Is Germany overbanked? - Market structure and competition

Seminar paper from the year 2006 in the subject Business economics - Investment and Finance, grade: 1,3, European Business School - International University Schloß Reichartshausen Oestrich-Winkel, course: Seminar Retail Banking, language: English, abstract: German banks have come under pressure for their disappointing profitability. Indeed, rankings of developed nations along profitability indicators place Germany at the end of the scale. Critics attribute that situation mainly to the German banking system being overbanked and overbranched. The purpose of this paper is to analyze that notion and to examine the German market and competitive landscape of the retail banking industry. The analysis contains four sections. The first section compares profitability ratios and indicators of German banks to their peers' performances. The study produces surprising results. Despite the ostensibly high branch density, Germany's banks operate very cost efficiently. Yet it is their inability togenerate sufficient income that results in the sluggish net earnings.Consequently, in the second section, the authors examine the German banking system and portray and compare its peculiarities in order to find out if the income problems are inherent to the system. More than in any other country, public banks dominate the market and, together with the cooperative banks, do not follow the economic principle of profit maximization. Moreover, the public banks have also received unjust government subsidies in the form of the maintenance and guarantee obligations. Thus, one presumes that private German banks operate in a very difficult system. The third section then takes a closer look at the market and analyzes the bank density, branch density and competition which the system produces. In the past, waves of intra-group consolidations have occurred. Similarly, branch networks have been thinned out especially by the private banks in an effort to cut costs. The result is that the current situation