Questions monétaires et financières

Economic Survey of Germany 2010: The banking system: lessons from the financial crisis


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The following OECD assessment and recommendations summarise chapter 4 of the Economic Survey of Germany published on 26 March 2010.



Problems in the banking sector need to be addressed quickly…

A notable feature of the recent recession was that it was triggered and accompanied by a banking crisis. In contrast to several other countries where the financial sector suffered from excessive domestic lending, for example in relation to housing booms, German banks were affected through their investments in foreign structured credit products, mostly originating in the United States, as well as by the turmoil on international financial markets in the wake of the collapse of Lehman Brothers. The situation was stabilised by a variety of government measures, ranging from bailouts of individual banks at the onset of the crisis, to the setup of the Special Fund Financial Market Stabilization (SOFFIN) later on and finally to the creation of the possibility for banks to set up bad banks. The possibilities created for banks to voluntarily address problems such as the toxic assets on their balance sheets have so far not been used extensively. In that respect, the concern is that banks may not be adequately capitalised in view of the likely rise in company insolvencies, a situation which risks restricting lending in an upswing. The authorities should play an active role, by closely monitoring capital adequacy, notably including the application of stress tests, and maintaining support instruments in order to, if needed and as a last resort, provide public capital to those banks that are not able to raise funds from private sources.

…including reforms of the structure of the banking sector…

 The structural weaknesses in the banking system that contributed to the crisis also have to be addressed. This concerns foremost reforming the state owned Landesbanken which are the most prominent casualties during this crisis due to their significant exposure to toxic assets. During the long phase out of government guarantees for these banks from 2002 until 2005, several Landesbanken expanded their balance sheets significantly, benefitting from still favourable financing conditions, and invested the funds in risky foreign securities due to the lack of a viable domestic business model. The crisis has thus reinforced earlier calls for a fundamental reform of the Landesbanken sector, notably through significant consolidation and privatization. Increased pressure by the European Commission has already led to reforms in individual institutions that are receiving government aid, but from there, further sector wide restructuring and consolidation will be needed.

Refinancing and investments across banking sectors in Germany
Billion euros


Note: Credit co operatives include regional institutions. The decline in bonds outstanding for the Landesbanken in December 2004 is primarily due to a reclassification. The vertical lines indicate the period during which state guarantees for new liabilities of the Landesbanken were phased out, February 2002 to July 2005.
Source: Bundesbank.

Although the capitalization of German banks compared well with other countries on a risk weighted basis, it was very low on a non risk weighted basis, raising the structural vulnerability of the German financial system. Remedies will involve regulatory reform with some international co ordination, and measures in Germany should be consistent with international efforts. While the increased focus on a leverage ratio as an additional source of information is welcome in order to prevent banks from becoming too leveraged, the authorities should consider making such an instrument binding.

Furthermore, while the savings and cooperative banks have been a source of stability during the crisis, the banking system nevertheless remains highly fragmented. In this regard, consideration should be given to softening the dividing lines between the three pillars (private banks, savings banks, cooperative banks), which remain strict compared with other countries. One possibility of levelling the playing field and raising efficiency would be to allow takeovers of savings banks by private banks. This may involve reforming the savings bank sector along the experiences of other European countries, which have allowed private ownership to differing extents.

…and in banking regulation and supervision

Finally, the crisis has laid bare some deficiencies in banking supervision, which may in part be related to its shared responsibilities as well as to a lack of independence of the regulator. The government’s plan to consolidate banking supervision at the Bundesbank (as opposed to the prior division of labour between the Bundesbank and the German Financial Supervisory Authority) is a step in the right direction, not least as it should raise the independence of the supervisor and provide the framework for a more macro prudential approach to supervision.

Given the widespread regulatory arbitrage prior to the crisis, the powers of the supervisor should be strengthened beyond recent legislative changes to allow for the possibility to widen the scope for supervision beyond compliance with quantitative requirements. In this regard, supervisors should address more clearly the risks that business strategies entail. In addition, consideration should be given to introducing capital buffers that fluctuate with the business cycle, akin to the approach practiced in Spain.

The government’s initial use of ad hoc measures to bail out individual banks showed that the current mechanisms to handle banking crisis do not provide sufficient scope for an appropriate response to systemically relevant banks in distress. Thus, in order to allow for a more efficient dealing with future bank failures, existing plans for the introduction of a framework for restructuring and winding up of systemically relevant banks should be pursued further. Ideally, such a scheme would allow the negative system wide effects of an individual bank failure to be limited, while keeping the costs for the taxpayer to a minimum and mitigating incentive distortions. A critical element of such a framework should thus be that supervisory intervention takes place at an early stage, to widen the options for restructuring.


How to obtain this publication

The Policy Brief (pdf format) can be downloaded in English. It contains the OECD assessment and recommendations.

Eine Druckversion des Policy Brief in deutsch (pdf Format) kann ebenfalls heruntergeladen werden. Es enthält die Gesamtbeurteilung und die Empfehlungen, aber nicht alle oben gezeigten Grafiken.


The complete edition of the Economic Survey of Germany is available from:


Additional information

For further information please contact the Germany Desk at the OECD Economics Department at

The OECD Secretariat's report was prepared by Felix Hüfner and Isabell Koske under the supervision of Andreas Wörgötter. Research assistance was provided by Margaret Morgan.




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