We first looked at the flow of funds accounts to determine the overall amount of financial assets in the German economy. Total monetary wealth as a percentage of GDP has increased rapidly since In particular financial linkages with the rest of the world have increased. Other financial institutions non-banks became more important as holders of financial assets and liabilities. Looking at the different parts of the German financial system, we find that financial activity has increased in relation to GDP.
Both banks and financial markets have grown in size and in activity. However, comparing their importance internationally, we find that financial markets are relatively underdeveloped despite their recent growth, while banks continue to account for most intermediation. This confirms the general view about Germany being a predominantly bank based system. Looking at the share of the financial sector in value added and employment in the German economy we did not find that it increased its importance significantly.
From to we find a slow increase, but thereafter the share of the financial sector in value added remains rather stable and employment in the financial sector even has been decreasing since Looking at non-financial firms we find increasing financial activity.
Their holding of financial assets has increased. This is true in absolute amounts as well as in comparison to productive assets. Accordingly, a larger part of their profits is generated by financial activities. At the same time overall financial payments interest and dividends have increased, so that net financial payments as a share of cash-flows stayed stable. However, this is driven by two different trends.
On the one hand, we have lower interest payments; on the other hand payments to shareholders went up. Hence, we have an indication of increased financial activity by non-financial corporations and, possibly, some indication of an increased shareholder value orientation. We also looked at the indebtedness and the asset composition of households.
We could not find increased borrowing for consumption or a particularly high indebtedness of the household sector. Portfolio shifts towards more risky assets and more marketable assets were apparent. However, the share of those assets in the financial portfolio of the household sector is still low compared to for example the US.
Lastly, we looked at the importance of institutional investors and found that they grew rapidly from to and then again from on. However, in international comparison the amount of financial wealth managed by institutional investors is still relatively low. Over all, the data we examined in this chapter suggests that the growth of finance is a quite recent and still relatively modest phenomenon in Germany. Girouard and M.
Schoeller and C. Hein and P. The structure of the German financial system 3. Introduction 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 and cooperative banks that are not driven primarily by the search for profits.
In the s, the big banks played an important role in 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, 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 s, and are now almost as large, while pension funds remain much less significant.
Highly leveraged financial institutions, such as hedge funds and private equity funds, have a relatively limited presence in Germany. Banks In Germany there is no restriction on banks conducting both commercial and investment banking activities and, as a result, most German banks are, in principle, universal banks. The universal banks fall into three main groups: private banks, which accounted for 38 per cent of banking assets in ; a publically-owned savings bank sector, with The official statistics, slightly confusingly, refer to the first group as commercial banks, presumably to signify their profit-making orientation, but all three groups carry out what are usually referred to as commercial banking activities accepting deposits and making loans as well as, to varying degrees, engaging in investment banking activities advising and dealing in activities related to securities markets.
To avoid confusion, the profit-driven capitalist banks will be referred to as the private sector. In addition to the universal banks there are also a small number of special purpose banks which accounted for The total number of banks in Germany is high compared with other major European countries, both in absolute numbers and in relation to the size of the population, with 1, institutions in Private banks The official statistics published by the Deutsche Bundesbank distinguish between three forms of private banks: big banks, regional banks and branches of foreign banks.
Six institutions were designated as big banks in but, as a result of failures, mergers and takeovers, the number had fallen to four by see Table 3. In its assets amounted to 1.
Prior to the onset of the crisis, the bank famously strove for a rate of return on equity of 25 per cent. The bank has pursued an aggressive policy of international expansion and was an important participant in the provision of subprime mortgages and the packaging of subprime mortgages in opaque securities in the US, where it has faced numerous civil and criminal court cases.
In it took over the Dresdner Bank, which had been the second largest bank but which suffered large losses. The Unicredit Bank, which was formed from the merger of two medium sized Bavarian banks in , is the third largest of the big banks, with assets of billion euro in The Bundesbank also includes in its category of big banks the Post Bank, which was split off from the Deutsche Post in and sold off in It had assets of billion euro in However, the Deutsche Bank, which first purchased shares in the Post Bank in , raised its holding to Other fines include million dollar by the Department of Justice for tax-oriented transactions for clients between and FT, 21 December ; 7.
