by Josef A

Created on: July 01, 2009

The German banking system relies on three pillars: the public sector, the cooperative sector, and the purely private sector. This construct, although first signs of a future change have emerged, creates a quite rigid system. As a result, the German banking market is quite fragmented and difficult to understand for outsiders. For costumers this has not let to high prices or bad service, rather the opposite is the case. Most private costumers hardly have an understanding of how the banks differ in their form of organization and perceive the service of the different sectors as quite comparable. As the share of the purely private sector is quite low, German commercial banks such as Deutsche Bank and Commerzbank have not been able to compete with the strongest and biggest global institutions on the same level. In the following all three pillars are described briefly.

The public sector, consisting of the Sparkassen and Landesbanken has the largest market share of the three pillars. A Sparkasse is a local institute with a regional focus whereas a Landesbank is the top institute taking over tasks that a local Sparkasse is too small for. This public sector banking is backed by the state and should guarantee adequate banking services for everybody. Although the approach of the public sector has been traditionally more conservative and risk averse, many of the Landesbanken have been affected badly by the current financial crisis through investing in the U.S. sub-prime mortgage markets.

The second pillar consists of the cooperative banking sector, called Genossenschaftsbanken. Their organisation is similar to the public sector with local institutes covering regions of differing sizes. Their top institute is called DZ Bank and takes a similar role as a Landesbank. Their form of organisation builds on the tradition of co-operatives which were formerly self-help organizations of small farmers and craftsmen. Today, they are profit-oriented institutions that often maintain close ties to the local economy.

The last pillar comprises the privately held commercial banks such as Deutsche Bank, Commerzbank, and Hypo Real Estate. They are usually structured as a Aktiengesellschaft describing the German term for a publicly traded corporation and structured similar to most global banking institutes. Although many of those banks have an international profile and operate around the globe, they have fallen behind when it comes to their size and importance. The reason is, together with the rigid structure of the German banking system, the tight regulatory framework compared to more liberal approaches in the Anglo-Saxon world.

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