German banks have come under pressure for their disappointing profitability. Indeed, rankings of developed nations along profitability indicators place Germany at the end of the scale. Critics attribute that situation mainly to the German banking system being overbanked and overbranched. The purpose of this paper is to analyze that notion and to examine the German market and competitive landscape of the retail banking industry.
The analysis contains four sections. The first section compares profitability ratios and indicators of German banks to their peers’ performances. The study produces surprising results. Despite the ostensibly high branch density, Germany’s banks operate very cost efficiently. Yet it is their inability to generate sufficient income that results in the sluggish net earnings.
Consequently, in the second section, the authors examine the German banking system and portray and compare its peculiarities in order to find out if the income problems are inherent to the system. More than in any other country, public banks dominate the market and, together with the cooperative banks, do not follow the economic principle of profit maximization. Moreover, the public banks have also received unjust government subsidies in the form of the maintenance and guarantee obligations. Thus, one presumes that private German banks operate in a very difficult system.
The third section then takes a closer look at the market and analyzes the bank density, branch density and competition which the system produces. In the past, waves of intra-group consolidations have occurred. Similarly, branch networks have been thinned out especially by the private banks in an effort to cut costs. The result is that the current situation does not appear overly overbanked when put into perspective to the population, area, productivity and customer business. However, the German banking market is very competitive, and calls for further consolidations aim at decreasing competition rather than realizing synergies.
In the fourth and last section, an appraisal of the current system is presented. Customers benefit from the current structure as it allows for easier access to credit compared to other countries, offers banking services to everybody at low costs and appears to be inherently stable. Thus, Germany is overbanked in the sense of high competition which negatively impacts bank profitability. Yet good companies should also be profitable in a competitive environment.
Table of Contents
1 INTRODUCTION
1.1 PROBLEM DEFINITION AND OBJECTIVES
1.2 COURSE OF ANALYSIS
2 INTERNATIONAL PROFITABILITY COMPARISON
2.1 PROFITABILITY OF THE BANKING SECTOR
2.2 INCOME GENERATION OF THE BANKING SECTOR
2.3 COSTS OF THE BANKING SECTOR
3 GERMAN BANKING SYSTEM
3.1 OVERVIEW
3.2 COMMERCIAL BANKS
3.3 SAVINGS BANKS
3.4 COOPERATIVE BANKS
4 MARKET ENVIRONMENT
4.1 BANK DENSITY
4.2 BRANCH DENSITY
4.3 COMPETITION
4.4 CALLS FOR FURTHER CONSOLIDATION
5 EVALUATION OF THE SYSTEM
5.1 CUSTOMER NEEDS
5.2 STABILITY OF THE GERMAN BANKING SYSTEM
5.3 LESSONS LEARNED FROM OTHER COUNTRIES
6 CONCLUDING REMARKS
Research Objectives and Topics
The paper aims to analyze and evaluate the merits of the widely held claim that the German banking sector is overbanked and overbranched by contrasting empirical German data with international benchmarks to determine the root causes of the industry's low profitability.
- Analysis of bank profitability and cost-income structures in an international context.
- Examination of the German three-pillar banking system and its structural peculiarities.
- Assessment of bank density, branch density, and competition within the German retail banking market.
- Evaluation of system stability and the impact of consolidation efforts on customer needs and credit supply.
Excerpt from the Book
3.2 Commercial Banks
Having a closer look at the first pillar, commercial banks, three different groups can be identified, namely the large and regional banks as well as the branches of foreign banks. All three groups together, constituting 12% (261) of all banks by number, account for 28% of total assets. Especially compared to countries with a market centered system this figure seems extremely low. For instance, in the U.S., even after an extensive consolidation, the by far most important pillar of the banking system is provided by roughly 10,000 commercial banks.
This group of commercial banks has its roots in the mid-19th century where the industrial revolution increased the need for large scale financing significantly. Hence, first banks agreed on a joint future, constituting the foundation of the big banks. After the Great Depression three institutions, the Dresdner Bank, Commerzbank and Deutsche Bank, emerged as major players in the banking industry. Although shattered and splintered after World War II all three of them had their revival after 1950 and continue in the group of the biggest banks till these days. Apart from the three already mentioned banks the Bayerische Hypo- und Vereinsbank (HVB), a so called hybrid institution which has emerged from a mortgage and a commercial bank, can be found in the group of the big banks, too. In total, big commercial banks accumulate 58% of the total assets of commercial banks in Germany. All institutions belonging to this group can be described as truly universal banks which are, after several acquisitions, heavily internationally engaged and belong to the biggest institutions in the world.
Summary of Chapters
1 INTRODUCTION: Outlines the heated dispute over whether Germany is overbanked and defines the objectives of the paper to evaluate this claim empirically.
2 INTERNATIONAL PROFITABILITY COMPARISON: Compares profitability indicators of German banks against international peers, highlighting the inability to generate sufficient income despite high cost-efficiency.
3 GERMAN BANKING SYSTEM: Describes the unique three-pillar structure of the German banking landscape and its historical and institutional foundations.
4 MARKET ENVIRONMENT: Analyzes bank and branch density, competitive intensity, and the arguments surrounding further market consolidation.
5 EVALUATION OF THE SYSTEM: Evaluates the current banking structure in terms of meeting customer needs, maintaining systemic stability, and learning from international structural reforms.
6 CONCLUDING REMARKS: Summarizes that the "overbanked" claim is largely based on flawed comparisons and suggests that the unique structure provides value in stability and credit access.
Keywords
German banking system, overbanked, overbranched, profitability, market structure, competition, three-pillar system, Sparkassen, commercial banks, cooperative banks, financial stability, cost-income ratio, retail banking, bank consolidation, credit access.
Frequently Asked Questions
What is the fundamental focus of this paper?
The paper examines the popular claim that the German banking sector is "overbanked" and "overbranched," leading to poor profitability, by investigating the market structure and competitive landscape.
What are the central themes of the work?
The core themes include international profitability comparisons, the unique three-pillar German banking model, competitive pressure in the retail market, and the stability of the financial system.
What is the primary research objective?
The objective is to determine if the German banking system's perceived lack of profitability is a result of structural inefficiencies or if the high density is actually justified by specific customer and economic needs.
Which research methodology is applied?
The authors use an analytical approach, contrasting empirical data and key performance indicators from Germany with other developed nations to validate or refute claims regarding the system's efficiency.
What does the main body of the paper cover?
It covers profitability trends, the distinct roles of commercial, savings, and cooperative banks, the assessment of bank and branch density, and an evaluation of systemic stability and the consequences of consolidation.
Which keywords characterize the work?
Key terms include German banking system, overbanked, profitability, market structure, competition, three-pillar system, and credit accessibility.
Why are Sparkassen considered central to the debate?
Sparkassen form a significant public pillar that prioritizes public service and small business support over profit maximization, which creates tension with private banks regarding competition and consolidation.
What role does the "one-way street rule" play in the German market?
This rule restricts the takeover of public banking institutions by private entities, a policy that the private banking sector criticizes for preventing efficiency-driven consolidations.
Does the paper conclude that Germany is overbanked?
The authors conclude that while Germany is competitive, the "overbanked" label is often a subjective and short-sighted observation that fails to account for the unique benefits the system provides to the public.
- Quote paper
- Chrysanth Herr (Author), Christian Weiß (Author), 2006, Is Germany overbanked? - Market structure and competition, Munich, GRIN Verlag, https://www.grin.com/document/64190