Furthermore, big firms have begun to obtain some external finance from the bond market. In the s and early s it stood at around 65 per cent of assets, but then fell strongly, declining to some 45 per cent of assets in , when the financial crisis began, and a mere 25 per cent of assets in Figure 3. The big banks then turned to promote the development of securities markets where they could earn fees from investment banking activities Deeg, , pp.
This created the basis for greater activity in international financial markets, and Deutsche Bank has actually based its investment banking activities in London. Consequently, while banks continue to hold shares as financial investments, they have sought to divest themselves of their large holdings in specific companies. This process of divestment received a strong impetus when the 50 per cent capital gains tax on the proceeds from sales of shares was abolished by the Social Democratic — Green government in The marked decline in the links between banks and non-bank enterprises between and can be seen in the network diagrams shown in Figure 3.
The second group of private banks includes smaller joint stock banks, most of which operate on a regional basis, and privately-owned banks, some of which have a long history. The number of banks in this group increased from in to a peak of in , but then declined to at the start of The group includes two significant foreign owned banks, the Dutch-owned ING-DiBa rank 18 with 96 billion euro assets in and the Spanish-owned Santander Consumer Bank rank 38 with 31 billion euro assets.
It also includes several banks set up by industrial companies, notably the Volkswagen Bank rank 37 with 33 billion euro assets and the Mercedes-Benz Bank rank 50 with 18 billion euro assets. The third group of private banks are the branches of foreign banks.
Their number has increased very significantly, from 20 in to in Nevertheless, although their share of assets doubled during this period, it remained very small, amounting to just 3. Savings Banks The savings bank sector consists of the primary savings banks, or Sparkassen, the regional Landesbanken, and the Deka Bank.
The Sparkassen are owned by local city and county governments. They act as bankers to small and medium enterprises, with which they have close local contact, and they are required to meet all requests for a bank account.
Most working-class and many middle-class citizens have their accounts at the Sparkassen, which enjoy a high degree of public trust. As a result of a process of rationalisation, the number of Sparkassen has declined, from in to in Perhaps more significantly, Sparkassen assets have not grown as rapidly as those of the private banks and, as a result, their share of total bank assets has declined, from Unlike the case of the private banks, there has not been a strong shift away from lending to non-banks, and such loans have accounted for around 70 per cent of assets throughout the period since , as shown in Figure 3.
The Sparkassen have also been more willing than private banks to continue providing credit when companies are under stress. Because of their focus on lending to small and medium enterprises, the Sparkassen were far less affected by the financial crisis in and, whereas private banks curtailed lending in response to large losses, lending by the Sparkassen remained relatively stable.
They are generally owned jointly by regional associations of the Sparkassen and the regional state governments. The Landesbanken originally had two functions: to act as banker to the regional state, and to act as central banks for the Sparkassen in their region. However, they have also 3 There is also some cross-ownership between the Landesbanken. For details of the ownership structure see IMF, , p.
The increased importance of investment banking activity for Landesbanken is reflected in the declining importance of business based on lending to non-banks. This accounted for around 65 per cent of their assets throughout the s and 90s, but then fell to just over 50 per cent in the mid s Figure 3. The Landesbanken formerly benefited from a guarantee from the regional states, and this enabled them to raise capital through selling bonds at a slightly lower interest rate than the private banks.
The private banks had long considered this as unfair competition and, following a successful appeal to the European Commission, they succeeded in obtaining a judgement which required the regional states to end such guarantees from Following the end of this guarantee, the Landesbanken sharply increased their investments in foreign securities see IMF, , p.
Following the onset of the financial crisis and the collapse in value of these complex securities several Landesbanken registered large losses and required substantial state support. There is also a third level in the savings bank sector. The Deka Bank was formed from a merger of the Deka Bank investment company and the Deutsche Girozentrale the German savings banks clearing centre in and serves as the central asset manager for the whole savings bank sector.
The Landesbanken and the Deka Bank together accounted for While the record of the Landesbanken is more problematic than that of the highly successful local Sparkassen, the existence of such a large publicly-owned savings bank sector is a striking feature of German capitalism.
In his study of German banks, Hackethal , p. Cooperative Banks The cooperative banking sector consists of two levels, the primary cooperative banks and two regional institutions. The credit cooperatives are owned by their members, although they also provide retail banking services to non-members. Since the s, loans to non-banks have accounted for around 70 per cent of their assets Figure 3. The primary cooperative banks share of total banking assets has fallen very slightly, from The cooperative sector includes two regional institutions which act as central banks for the primary credit banks.
