Germany has a non-discriminatory, well-developed financial services infrastructure. Although corporate financing via capital markets is on the rise, Germany’s financial system remains mostly bank-based, with bank loans serving as the predominant form of funding for firms, particularly the small and medium sized enterprises of Germany’s famed Mittelstand.
Germany’s universal banking system allows the country’s more than 36,000 bank offices not only to take deposits and make loans to customers but also to trade in securities. There are no reports of a shortage of credit in the German economy. Credit is available at market-determined rates to both domestic and foreign investors, and a variety of credit instruments are available. The traditional German system of cross-shareholding among banks and industry, as well as a high rate of bank borrowing relative to equity financing, allowed German banks to exert substantial influence on industry in the past.
Germany has a modern banking sector but is considered “over-banked,” as evidenced by ongoing consolidation and low profit margins. The country’s so-called “three-pillar" banking system is made up of private commercial banks, cooperative banks, and the public banks (savings banks or Sparkassen, and the regional state-owned banks, or Landesbanken). German banks’ profitability is increasingly under pressure given the very low interest rates, high cost structures and increasing compliance costs as a result of new regulation and supervision.
Private banks control roughly 30% of the market, while publicly owned savings banks partially linked to state and local governments account for 50% of banking transactions, and cooperative banks make up the balance. All three types of banks offer a full range of services to their customers. A state-owned bank, KfW, provides special credit services, including the financing of homeowner mortgages, guarantees to small and medium-sized businesses, financing for projects in disadvantaged regions in Germany and export financing for projects in developing countries.
The private bank sector is dominated by Deutsche Bank and Commerzbank, with a balance sheet total of EUR1.3 billion and EUR462 billion respectively (2018 figures). In efforts to raise capital ratios in advance of new international guidelines (the Basel III agreement), both banks continue to shrink the size of their balance sheets. Commerzbank received EUR18 billion in financial assistance from the federal government in 2009, which gave the government a 25% stake in the bank (now reduced to 15.6%). Merger talks between Deutsche Bank and Commerzbank, a deal that would have created Europe’s third-largest bank with €1.8 trillion (c. $2 trillion), failed in April 2019. Experts speculate the failure could open the door for a take-over attempt of Commerzbank by a rival foreign bank. Germany’s regional state-owned banks were among the hardest hit by the global financial crisis and continue to face major challenges to their business models. The federal government is currently in the process of winding down several so-called “bad banks” composed of toxic assets of failed banks WestLB (now Portigon AG) and Hypo Real Estate.
Most major U.S. banks are represented in the German market, principally but not exclusively in the city of Frankfurt am Main, Germany’s main financial center. A large number of German banks, including some of the partially state-owned regional banks, similarly maintain subsidiaries, branches and/or representative offices in the United States.
Practices regarding finance, availability of capital and schedules of payment are comparable to those that prevail in the United States. There are no restrictions or barriers on the movement of capital, foreign exchange earnings or dividends.
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