The main theme of this chapter is that as the German financial system adapted to changing circumstances after 1945, it did so in a “path dependent” way. The complex negotiations conducted within the German federal polity yielded a “national solution” to the question of Germany as a production site–Standort Deutschland. In other words, Germany’s financial system remained specific, and continued to yield outcomes in the form of ever more competitive unit labour costs relative to competitors in what later became Euroland.
As we observe:The spirit underlying the creation of Finanzplatz Deutschland was captured by two statements, one on the urgency of preserving national ownership and business practices, and the other on the threat to politics in modern states posed by world financial markets. In Bundestag hearings of May 1990 on the theme of “bank power,” the representative of German industry stated that there was a need in the light of internationalisation,” for a strong domestic anchoring of capital and investors.”60 After the widening of the bands in the exchange rate mechanism in August 1993, Wilhelm Nölling, member of the Bundesbank Council and president of the Hamburg Landeszentralbank from 1982 to 1992 said, “It is no exaggeration to speak of an abdication of the democracies in the face of anonymous, uncontrolled market forces.”61
Why is this important? Because the assumption behind monetary union and the financial services program me was that all member states would “converge”: they have not. The deep crisis in Euroland is because they have diverged. The evidence that this would happen was abundantly available in the mid-1990s, when this chapter was written.
The Politics and Markets of German Financial Services
With the switch in Bonn late in 1982-83 from a liberal-social democrat to a liberal-christian democrat coalition, Chancellor Kohl’s new government embarked on a pro-business platform to shift financial resources back from the government sector to the private sector. But little had been achieved in the way of financial market reform by the end of the decade, when the EU’s internal market programme was in full swing and the Berlin Wall was dismantled, ending Germany’s division. The government was content to preside over incremental changes, and remained averse to any “Big Bang” experiment among British lines. Essential to this hesitancy was the long shadow cast over financial arrangements under the Federal Republic by Germany’s turbulent history between 1870 and 1945.
Several features of German banking survived the two world wars.
• One was the determination, born of war and defeat, to avoid the mistakes of the past. For that, an essential condition for an effective financial system was a stable monetary environment.
• Another was the reluctance of the Bundesbank, at the pinnacle of the German regulatory structure, to engage in intemperate experiments. The universal banking principle, where banks provide both commercial and investment services, applied to all. Legislation was concerned with general regulations involving the granting of licenses, to solvency ratios and to ensuring liquidity for the system as a whole.
• A third feature, outlined in Chapter 5 and elaborated in chapter 10 in connection with the political legitimacy of Germany’s financial system, the recurrent debate on “bank power” usually served-up as a political vent against the private commercial banks, originally set up in Berlin by German industrialists in 1870-72 with a view to promoting industrial growth.1 The banks dominate the stock exchanges, hold shares, maintain privileged Hausbank relations with German corporations, and have seats on a range of corporate supervisory boards. But they accounted for only a fraction of banking activity, which was largely controlled or directly influenced by state and local governments. The broad spirit of German banking remained servicing the industrial and export activities of the economy.2
Banks, too, were closely associated with state policy to promote growth and fund government spending. They and insurance companies were organised in hierarchically-structured trade associations.3 State regulation was general in scope¾ extensive powers of self-governance were delegated to the associations and their leading members, and complexity was built into the financial system of the Federal Republic.
The Post-1945 Regulatory System
The central principle permeating the style of public policy in the Federal Republic is the “social market economy.” The concept derives from the Freiburg school of liberal economists, whose ideas found favour in the Economics Ministry of the 1950s.4 The doctrine delineates the boundaries between public authority and private interests, linking the respective roles of competition in markets, state supervision, and the law.
• Public authority sets the broad regulatory framework, within which competitive markets operates.
• Competitive markets provide the necessary but not sufficient condition for a liberal market order.
• Statutory law is required to broadly define and delimit the competences of the public powers and the banking profession.
In practice, this “organised liberalism” yields a dense field of regulatory institutions, where public authorities enjoy specific powers which are restricted in operation to a specialised area, and are often at variance with other functions of the state. This dispersion of public authority is reinforced by the workings of federalism, as supervision of stock exchanges and savings banks is in the hands of the German state government rather than of the federal authorities. The federal government also owns a plethora of specialised institutions. Detailed supervision of markets is by financial institutions, with the public authorities playing a limited and distant role.
Financial markets are broadly regulated by legislation on banking, insurance, and competition policy, drawn up by the ministries in close cooperation with sectoral representatives and discussed in parliamentary committee. The ultimate court of appeal to parliamentary legislation in Germany is the Constitutional Court. Its exclusive competence¾in parallel to that of the Bundesbank to guard the value of the currency ¾is to define the spirit and letter of the Basic Law, the Constitution of 1949. The Court, established in Karlsruhe in 1951, has the power to nullify legislative acts of parliament, and thereby not only interprets but makes law. It is the custodian of basic rights, the umpire on disputes between the federal authorities and the states, and the guardian of the social market. Law prevails over politics. Disputes tend to be referred to judicial review, making constitutionality the benchmark against which public policies are assessed. Banking and insurance does not escape its purview. The Court regularly pronounces on a range of issues from competition policy, to consumer interests, to bank secrecy and taxation.
