European Business School Schloß Reichartshausen
Seminar Retail Banking

Is Germany overbanked? - market structure and competition

Chrysanth Herr

Co-author: Christian Weiß

Table of Contents

1 Introduction ... 1

1.1 Problem Definition and Objectives ... 1
1.2 Course of Analysis ... 2

2 International Profitability Comparison ... 3

2.1 Profitability of the Banking Sector ... 3
2.2 Income Generation of the Banking Sector ... 5
2.3 Costs of the Banking Sector ... 6

3 German Banking System ... 8

3.1 Overview ... 8
3.2 Commercial Banks ... 10
3.3 Savings Banks ... 11
3.4 Cooperative Banks ... 15

4 Market Environment ... 17

4.1 Bank Density ... 17
4.2 Branch Density ... 20
4.3 Competition ... 23
4.4 Calls for Further Consolidation ... 26

5 Evaluation of the System ... 30

5.1 Customer Needs ... 30
5.2 Stability of the German Banking System ... 33
5.3 Lessons Learned From Other Countries ... 34

6 Concluding Remarks ... 37

Appendix ... 38

References ... 42

1 Introduction

1.1 Problem Definition and Objectives

“Germany is overbanked. There is no country in the world with more banks than Germany. Not only the number of credit institutions is remarkable, but also the branch density.”¹ That position by Georg Wübke, head of financial activities at Simon-Kucher & Partners Strategy & Marketing Consultants, is shared by many in the financial industry. Christopher Pleister, president of the German association of cooperative banks (BVR) opposes this view and asserts that “Germany is not overbanked in the retail banking industry”.²

These two contrary positions give rise to heated disputes about the features of the German banking system. The banking landscape has changed tremendously in the past decades, yet it has not gone far enough for some critics, collectively represented by the Bundesverband deutscher Banken (BdB). Persistently low profitability of major German private banks has sparked a dispute about structural reforms by way of continued and intensified consolidations with the aim of reducing costs and benefiting from economies of scale and scope. Mergers and acquisitions of banks within the traditional three groups cooperative banks, Sparkassen (savings banks) and private commercial banks are no new phenomenon and have been going on for decades. However, the advent of Basel II with its minimum capital requirements and the recent abolition of the guarantee and maintenance obligation (Gewährträgerhaftung and Anstaltslast) for public banks have been seen as the catalyst for more fundamental change in the German system.

These calls for more fundamental change, such as the privatization of Sparkassen, base their claim on the notion that Germany is still overbanked. The high number of banks, the high number of branches and the structural peculiarities are portrayed as the culprits of the weak profitability. Oftentimes, this is accepted as a fact without reflecting critically on this proposition. Moreover, it is argued that private banks need to recuperate their profitability to prevent hostile takeovers by other international banking giants and to ensure stability in the German banking system.

Consequently, the objective of this paper is to analyze and evaluate the merits of the claims that Germany is overbanked and overbranched by examining empirical data from other countries and contrasting them with the German situation. The effects of the market structure on the profitability are the main theme; yet, customer needs and systemic stability as well as experiences made in other countries are to be taken into account when appraising the situation.

1.2 Course of Analysis

To elaborate on this issue, first, key performance indicators of the German retail banking industry will be compared to those of other key international markets to give a better understanding of the profitability of German banks and identify the main driver of the situation. Second, the German banking system is to be described and its unique features are to be pointed out and compared to other nations’ systems. Having shed light on the profitability and the peculiarities of the system, as a third point, the market environment is to be analyzed in a comparison to other countries. This part deals more directly with the overlying question if Germany is overbanked and overbranched, and it also discusses the competitive environment. In the last section, the preceding three chapters, the profitability, the peculiarities of the system and the market environment, are to be evaluated in light of customer needs, stability and experiences from other nations. Lastly, a conclusion will be drawn in which a weighted appraisal of the German banking structure is presented.

2 International Profitability Comparison

The profitability of the German banking sector is the main focus of the debate that Germany is overbanked. Pressure by certain institutions and the advent of Basel II have put pressure on banks to improve their earnings.³ Thus, it is important to understand the components of profitability, costs and income, and other key performance indicators of German banks. This chapter will compare them with other banking systems in order to find the culprits of the weak earnings in Germany.

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1 Wübke, G. (2006), p. 3.
2 Pleister, C. (2005), p. 1.
3 See International Monetary Fund (2006), p. 100.