The DZ Bank, which was formed by a merger in , has around members. These banks also compete with private banks for commercial and investment bank business. However, although the importance of lending to non-banks has increased, by such loans only accounted for just over 30 per cent of assets.
Specialised banks In addition to the universal banks, there are three groups of banks which have specialised functions. One group consists of mortgage banks, which provide loans to purchase property and raise money from long-term deposits and the issue of bonds. In there were 39 mortgage banks but the number has fallen steadily, and since there have been The mortgage banks share of total bank assets fell from Another group of specialised banks is made up of building and loan associations.
These are institutions where households commit themselves to save regularly for a specific period and, after having saved an appropriate amount, are eligible for a mortgage to buy a home. In there were 23 such institutions, but they accounted for only 2. The other group of specialised banks provide funding to promote investment in specific sectors of the economy.
There were 17 such institutions in and, following small variations, the same number existed in In , the special purpose banks accounted for Securities markets Until the s the German financial system was strongly bank based but following the end of the Bretton Woods system and the abolition of capital controls, there was greater competition from foreign financial institutions, and the big banks were keen to develop new business opportunities linked to investment banking.
This initiative was welcomed by big firms and by the German government, and was supported by several new Laws on the Promotion of Financial Markets. The first two in and were introduced by a Christian Democrat led government; the third, and most significant, was introduced in by the newly elected Social Democrat led government see chapter 6 for details.
The main securities market in Germany is in Frankfurt, although there are also five smaller exchanges in other cities. It began trading in in fierce competition with the London International Financial Futures Exchange.
Increased stock market activity was also associated with the acquisition by foreign investors of significant holdings in major companies, including Siemens, Deutsche Bank, E.
In the late s, when German stock market prices registered a boom, closely following trends in the US, two new exchanges were founded. The Neue Markt for so-called growth stocks, strongly modelled on the New York Nasdaq, was opened in , and the SMAX for smaller companies was launched in , but neither survived the collapse of the stock-market bubble in , and they were closed in A further initiative which was, in part, intended to strengthen the role of securities markets in Germany was the reform of the pension system introduced by the Social Democratic led government in In Germany, there is a high level of public pension provision and pension payments account for some per cent of GDP as compared with per cent in the US and Britain.
The key feature of the new policy was to reduce public pensions from 70 to 67 per cent of previous net income, and to provide tax incentives for employees to invest up to 4 per cent of their income in private pensions Vitols, Despite the expansion of the role of securities markets in the s, they still play a relatively restricted role in Germany.
There was a rapid expansion in the issue of bonds by companies raising external finance, but from a very low base, and by outstanding bonds amounted to only billion euro, while the value of outstanding bank loans was 1, billion euro Deutsche Bundesbank, Stock market activity had increased, but market capitalisation in was equal to 43 per cent of GDP, even lower than the EU average of 67 per cent, and considerably below the US figure of per cent IMF, , p.
The number of share and investment fund holders was slightly larger, rising from 5. In summary: the corporate bond market is small, equity market capitalisation is low, and households hold their wealth mainly in bank deposits or insurance funds see chapter 14 for details.
Shadow banks The shadow banking system refers to activities related to credit intermediation, and liquidity and maturity transformation that take place outside the regulated banking system ECB, , p. In the US, shadow banking institutions played an important role in the onset of the recent financial crisis, in particular through entities involved in securitisation, such as special purpose vehicles.
There is no agreed definition of exactly what should be included in the shadow banking system and relevant data has only recently begun to be collected. There is, however, a general consensus that in Germany the shadow banking system is small.
The Deutsche Bundesbank employs a rather broad definition of the shadow banking system. This is very much smaller than in the US. The Bundesbank points out that, since these funds provide capital to banks, enterprises and the government, they are potentially important channels through which financial contagion might be transmitted if institutional investors are faced with serious losses.
Furthermore, some 70 per cent of the holdings of these funds were in foreign issued securities, thereby exposing investors 5 Our own attempts to replicate the ECBs estimates of the size of the shadow banking sector indicated that for Germany the figure was around billion euro in and , which is even smaller than the Bundesbank figure.