At the heart of the regulatory complex lies the Bundesbank,5 set up in its present form in 1957, and located in Frankfurt, the capital of the state of Hesse. Its statutory task, in cooperation with the federal government, is maintenance of price stability. Daily business is the responsibility of the Directorate, whose members are appointed ex officio by the government to the Council, which sets policy guidelines at its fortnightly meetings. Each state is represented on the Council through the president of its own central bank (Landeszentralbank), which operates on the Bank’s behalf and as a regulator of local financial institutions. Regional concerns are thus incorporated into national policy, while central decisions are implemented locally. The Bundesbank’s regulatory powers extend over all credit institutions. Control of money and credit is centred on the Bank’s manipulation of key interest rates, and in particular of reserve requirements. These oblige banks to keep non-remunerated assets with the Bundesbank, thereby restricting their loan activities. The Bank also keeps tight control over the money market. This ensures that banks remain dependent on its refinancing facilities. Not least, a range of tax and spending decisions by federal and state governments affect liquidity and investment prospects in the economy. Bank announcements of money supply targets since 1974 also serve to place a cap on wage negotiations in the economy, and tend to be taken by the banks as a target for price stability.
Another state regulator is the Finance Ministry, located in Bonn. State regulation of the financial system was introduced in a major way in 1931, following the financial crash. The Bank Credit Law, introduced by the National Socialists in December 1934, provides the modern framework, governing rules on admission, large-exposure, capital and liquidity rules, as well as restrictions on the number of supervisory board seats occupied by any single banker.6 The Law was modified in 1961, when bank supervision was centralised in the Federal Bank Supervisory Office, based in Berlin. It exercises tutelage as an autonomous federal authority over the banking system, and is placed under the authority of the Finance Ministry. The Office is supported by the Bundesbank, which is not directly charged with supervising banks. The law was tightened by two modifications to the Credit Law in 1976 and 1984, regarding large exposures and own funds. Banks make monthly reports to the Bundesbank, that are then transmitted to the Supervisory Office. Annual bank accounts are supervised by an auditor, appointed by the Bundesbank, on the Supervisory Office’s accord. The Supervisory Office has powers to discipline banks, sack their directors, or withdraw licenses. But it shares supervision of the state savings banks with the supervisory authorities in each state; and its mandate is to ensure the system’s overall stability. The Supervisory Office consistently champions bank exemptions from competition law in the interests of consumers.7
Insurance also falls into the Finance Ministry’s domain. State regulation is based on the law of 1901, as modified by the National Socialists in the 1930s. The powers of the Federal Supervisory Office for Insurance, located in Berlin, were subsequently redefined in the law of 1961. The least that can be said is that relations between the insurance industry and its supervisors are intimate. The Berlin office, with 300 employees, has nine-tenths of its finances met by contributions from the insurance sector.8 It is flanked by an insurance supervisory council, composed of up to 60 members. Any alterations to existing regulations on the issue of licenses, pricing, product content or own funds are closely discussed between the federal supervisor and trade associations.9 Both supervisor and trade associations concur that their prime task is to ensure consumer safety, and that the insurance companies are adequately funded through stable, high prices in order to be able to meet their obligations over the longer term. Competition is restricted as being incompatible with the interests of the insured. The Office exercises regular and detailed supervision over insurance products and premiums. As in banking, product innovation is discouraged. Insurance companies are prohibited from entering new markets. They may not become members of the stock exchanges, and there is an upper limit, raised over the 1980s from 10% to 30% of financial assets from life insurance that may be placed in shares. Competition law, introduced in 1958, comes within the province of the Ministry of Economics and the Berlin-based Federal Cartel Office. Banks and insurance companies were granted exemptions from the full force of the law, although they were subject to restrictions under the “abuse of power” principle. The official explanation for perpetuating these exemptions was the need to protect depositors’ confidence in the stability of the banking system, and the special role played by the two sectors in monetary and credit policies.10 The insurance sector was seen as particularly sensitive to price competition, and to major uncertainties over the likely costs of past or future business The coalition in favour of cartel privileges held a more mixed bag of motives. In the course of negotiations, the state governments battled to keep as many of their local supervisory powers as possible from slipping into the hands of the federal authorities.11 The bank associations had a vested interest in perpetuating the powers of the 1939 Bank Credit Law, whereby the Reichskommissar could declare the majority decisions of the trade associations as binding on all.12 A provision that was eventually ended in the 1984 Bank Credit Law. The competition law was amended in 1973 in order to extend state regulation over corporate mergers.13 A further amendment in 1990 brought banks and insurance under EU competition law.
