. (1991), ‘Banking and economic growth: banks and industry in the nineteenth
century and their changing relationship during industrialisation’, in W. R. Lee (ed), German
Industry and German Industrialisation, London, Routledge
Frohlin, C. (2007), Finance Capitalism and Germany’s Rise to Industrial Power, Cambridge, Cambridge
University Press
Gerschenkron, A. (1962), Economic Backwardness in Historical Perspective, Cambridge, Belknap Press
of Harvard University Press
Hilferding, R. (1910), Finance Capital. A Study of the Latest Phase of Capitalist Development, London,
Routledge & Kegan Paul, 1981
Tilly, R. (1988), ‘German industrialisation and Gerschenkronian backwardness’, reprinted in W.
Fischer (ed), The Economic Development of Germany Since 1870, Cheltenham, Edward Elgar,
1997
Tilly, R. (1994), ‘On the development of German big banks as universal banks in the 19
th
and 20
th
centuries. Engines of growth or power block?’, in German Year Book on Business History
1993, reprinted in W. Fischer (ed.), The Economic Development of Germany Since 1870,
Cheltenham, Edward Elgar, 1997

43
Tilly, R. (1996), ‘Banks and industry: lessons from history?’, in R. Tilly and P. Welfens (eds.), European
Economic Integration as a Challenge to Industry and Government, Berlin and New York,
Springer Publishing

44

45
2. The growth in finance and its role in the decades of
financialisation
2.1. Introduction
To date, there is no generally accepted definition for financialisation. A relatively broad
characterisation of the term is given by Epstein (2005, p. 3) for whom ‘financialisation means the
increasing role of financial motives, financial markets, financial actors, and financial institutions in the
operation of the domestic and international economies.’
More concretely, Stockhammer (2007, p. 2) identifies the following phenomena characterising
financialisation: the deregulation of the financial sector and the proliferation of new financial
instruments, the liberalisation of capital flows and instability in exchange rate markets, a shift toward
market-based financial systems, the emergence of institutional investors as major players on
financial markets, the booms and busts in asset markets, shareholder-value orientation and changes
in corporate governance of non-financial business, increased access to credit by previously
underbanked groups, changes in the level of (real) interest rates.
For Krippner (2005, p. 174) financialisation is a ‘pattern of accumulation, in which profits accrue
primarily through financial channels, rather than through trade and commodity production.
‘Financial’ here refers to activities relating to the provisions (or transfer) of liquid capital in
expectation of future interest, dividends or capital gains.’
One can see that financialisation covers a range of phenomena; some are of a quantitative nature,
while others of a more qualitative nature.
This chapter will employ empirical data to assess how, and in which areas the growth of finance has
manifested itself in Germany. Based on the short theoretical review given, there are different
dimensions one can look at. First a general overview on the growth of financial assets held by the
German domestic sectors will be presented. Subsequently, in an international comparison, the size
and activity of banks and financial markets is assessed. To find out whether a structural shift of the
production pattern towards the financial industry has taken place, the value added and employment
of the financial industry is reviewed. Thereafter, a closer look at the non-financial corporate, as well
as at the household sector, is taken, since for the US, it was found that financialisation led to
different changes in those sectors. Finally, a look at the importance of institutional investors in