Although the shadow banking system in Germany is rather small, banks in Germany are also connected extensively with the global shadow banking system Deutsche Bundsbank, , p. As with US banks, German banks set up special purpose vehicles in off-shore financial centres in order to circumvent German regulatory and tax requirements, and these were used to hold complex securities based on US mortgages.
Details of the German owned vehicles are shown in Table 3. The table brings out that, in addition to the major private banks, the Landesbanks were also heavily involved. The vehicles set up by the publicly-owned IKB and the Saxon Landesbank, which were the largest owned by German banks, both made large losses and were closed; as a result of the losses the banks themselves had to be rescued and were subsequently taken over. Table 3. However, it warns of the possible impact of international contagion, and notes that German banks continue to borrow from US money market funds, a source of funding which notoriously dried up suddenly in While there has been a limited development of financial markets in Germany, the financial system remains primarily bank based.
The different sectors of the banking system fared very differently in the course of the recent financial crisis, with important parts of the large non- profit cooperative and savings banks remaining substantially unscathed. The cooperative sector continued a process of rationalisation to establish a smaller number of more viable units directed primarily at serving small businesses. By contrast the regional organisations of the savings banks fared less well, with some making significant losses on injudicious financial investments in the US.
The private banking sector is dominated by four big banks. A fifth big bank, the Dresdner, which had been the second largest, failed to survive the crisis and was taken over by the Commerzbank. The Deutsche Bank, which is by far the largest of the private banks, had aggressively expanded its investment banking activities prior to the crisis.
It was a major player in the provision and dubious packaging of mortgages in the US itself and was involved more widely in the rapid expansion of an extensive range of highly risky transactions.
Together with a small number of other very big US and European banks it was centrally involved in the developments which led to the onset and impact of the recent financial crisis.
Krahnen and R. Schmidt eds. Introduction In the late s as the US dollar came under pressure, the West German economy was buffeted by very large inflows of capital, and from to the German authorities imposed increasingly restrictive controls in an attempt to limit the inflows. However, German banks responded by opening international branches and used these to evade the controls, which consequently had only a limited impact Hewson and Sakakibara, In late , Germany began to relax its controls, and controls were fully abolished in It then deepened rapidly during the business expansion in the second half of the s and, following a temporary weakening during the recession, again increased very strongly up to Following the sharp deepening of the financial crisis at the end of , however, there was a significant international disengagement in , and this was only partly recuperated in and In the s Germany registered a rising trade surplus, and this was reflected in a current account balance which rose to a peak in of 4.
Then in the s, after the introduction of the euro and the end of the international recession, the country registered an exceptionally strong increase in its trade surplus, and by , the final year of the expansion, its current account surplus had risen to 7. Figure 4. In the s, the small current account deficit was matched by a small capital account surplus, but it is striking that the scale of the net capital flows had increased since the s.
Net direct investment registered a steadily rising outflow, but this was more than offset by the increase in capital inflows which were due principally to net portfolio investment and especially net other investment, which was mainly attributable to bank transactions. Between and , when the current account surplus soared, there was a very large increase in the net outflow of other investment, again mainly reflecting bank transactions, although there was also a rising outflow of net direct investment and net portfolio investment.
Between and , net direct investment continued to register outflows each year and net portfolio investment registered significant outflows in two of the years. Capital outflows and capital inflows Figure 4. The outflow of capital from Germany is shown in Figure 4. The annual outflow increased in the s, rising from The largest outflows were registered by banks, followed by portfolio investment and then direct investment.
In the first half of the s annual outflows declined slightly, but in the second half of the decade they rose strongly, to reach Following a short decline at the start of the s, annual outflows then again increased very strongly from , more than trebling, to reach Although direct investment rose, the largest outflows were due to big increases in bank transactions and portfolio investment.
Following the onset of the crisis, total capital outflows from Germany declined very markedly in and In the total capital outflow fell to only In and banks continued to repatriate funds, albeit on a smaller scale. The inflow of capital to Germany is shown in Figure 4. Total inflows were low in the s generally under 30 billion euro , and consisted predominantly of portfolio investment. Total inflows increased in the s, especially in the second half of the decade, and reached Inflows of bank deposits increased in significance, and towards the end of the decade direct investment also rose.
During the economic downturn in — inflows fell, but they then increased strongly to reach a peak of Following the onset of the crisis, however, the total inflow of capital fell to almost zero in , and there was a net withdrawal of funds amounting to billion euro in This was a result of a collapse in portfolio investment in the country and, more particularly, a significant withdrawal of bank deposits.
