German Universal Banking

1. Stylized facts

The main features of the German-type model of universal banks, namely: financing, information and control. Financing is defined by the author as creating channels to transform savings into investment; the information aspect here is analyzed from the viewpoint of generation of information on the value of the firms and on different investment opportunities.

A major distinction of the German-type financial system is the dominance of a relatively small number of banks ('big three' or 'big four' largest banks), involved in both commercial and investment banking and, maintaining close relationships with the industry.

German-type banks provide long-term money lending to enterprises.

German-type banks provide a wide range of financial services but the element of key importance is the accent on long-term money lending to enterprises. On the information part, little information on the value of securities is made publicly available; instead, banks have a rather privileged access to it through the established close links with the industries. Lastly, with respect to corporate control, the German-type model has as a main feature high concentration of ownership, i.e. companies own substantial stakes of each other. As expected in this situation, banks have both the incentives and the ability to take active participation in shaping the major decisions of the enterprises. The last means that banks are in a position to also influence the investment decisions of non-financial companies. Hostile takeovers and leveraged buy-outs are rare in the German-type model.

In short, the German-type model of universal banks has as a core element the 'close participation in the ownership and control on non-financial firms'.

2. Pros and Cons

'The distinctive feature of successful financial systems is their close involvement in industry'.

A bank's stake in an enterprise would prevent banks from behaving too cautiously when providing credit through allowing them to reap some benefits from financing riskier projects.

Banks would help reduce the existing moral hazard problem between providers of finance, managers and employees via the creation of long-term commitment.

One possible reason for this is the fact that there are too many other factors, such as macroeconomic policy and legal framework that play a considerable role for realization of growth.

More importantly, some authors provide severe arguments against the introduction of the German model since banks as large investors might be too soft because they fail to terminate unprofitable projects they have invested in.

Adv: The main point of introducing such a model in the post communist countries is that universal banks could mobilize a considerable amount of savings and make them available as capital for investment in strategic projects of the firms, as well as impose a better corporate control structure on the firms; thus, they might play the role of an instrument thought which the economy would catch up with the advanced market economies. Often underline that fact that this mechanism is only possible if banks hold concentrated equity of their debtor clients

Adv: The development of efficient security markets on average takes much longer time as compared to the time period needed for the establishment of a stable banking system.

DisAdv: The initial conditions in the transition economies provided little scope to develop banking systems of German type. The main question raised is whether banks in the post-communist countries could play the role of universal banks of German type, taking into consideration the specific conditions in these economies.

Elliot Clark,

Writer, freelancer, scholar, author of thousands of articles available in the Internet, owner of number of blogs on

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