## Germany’s Three-Pillar Banking System

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**Canonical URL:** [Germany’s Three-Pillar Banking System](https://www.imf.org/-/media/websites/imf/imported-publications/external/pubs/nft/op/233/_op233.pdf)

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### Overview
- The German banking system is composed of three pillars: public sector banks, cooperatives, and commercial banks.
- Public sector banks comprise the Landesbanken (mostly owned by the states), Sparkassen (savings banks, mostly owned by local governments), and development institutions; they operate commercially but have a public mandate and currently benefit from a government guarantee.
- Cooperatives serve the interest of their owners, who are also their depositors and borrowers.
- Several smaller commercial banks are held by a few, stable shareholders.
- The paper was prepared as background in the summer of 2003 for IMF Executive Board discussions on the German FSAP and the 2003 Article IV consultation; authors: Allan Brunner, Jörg Decressin, Daniel Hardy, and Beata Kudela.

### Objectives of the analysis
- Compare the performance of German banks with those in France, Italy, Spain, and the United Kingdom (with some information on Austria and Sweden).
- Reflect on the role of the public sector in the German banking system and how the structure can be adapted to changed circumstances.

### Cross-country comparison: profitability and drivers
- Finding: Banks in Germany tend to be less profitable than banks in the comparator countries, even when comparing across similar pillars.
- Recent trend: Profitability in Germany has fallen sharply over the past five years (relative to the paper’s preparation), unlike in the other countries reviewed.
- Analytical approach:
  - Comparison of cost and revenue ratios across countries.
  - Estimation of deviations relative to “best-practices” cost and revenue functions fitted to microeconomic bank-level data.
- Main drivers identified:
  - German banks are less profitable mainly because of lower revenue mobilization.
  - In particular, German banks show an inability to increase non-interest revenue to compensate for narrowing spreads.
  - The motive structure matters: profit maximization is not the primary motive for large segments of the German banking system, which may explain part of the profitability gap.

### Phaseout of government guarantees and likely effects
- Policy change: Government guarantees for public sector banks will be terminated starting in mid-2005.
- Primary impact: The phaseout is likely to affect primarily the Landesbanken, which are mainly engaged in wholesale intermediation with narrow margins.
- Risk identified:
  - The phaseout of state guarantees could put the profit margin of the Landesbanken sector at risk, unless they change their current business model.
  - Repercussions would extend to the Sparkassen (savings banks).
- Constraints on adaptation:
  - Landesbanken and associated Sparkassen are developing different business models in response.
  - These new strategies do not involve introduction of private capital because of legal and other obstacles, constraining options for innovative restructuring and strengthening market incentives.

### Structural adaptation, public involvement, and efficiency
- The paper analyzes two specific policy questions:
  - Does efficiency differ markedly between publicly and privately owned banks?
  - Are market failures in Germany sufficiently extensive to warrant public ownership of almost half of the banking system?
- Conclusions from analysis:
  - There seem to be no major differences between the efficiency of public and private sector banks.
  - There are no major market failures identified that would justify continuing public ownership at current scale.
- Cross-country experience:
  - Several European countries with similar three-pillar systems introduced more flexibility for cross-pillar restructuring during the 1980s and 1990s.
  - Those systems reduced the role of the state, increased market incentives, and facilitated restructuring and reorientation; greater role was afforded to the private sector during the 1990s and this accompanied financial strengthening.

### Key contextual and bibliographic facts preserved from source
- Publication: OCCASIONAL PAPER 233
- Title: Germany’s Three-Pillar Banking System: Cross-Country Perspectives in Europe
- Authors: Allan Brunner, Jörg Decressin, Daniel Hardy, and Beata Kudela
- Publisher: INTERNATIONAL MONETARY FUND, Washington DC
- Year: 2004
- ISBN: 1-58906-348-1
- Price: US$25.00 (US$22.00 to full-time faculty members and students at universities and colleges)
- Material originally prepared in the summer of 2003 as background for IMF Executive Board discussions on the German FSAP and the 2003 Article IV consultation.
- Policy timing note: guarantees to be terminated starting in mid-2005.

*International Monetary Fund, Occasional Paper 233, 2004.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-publications/external/pubs/nft/op/233/_op233.pdf_