German banks have come under pressure for their disappointing profitability. Indeed, rankings of developed nations along profitability indicators place Germany at the end of the scale. Critics attribute that situation mainly to the German banking system being overbanked and overbranched. The purpose of this paper is to analyze that notion and to examine the German market and competitive landscape of the retail banking industry.
The analysis contains four sections. The first section compares profitability ratios and indicators of German banks to their peers’ performances. The study produces surprising results. Despite the ostensibly high branch density, Germany’s banks operate very cost efficiently. Yet it is their inability to generate sufficient income that results in the sluggish net earnings.
Consequently, in the second section, the authors examine the German banking system and portray and compare its peculiarities in order to find out if the income problems are inherent to the system. More than in any other country, public banks dominate the market and, together with the cooperative banks, do not follow the economic principle of profit maximization. Moreover, the public banks have also received unjust government subsidies in the form of the maintenance and guarantee obligations. Thus, one presumes that private German banks operate in a very difficult system.
The third section then takes a closer look at the market and analyzes the bank density, branch density and competition which the system produces. In the past, waves of intra-group consolidations have occurred. Similarly, branch networks have been thinned out especially by the private banks in an effort to cut costs. The result is that the current situation does not appear overly overbanked when put into perspective to the population, area, productivity and customer business. However, the German banking market is very competitive, and calls for further consolidations aim at decreasing competition rather than realizing synergies.
In the fourth and last section, an appraisal of the current system is presented. Customers benefit from the current structure as it allows for easier access to credit compared to other countries, offers banking services to everybody at low costs and appears to be inherently stable. Thus, Germany is overbanked in the sense of high competition which negatively impacts bank profitability. Yet good companies should also be profitable in a competitive environment.
Table of Contents
- INTRODUCTION
- PROBLEM DEFINITION AND OBJECTIVES
- COURSE OF ANALYSIS
- PROFITABILITY OF THE BANKING SECTOR
- INTERNATIONAL PROFITABILITY COMPARISON
- INCOME GENERATION OF THE BANKING SECTOR
- COSTS OF THE BANKING SECTOR
- GERMAN BANKING SYSTEM
- OVERVIEW
- COMMERCIAL BANKS
- SAVINGS BANKS
- COOPERATIVE BANKS
- MARKET ENVIRONMENT
- BRANCH DENSITY
- COMPETITION
- EVALUATION OF THE SYSTEM
- CUSTOMER NEEDS
- STABILITY OF THE GERMAN BANKING SYSTEM
- LESSONS LEARNED FROM OTHER COUNTRIES
- CONCLUDING REMARKS
Objectives and Key Themes
This paper analyzes the notion that the German banking system is overbanked and overbranched, contributing to the underwhelming profitability of German banks. The paper compares profitability ratios and indicators of German banks to their international counterparts, examines the German banking system's unique characteristics, and analyzes the market environment in terms of bank and branch density and competition. Ultimately, the paper aims to evaluate the current system's impact on customers, stability, and profitability.
- Profitability of German banks in comparison to international peers
- The structure and characteristics of the German banking system
- Market environment analysis, including bank and branch density and competition
- The impact of the banking system on customer needs, stability, and profitability
- An evaluation of the current system and potential for future consolidation
Chapter Summaries
The paper begins by comparing the profitability of German banks to their international counterparts, revealing that while German banks operate with high cost efficiency, their inability to generate sufficient income leads to sluggish net earnings. The authors attribute this to razor-thin interest margins and a lack of advisory business.
The second chapter delves into the German banking system, highlighting the dominance of public banks and the influence of cooperative banks, both of which do not strictly follow the principle of profit maximization. The chapter also discusses the government subsidies provided to public banks, suggesting that private German banks operate in a challenging environment.
Chapter three analyzes the market environment, focusing on bank and branch density and competition. The paper notes that recent consolidations have reduced the number of banks and branches, particularly among private banks. Despite this, the paper argues that the current situation does not appear overly overbanked in relation to population, area, productivity, and customer business. However, the German banking market remains highly competitive, leading to calls for further consolidations.
Keywords
The key concepts explored in this paper include German banking system, overbanking, branch density, competition, profitability, interest margins, advisory business, public banks, cooperative banks, government subsidies, consolidation, customer needs, and stability. The paper examines the structure, performance, and challenges of the German banking sector, focusing on the interplay of these key elements.
- Quote paper
- Chrysanth Herr (Author), Christian Weiß (Author), 2006, Is Germany overbanked? - Market structure and competition, Munich, GRIN Verlag, https://www.grin.com/document/64190
