Regulation and Competition in German Banking: An Assessment

In Germany a public discussion on the "power of banks" has been going on for decades now with the term "power" having at least two meanings. On the one hand, it denotes the power of banks to control public corporations through direct shareholdings or the exercise of proxy votes – this is the power of banks in corporate control. On the other hand, the market power derived from imperfect competition in markets for financial services is implied, which banks exercise vis-à-vis their loan and deposit customers. In the past, bank regulation has often been blamed for undermining competition and the functioning of market forces in the financial industry for the sake of soundness and the stability of financial services firms. This chapter tries to shed some light on the historical development and current state of bank regulation in Germany. In so doing, it tries to embed the analysis of bank regulation in a more general industrial organization framework. For every regulated industry, competition and regulation are deeply interrelated as most regulatory institutions, even if they do not explicitly address the competitiveness of the market, affect either market structure or conduct. This paper aims to uncover some of the specific relationships between monetary policy, government intervention and bank regulation on the one hand and bank market structure and economic performance on the other. We hope thereby to be able to point the way to several areas for fruitful research in the future. While our focus is on Germany, some of the questions that we raise and some of our insights might also be applicable to banking systems elsewhere.