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Banking and Its Role in the Economy

The German economy is a bank economy, with the main role in finance and credit being played by commercial and savings banks while other forms of credit are secondary. Banks provide most of the country's investment capital because of the high German savings rate and because most Germans prefer to put those savings into banks rather than into stocks or bonds. As with many other German economic phenomena, this bank role is not new. Banks have played a central role in German financial and economic history since the Middle Ages.

German banks function as universal banks, able to offer a full range of banking, saving, foreign exchange, and investment services to their depositors and clients. They hold funds or other assets, broker securities, underwrite equity issues, give advice on asset placement, manage accounts, and so on. About one-quarter of German banks are commercial. Most of the remainder are savings banks, mainly owned locally or regionally and operating under public statutes, or cooperatives that perform such specialized services as agricultural, crafts, or mortgage lending.

The three best known and most important German universal banks--the Deutsche Bank, the Dresdner Bank, and the Commerzbank--are omnipresent throughout unified Germany and have immense influence. These banks opened hundreds of new offices in the east during unification and sent large staffs of bankers to manage offices and to train permanent personnel there. In effect, they were the principal agents for control of Germany's economic unification.

But the "big three," as they are often known, are not the only large banks in Germany. A number of other banks, including regional banks, are even more important than the big three within their areas of operations. The DG Bank, which operates out of Frankfurt am Main, has a higher nominal capital stock than that of the Commerzbank. The Westdeutsche Landesbank, headquartered in Düsseldorf and owned in part by the Land of North Rhine-Westphalia, has a higher nominal capital stock value than that of the Deutsche Bank. The value of the combined nominal stock of the three major banks in Bavaria is even higher, and those banks have helped finance the economic boom in southern Germany. Other major banks exist in other Länder , often owned in part by the Länder themselves with additional capital coming from state-wide savings associations or other local institutions. An important element in the German savings system is the Postbank, the postal savings bank, with 27,000 employees. Almost one in three Germans has an account in the Postbank, using it for savings and for personal financial transactions such as paying monthly bills in preference to bank accounts. The Postbank has 24 million savings accounts and hopes to branch into other areas of financial services.

The most important and most controversial aspect of German banking is the role that banks play as shareholders and policy makers in the country's industrial firms. It has been estimated that banks directly or indirectly hold more than 25 percent of the voting capital in one-quarter of Germany's largest corporations and hold about 28 percent of all seats on the supervisory boards. The banks are empowered to vote not only their own shares but also, by proxy, shares that they hold for their clients. Although there are indications that the banks' ownership proportion of major firms has been reduced over time as other sources of investment funds have become more available, the combined influence and presence of the banks is considerable. They are even said to pool information on the basis of which they steer investments throughout the economy.

According to a Commerzbank listing of ownership of 10,000 large West German companies, the Deutsche Bank owns shares in seventy-seven different firms, the Dresdner Bank in fifty-five, and the Commerzbank in forty-eight. Other smaller banks are also widely invested. The Commerzbank listing did not show the bond or loan holdings of the banks or the votes they exercised in proxy, but it did show that in pure ownership terms alone the banks have a strong voice in a significant number of major German companies. The positions that the banks hold could afford wide opportunities to influence industrial decision making, although they are not the kinds of true monopoly positions that earlier German cartel arrangements offered.

A mid-1980s study by the government agency that examines potential monopolies, the Monopolkommission, looking only at major companies, concluded that the three major banks could vote well over three-quarters of the shares of many major German corporations and that all banks together had even greater voting authority. The power of the banks also is evident in the seats they hold on the boards of the country's most important corporations, with bank presidents or representatives sitting on the boards of every major German firm.

The banks do not appear to want to seize industrial power or make production decisions. They would be hard put to exercise monopoly power, and their actions on individual boards are clearly subject to enough scrutiny--at least by other board members--that improper actions would become widely known. German business is prepared to accept the power and influence of the banks and to see it perpetuated. Nonetheless, the direction of bank influence probably adds a conservative element to German economic decision making because banks traditionally prefer to avoid risk-taking in favor of slow but steady dividends and debt repayment. They also could be accused of becoming new masters of German cartel-like structures, with banks directing separate firms toward similar policies even if the firms themselves are not colluding.

The role of the banks in the economy has raised questions. Some political figures, including FDP leader Otto Lambsdorff, have charged that the banks have accumulated excessive power. Newspapers and magazines, including business journals, periodically make the same charge. But there are no indications that the system is changing or will change in response to those criticisms. One could even argue that it is more pervasive than ever, as banks now also play roles in managing former East German firms that were privatized with western bank funds.

Data as of August 1995

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