Germany’s third-largest bank, KfW, is a development bank unlike any other – designed originally by the UK and US military governments specifically to complement a fragmentation of German banking they enforced.
Its remit now ranges from student loans to financing Germany’s renewable energy drive through to occasional transactions for the government in the national interest, such as last year’s thwarting of a Chinese acquisition.
How does such an organ of the government avoid distorting the market, let alone survive state aid rules? The EC examined it closely in 2002 and obliged it to spin out project and export finance. But the fundamental idea of a bank to support rather than compete with the commercial banking sector is alive and well, and blessed with broad domestic consensus.
KfW operates on the principle that it finances the public good, where the market is unable to do so economically. Is KfW a disincentive for the market to find a way, therefore perpetuating the fragmentation it was designed to offset? The idea of ‘market failure’ seems also to include ‘a little bit more expensive’.
Maintaining equilibrium
Commercial bankers grumble a bit in private but don’t challenge the fundamental principles of the arrangement.