The Banking Environment
Economic and political environment
Germany was a founder member of the Euro in 1999.
Situated in the centre of Europe, comprising an area of 357,000 km² and a population of around 82 million, Germany is one of the biggest countries on the European continent. Since the re-unification of the two formerly separated parts of West and Eastern Germany in 1990, its capital city is Berlin (until 1990: Bonn). Since the end of World War II Germany has been a parliamentary democracy with two chambers of parliament. The highest legislative institution is the "Bundestag", the members of which are directly elected by the population for a 4-year session period. The "Bundesrat" as the second chamber is the representation of the governments of Germany´s 16 federal states ("Länder"). The states with the largest populations are Nordrhine-Westphalia, Bavaria and Baden-Württemberg. These are also the strongest in economic terms. Some areas of legislation can be decided by the Bundestag alone, others need approval by the Bundesrat. Besides, the Länder have specific areas of policy (e.g. education), where they can decide on their own. The main political parties are the Social Democratic Party of Germany (SPD), the Christian Democratic Union (CDU) and their Bavarian sister party Christian Social Union (CSU), the Green Party and the Free Democratic Party (FDP) with. The Party of Democratic Socialism is the heir of East Germany´s former ruling communist party. Besides the legislative institutions (Bundestag and Bundesrat) and the government an independent jurisdiction is the third main pillar of German democracy with the Constitutional Court as the highest instance. In addition, a Federal President (currently: Johannes Rau), without any executive powers, has the task of representing the country.
Germany is a member of various international organisations. These include the United Nations, the OECD, the G7 and, most importantly the European Union (EU). Germany, together with the Netherlands, Belgium, Luxembourg, France and Italy, has been one of the founding members of the EU in the 1950s. In 1999 Germany joined 10 other EU member countries in starting the European Monetary Union (EMU, see currency issues, below).
71% of the economy is in the services sector, 26% industrial and only 3% agriculture.
Per capita GDP is USD 24, 000.
Banking in general
The central bank of Germany is the Bundesbank, operating at the federal level and as the German arm of the European System of Central Banks (the “ESCB”). The European Central Bank (the “ECB”) is also based in Frankfurt.
The Bundesbank carries out its mandate within Germany in part through its domestic branches in each federal state, the State Central Bank (the “Landeszentralbanken” or “LZBs”).
German banking is characterized by the existence of a large sector of public and cooperative banks. The share of total bank assets of public banks is around 50%, while the cooperative banks reach a share of 13%. The advantage the public banks gain from state guarantees has drawn criticism from the EU-commission, which argues that these guarantees, by lowering the respective banks' refinancing costs, are an unfair subsidy. This is particularly visible in medium-term business: loan notes (“Schuldscheine”) issued by such banks have lower yields because they are eligible for use in two ways that the notes of commercial banks are not:
- As collateral against credit facilities at the Bundesbank known as the “Lombard” facility; the notes are thus referred to as “Lombardfaehig” or “Lombard-eligible”
- For investment by trust funds which can include certain obligatory reserves of pension funds and insurance companies that can only be held in investments that are referred to as “muendelsicher”
The private banks, against this background, have only a limited share of the banking market (37% of total assets). The biggest private banks are Deutsche Bank and HypoVereinsbank. The third biggest, Dresdner Bank, has only recently been acquired by Allianz, the country’s largest insurance company. This acquisition was a milestone in the current trend of attempting to create successful "bancassurance" businesses. HypoVereinsbank is in a strategic partnership with MunichRe, the world’s largest reinsurance company. Germany still is overbanked in terms of branches per customer (0.6 bank branches per customer; US: 0.3), thus further consolidation is to be expected.
It is possible to establish resident and non-resident accounts in EUR or foreign currency without regulatory restrictions.
However, yields on credit balances can be lower than in other centres for two reasons:
- The impact of Minimum Reserves (which banks throughout euroland have to hold at their central bank as a percentage of customer sight deposits) is fully factored in
- Banks have to make a contribution to the national deposit insurance scheme (“Einlagesicherungsfonds”)
In both cases the charge on the bank equates exactly to an effective loss of interest to the bank on customers’ funds, and this is directly deducted from what can be paid to customers.
On the other side of the coin, overdraft is not as accepted a form of finance as in other centres. It is common to base the interest rate on the Lombard rate. Bearing in mind that the Lombard facility that banks have at the Bundesbank is looked upon as an emergency facility for end-of-day usage, the Lombard base rate is high compared to interbank rates that might prevail in the middle of the same business day.
Medium-term bank financing usually has a maturity of over 4 years, especially if it is not in EUR. Banks that make loans of foreign currency below 4 years and 1 day, or which borrow EUR from outside Germany for that time, have to place a portion of the loan interest-free at the Bundesbank – another form of Minimum Reserves.
This interest loss would be added back into the margin paid by the customer.
Lifting fees are still common on cross-border payments. They can be up to 0.15%, with a minimum by no ceiling. Payments within scope of the EU Regulation are charged at domestic prices. The first bank in the country handling the payment is entitled to take the fee, but that bank should make the payment as “Fees Taken” in order to be sure that further banks in the chain do not try to take them as well.
The payments on which the fee may be claimed can be wide, depending on the bank:
- payments by a resident to their own account outside Germany;
- payments in foreign currency, even between residents and within Germany;
- payments in EUR between a resident and a non-resident, both accounts in Germany or even in the same bank;
- any payments to or from non-resident amounts held in Germany;
- the fee is taken where either the debit side or the credit side is at a German bank and another German bank did not already take the fee and make the payment “Fees Taken”.
As a result, the combination of lower yields, lifting fees and central bank reporting (see below) make it likely that non-residents will limit their accounts to EUR only, and hold non-EUR accounts elsewhere.
Currency
The Euro.