The Institutional Structure of the German Financial System

The German financial system has historically been a prime example of a bank-based system although, in contrast to most other developed capitalist countries, a significant part of the banking system has consisted of publically-owned savings banks and cooperative banks that are not driven primarily by the search for profits. Big private banks had traditionally functioned as house banks to big industrial companies, but investment and borrowing by industry declined after the 1970s. In the mid-1980s, the big private banks responded by promoting the development of securities markets in Germany with the aim of increasing their earnings from investment banking activities. This has resulted in some strengthening of the role of securities markets since the 1990s, although banks continue to occupy a predominant position in the German financial system. Amongst non-bank financial institutions, insurance companies have historically been the most significant, although investment funds expanded very rapidly in the 1990s, and are now almost as large. Pension funds have been much less significant. Highly leveraged financial institutions, such as hedge funds and private equity funds, have also had a relatively limited presence in Germany.