Time to unbundle German banking
Weaving between the traditional three pillars can only get you so far.
A strong economy needs a strong bank. But with Deutsche Bank generally regarded as a global institution without a meaningful domestic market share, it is an open secret that what local bankers describe as a national champion remains conspicuous by its absence in Germany. To many financiers and policymakers in Europe’s largest economy, that is a source of growing angst.
At one level, it is easy enough to grasp why. As a German bank chief says, the largest local companies now rely on international banks for as much as 50% of their credit. It is, he says, unhealthy that decisions influencing the financing strategy of the cream of German industry should rest much more with credit committees in London or New York than with chummy relationship bankers in Munich or Hamburg.
At another level, that is a shaky argument – for at least two reasons. The first, as a recent UBS report says, is that Germany is the world’s champion exporter, shipping more goods and services per capita than the US, Japan or even China. In the context of an increasingly global financial services industry, it is no surprise that Germany’s leading exporters should depend so heavily on international banks.
But when it comes to the more domestically oriented companies, the German market is notoriously difficult for non-local banks to penetrate. For German banks looking to capture a rising share of the domestic market for financing all but the largest and most cosmopolitan of the Mittelstand companies, it is not foreign banks – in the strictest sense – that are the stumbling block. It is the strength of relationships forged over several generations between SMEs and their local public sector banks. In many of those relationships, profitability remains an irrelevance. So, too, for companies dependent principally on friendly bilateral funding lines, does product innovation.
If those relationships are to be challenged, and if banks are to be allowed to build more satisfactory shares of the local market, consolidation in the financial services sector needs to be encouraged. That need not mean tearing down the long-standing architecture of Germany’s three-pillar banking system, because plenty of value could still be unlocked through consolidation within the individual pillars. LBBW’s ambitions of cementing its credentials as a would-be national champion, for example, would be underpinned if it bought WestLB. That would support its expansion into North Rhine-Westphalia and add to its capital market franchise without upsetting the three-pillar structure. Equally, the three pillars would remain intact if a private sector bank (Deutsche Bank, perhaps, or Commerzbank) were to buy Postbank, and therefore give itself access to an off-the-peg customer base of some 15 million retail clients.
In the longer term, it is hard to see how Germany’s banking system can compete effectively within an increasingly integrated eurozone if the inviolacy of its three pillars is maintained indefinitely. Changing that mechanism, however, will not be straightforward, because it would mean challenging deep-seated socioeconomic principles, many of which continue to frown on unfettered competition. This is, after all, a country that still tells most corner shops when they can and can’t open. It also gives people ridiculously generous financial incentives to be unemployed. And it has recently told its bankers that they can sell real estate investment trusts as long as they don’t include residential apartments or condominiums – presumably for fear that tenants will be thrown onto the streets. Wrapping so many of its institutions, and so much of society, in cotton wool is unlikely to help Germany find a national banking champion.