46
Germany is taken. A more detailed treatment of the interaction of the financial sector with the non-
financial sectors of the economy will be provided in part III of this study.
2.2. Financial assets in the German economy
From 1960 until 1980, financial assets in per cent of disposable income grew on average by 2.9 per
cent per year (Deutsche Bundesbank, 1994). Figure 2.1 presents outstanding financial assets owned
by domestic sectors as a percentage of GDP since 1983. In the 1980s, growth fell below the average
of the previous decades and the ratio of financial assets to GDP grew at 1.6 per cent per year
relatively slow. Starting from 1991 the relatively stable pattern changes. We observed very high
growth from 1991 to 2000; financial assets in per cent of GDP grew with an average rate of 6 per
cent per year in this period. This seems in particular caused by a strong growth in outstanding bank
loans (see figure 2.7) and from 1995 onwards additionally by a strong increase in share prices (see
figure A14.1) Thereafter, average growth of the financial assets to GDP ratio is almost negligible and
very unstable with high positive growth in some years and negative growth in others.
Figure 2.1: Financial assets held by domestic sectors, Germany, 1983 – 2011 (% of GDP)
2% 2% 1%
3%
1% 1% 1%
9%
0%
11%
0%
5%
8%
9%
8%
10%
2%
0%
-6%
4%
2%
6%
-1%
1%
-2%
7%
-1%
-3%
0%
100%
200%
300%
400%
500%
600%
700%
800%
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
-8%
-6%
-4%
-2%
0%
2%
4%
6%
8%
10%
12%
Annual growth of financial assets in % of GDP (rhs)
Financial assets held by domestic sectors in % of
GDP (lhs)
Source: Deutsche Bundesbank (1994, 2012), European Commission (2012), own calculations
Notes: Before 1991, only West Germany, data consolidated.
Financial assets include monetary gold and special drawing rights, currency and deposits, debt securities, derivatives, loans,
shares and other equity claims, investment and money market fund shares, claims against insurance companies and pension
funds and other claims.
A more detailed picture of those developments is given by Figures 2.2 – 2.4. Banks (refered to as
Monetary Financial Institutions (MFIs) in the official European statistics) obviously increased their
activity, growing strongly in assets from 1991 – 2000. Also remarkable are the increased financial
activities of the non-financial corporations. Their liabilities, as well as assets shifted upwards by
about 50 percentage points. On the other hand, households increased their financial assets, while
their liabilities remained nearly constant, so that we see an increase in their net position. The

47
counterpart to this is the government sector. The percentage of financial assets held by the
government sector is relatively stable, but we can see an increase in financial liabilities from 37 per
cent in 1991 to 87 per cent of GDP in 2011. Therefore, we see a strong decline in the net-position of
the government sector over the period.
Starting in 1991 the sector of other financial institutions emerged and grew with remarkable speed.
In 1991, the size of financial assets held by the sector equalled 10 per cent of GDP. Already by 2011,
this figure reached 70 per cent of GDP. This sector includes non-bank and non-insurance financial
institutions, and for the most part consists of investment funds. This indicates an increased role of
institutional investors in the German financial system.
Figure 2.2: Financial assets by sector, Germany, 1991 – 2011 (% of GDP)
0%
50%
100%
150%
200%
250%
300%
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
NFC MFI OFI Ins. Gov. HH ROW
Source: Deutsche Bundesbank (2012), European Commission (2012), own calculations
Figure 2.3: Financial liabilities by sector, Germany, 1991 – 2011 (% of GDP)
0%
50%
100%
150%
200%
250%
300%
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
NFC MFI OFI Ins. Gov. HH ROW
Source: Deutsche Bundesbank (2012), European Commission (2012), own calculations

48
Figure 2.4: Net-financial wealth, Germany, 1991 – 2011 (% of GDP)
-100%
-50%
0%
50%
100%
150%
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
NFC MFI OFI Ins. Gov. HH ROW
Source: Deutsche Bundesbank (2012), European Commission (2012), own calculations
Notes: NFC – Non-financial corporations, MFI – Monetary financial institutions, OFI – Other financial institutions, Ins. –
Insurance corporations, Gov. – General government, HH - Households and non-profit institutions serving households, ROW -
Rest of the world.
Financial linkages with the rest of the world have also increased rapidly. While foreign financial
claims on the domestic economy were around 50 per cent in 1991, this figure grew to above 200 per
cent by 2011. The same picture emerges for the claims of domestic sectors on the rest of the world.
Overall, from 2006 onward, we see an increase in the net-position of Germany against the rest of the
world.
To sum up, we can see that the increase of financial assets observed for Germany since 1991 can be
explained on the one hand by an overall increase in the intermediation activities of banks, and in part
by the occurrence and the rapid growth of a new form of intermediaries - institutional investors. The
non-financial corporations increased their overall financial linkages by increasing financial assets and
liabilities, but they did not change their net-position. The household sector increased its financial
assets, while liabilities remained largely stable, so that its net position improved. Correspondingly,
the government sector and more recently the rest of the world experienced a deterioration of their
net-financial positions.
2.3. Size and activity of banking and financial markets in an
international comparison
The following part uses OECD, World Bank and Bundesbank data to compare the