In the case of portfolio investment, both outflows and inflows were predominantly in investments in debt securities rather than equities, as can be observed in Figure 4. In the case of the outflows, the main exceptions were associated with the period of stock market booms between and , when some 50 per cent of outflows were accounted for by equities, and in and when German investors reduced their holdings of foreign equities. During the s, foreign investors also began to purchase private issues, and in the period from to , inflows to private issues were slightly larger than those into government paper.
Following the onset of the crisis, however, this changed completely. From to , foreign investors began to reduce their holdings of private bonds, most notably in when foreign investors dumped almost billion euro of private German bonds.
By contrast, during the same period, foreign investors increased their holdings of German government bonds in every year. During this period, it was primarily banks and companies that built up a positive net international position, but this was partly offset by a rise in foreign holdings of German government bonds.
Although companies continued to increase their net international position, this was more than offset by an increase in the net liabilities of banks together with a continuing rise in foreign holdings of German government bonds.
By the end of the business expansion in it had risen to billion euro Companies continued to increase their net international position and, up to , banks also increased their net foreign assets. However, after , banks began to reduce their foreign exposure, although at the same time the net assets of the Bundesbank increased principally due to a rise in assets with the ECB through the TARGET 2 clearing system.
International indebtedness While the net international investment position of Germany has been positive since the s — and very strongly so since the turn of the century — different sectors of the German economy have been borrowing abroad and this has been reflected in a rising stock of external liabilities. This section will review the borrowing abroad by different sectors of the German economy; the following section will focus on the foreign lending of one particular sector, namely the banks.
It then rose very strongly in the s, to reach 2, billion euro By , when the financial crisis first erupted, the foreign indebtedness of German banks stood at 1, billion euro The figure for foreign borrowing by enterprises in Germany was equal to billion euro The decline was principally due to banks, which reduced their international indebtedness between and by some billion euro to 1, billion euro.
However, during the same period, the German government increased its foreign indebtedness by over billion euro to reach 1, billion euro, largely as a result of foreign investors purchasing government bonds. International bank lending International lending by banks in Germany increased steadily from 90 billion euro in to billion euro in Figure 4.
It then increased much more markedly from the late s until , when it reached a peak of 2, billion euro. In the aftermath of the crisis it then began to decline, and had fallen to 1, billion euro by mid This group of banks is extremely heterogeneous [3].
Table 1 shows the number of Banks operating within the country [4]. Germany, despite being a social market-economy, has got a banking system which is heavily controlled by public sector. If the publicly-owned banks fail, the municipality should bail them out by tax-payers money.
Competition is generally distorted. Consequently, German Banking system is inefficient in international level. But the positive side of this system is that the customers enjoy lower rates of interest and lower banking fees which results in higher rates of deposit. Institutional investors are financial mediators who are specialized in collecting and managing assets. In Germany, the major institutional investors are the investment funds and the insurance companies.
These institutions pose large volume of fund which could be used by the state and companies in the capital market. Usually they use stocks, bonds, and other money market instruments that are available on large liquid capital markets in national and international level. Insurance companies are regarded as risk a bearer that means they bear the risk of negative financial consequences. They hold assets to backup the liabilities that are issued by insurance contracts.
Table 2 shows the German Market for direct insurance in comparison with other G7 countries [6]. Bikal Dhungel Author. Add to cart. Too-big-to-fail and funding costs: A repository of research studies. Statement on the countercyclical capital buffer by the German Financial Stability Committee. BaFin activated the countercyclical capital buffer. German Financial Stability Committee recommends activating countercyclical capital buffer.
Proceedings of policy evaluation workshop published. G7 countries adopt reports on cybersecurity. International cooperation. More recent work has branched out in new directions, but more needs to be done. One promising avenue deals with the operations of financial markets and the IPO process that led to new listings on the markets.
The research cited in this chapter has started to overcome this lacuna, but much more remains to be done. Similarly, we know less about banks other than the very largest. There is some recent scholarship on credit cooperatives and private banks, but not enough really to address the question of their contribution to economic growth.
The Sparkassen remain especially under-studied; given how little we know about their lending portfolios, we cannot know whether to accept the long-standing view that they provided little direct finance to industry. Finally, we also know too little about other players in the financial system: the Landschaften, the Landesbanken, and others.
