The Historical Development of the German Financial System

The development of the German financial system has been characterised by two key features, both of which have their origin in the country’s pattern of industrialisation in the second half of the nineteenth century. The first is that Germany is a prime example of a bank-based financial system. Germany required large amounts of capital to industrialise, and this was mobilised primarily by banks. A major role was played by large joint-stock banks which were established in the early 1850s and the early 1870s. The second key feature is that, in addition to profit-oriented commercial banks, the German financial system has also included two other sectors that are not primarily motivated by making a profit, namely the publicly-owned savings banks, and the cooperative banks. By 1913 the German banking system consisted of a private sector, dominated by eight big banks, a large public savings bank sector, and a somewhat smaller cooperative sector. In the 1920s, the big private banks faced major challenges from inflation and competition from foreign banks, and three big banks emerged because of mergers and failures. At the end of the Second World War, the three big private banks were broken up because of their complicity in German war crimes but, following successful lobbying, could re-establish themselves as unified institutions in the 1950s. The big banks played a major role in financing larger firms during Germany’s post-war reconstruction, while savings banks and cooperative banks contributed significantly to the growth of Germany’s very successful small and medium-sized enterprises.