This economy overcame early hurdles to overtake Britain in some dimensions as early as the late nineteenth century, and to weather the shocks of two World Wars, an especially nasty Great Depression, significant territorial losses, and division into two states followed by costly reunification.
Other chapters in this volume discuss the challenge of demonstrating whether a financial system affects economic growth. Here we draw out some larger implications of the financial history we have surveyed.
The distinction is real and potentially important, but the German case reminds us not to take ideal types too seriously. First, by some measures, the German financial system relied more heavily on Carsten Burhop, Timothy W. Second, the early development of the large banks reminds us of the ties between banks and the larger financial system. Universal banks reached their size and influence in Germany in no small part because of their role in founding corporations and in the brokerage services these banks provided their customers.
Thus, as more research stresses, banking systems and financial markets can be comple- ments see, for example, Levine, , p. The German story also illustrates the sensitivity of financial systems to regulation, even regulation that is peripheral to financial institutions or markets.
The German universal banks played an important role in creating corporations not because of bank regulation, but because the company law made it so difficult to found new corporations without bank help. The German financial system also offers an answer to a question that the literature rarely poses: why do some countries have bank-based systems and others market-based systems? A simple answer is almost certainly wrong, but we can point to two elements that pushed the larger German banks to acquire their size and power.
Most German states, especially Prussia, demonstrated considerable hostility to note-issuing banks in the mid-nineteenth century. The implicit contrast here is to the USA or Britain, both of which allowed the formation of many note-issuing banks.
Bank notes resembled deposits held by the public, and frantic efforts to convert bank notes into specie were the proximate cause of many of the frequent financial panics observed in nineteenth- century USA especially. Note-issuing banks had to focus on the liquidity of their asset portfolios, limiting their ability to make long-term loans, or large loans to a single customer, or to tie up their capital in ventures such as IPOs that required the ability to hold an investment through a bad shock.
Regulatory authorities stiffened these incentives with rules about what kinds of loans banks could make, and what kinds of assets they could hold, but a note-issuing bank could not long remain in business if it did not pay careful attention to liquidity, quite aside from what the law or regulator might say. Barred from bank note issue, German private banks looked elsewhere for funding.
German banks became more capitalized and less reliant on household deposits than their US or British counterparts. This different liability structure allowed them to direct their energies to activities such as the dealing in government securities. General incorporation opened up a new area for the private banks, the foundation of corporations, including the joint-stock banks. The large joint-stock banks developed their business in ways that fully capitalized on their relative invulnerability to shocks.
By severely restricting the creation of note-issuing banks, the Prussians pushed their financial system towards one that relied heavily on these distinctive banks. Rajan and Zingales , Table 2 , for example, show that the ratio of deposits to GDP fell from to , rising thereafter. The ratio of stock market capitalization to GDP similarly fell from to , although the later increase was not continuous ibid. As an alternative to these measures, we can compute the percentage of bank loans in total financing bank loans, bonds, and equities.
This figure is 57 percent in the period —, 67 percent in the period —38, and 83 percent in the period —74 Deutsche Bundesbank, , pp. Germany had several different kinds of banks in the late nineteenth century. Most Americans in the s or s had their choice among banks that provided very similar services; if no financial institution provided this service, there was no practical way to go elsewhere. Firms too small to interest a joint-stock bank could borrow from a credit cooperative or from some private banks.
The diversity of institutions allowed each group to focus in ways that would be difficult in situations where groups of people or firms shut out of the only banks available would use their political voice to demand regulatory relief. In the early nineteenth century, the many states jeal- ously guarded their prerogatives, including control over much-needed seigniorage, forcing German businesses and households to contend with multiple coinage standards.
States sus- picious of private initiatives such as banks limited note issue, meaning that German banks and their customers relied heavily on other money substitutes.
The three-pillar banking system of credit banks, Sparkassen, and cooperatives emerged to serve drastically different clienteles, only beginning to compete seriously with one other at the start of the twentieth century. The reforms following the first all-German general incorporation law greatly enhanced the role of the emerging Great Banks; in the last decades of the nineteenth and first part of the twentieth century, these banks worked hand in hand with financial markets to create the distinctive financial system that survived through the twentieth century and up to this day.
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