State supervision for banks and insurance companies is complemented by sectoral self-governance. The three associations representing the private, savings and cooperative banks, as well as the insurance association, play a dominant role in defending sector-wide interests. Their representatives articulate policy at federal or state levels, and the largest members provide the bulk of their financing, personnel, and administrative support. Their leaders’ public pronouncements receive wide coverage in the media. They manage their own deposit guarantee and settlement systems, pool resources to ensure the solvency of their borrowers, provide liquidity for banks in difficulty, and run the Federal Bond Consortium, all under the direct authority of the Bundesbank. They maintain intimate relations with their regulators, whose budgets they also help finance. The pinnacle of prestige for the bank associations is the joint Central Credit Committee, where common positions are worked-out and discussed. The Insurance Federation plays a similar role. It helps restrain competition, permits nationwide wage negotiations with bank employers and unions, and maintains discipline among members. The sectoral union¾the Gewerkschaft Handel, Banken und Versicherungen¾represents 600,000 employeesin the public, private and mutual financial services sectors. Bank staff costs have risen steadily, and employment contracts are geared to those of the public-sector employees.
Public Power: State Ownership and Self-regulation
The most prominent of Germany’s banks are the “big three”-Deutsche, Dresdner Bank and Commerzbank all founded in the years 1870-72 to finance Germany’s industrial expansion. They operated from the start as industrial banks, taking deposits, extending loans, underwriting new issues on the stock market and engaging in trade finance. As described in 1900 by the speaker of Deutscher Bank, Georg von Siemens, the banks function “as a kind of leader of the entrepreneurial spirit of the nation.”14 In the initial years after 1945, the western allies divided the “big three” among the states on the grounds of their association with the German war effort. But Deutsche and Dresdner soon regained control over their branch networks. The 1952 Law on the Regional Scope of Credit Institutions acknowledged the fact, and the process was completed in 1957 with full reconstitution of the traditional banking system. The big banks played a central role in Germany’s export drive in the 1950s, financing four fifths of German trade transactions. In the 1960s, they expanded their branch networks, and consolidated their hold over Germany’s local stock exchanges. They raised capital for their clients, enjoyed privileged access to corporate information, and managed corporate equities. Yet the big three found that their overall market share dropped from over 11% in 1960 to below 10% by 1990 (Exhibit 6-1). The “big three” are flanked by sizeable regional private banks and smaller financial houses.
Insert Exhibit 6-1 about here
Not only do the “big three” have a rather small market share. Banking in the Federal Republic is divided formally into the three sectors: Private commercial, savings and cooperative banks. Representatives from all three sectors have been active in public policy, and prominent commercial bankers have advised successive Chancellors. Savings banks help finance state governments or operate as instruments of industrial development policies. Appointments to senior posts in such institutions are a matter of state policy. Cooperative banks stand in similar relation to local and municipal governments. Both types of banks have small and medium-size enterprises as their clients, and conceive of their function mainly in terms of serving local communities. With one bank to every 1,500 citizens, the retail financial services market in Germany is densely populated, and scarcely a village is without its cooperative bank. Bank and insurance associations have made clear their preferences for political parties’ positions. But the bank associations’ interests-or those of their members-are often disparate and divergent. They are only one of many producer-group constituencies which the federal or state governments attend to. This relative positioning in the changing hierarchy of successive government concerns has meant that bank or insurance interests have had to constantly cultivate constituencies favourable to their interests.
German banking and insurance has become highly competitive. In the early 1990s, there were 4,000-odd banks and 745 insurance companies under federal regulation. Interest rates were set in a competitive market, and customer options were many. The German banking system today also encompasses building societies, mortgage banks and specialised institutions. The mortgage banks are practically wholly dependent for funds on bond-issues, and are dominated by the “big three” private banks. The 19 specialised institutions are engaged essentially in medium- and long-term lending, and obtain their funds from government endowments or from other banks. The most important is the European Recovery Programme Special Fund, a public institution set up in 1948 to administer Marshall Aid. The Kreditanstalt für Wiederaufbau, later owned 80% by the federation and 20% by the states, was created as the Fund’s financing instrument. Initially used to help in German reconstruction, it was later deployed to promote exports, smaller businesses or investments in developing countries. Without a branch network of its own, it relies for information on other banks. Finally, the German postal service operates a large retail banking operation through its post offices, which compete with other sectors in retail deposit-taking.
Government policy has helped dismantle the older divisions between the three sectors of private commercial, savings and cooperative banks. By the 1970s, three-fourths of them functioned as industrial banks, providing both commercial and investment banking services. Capital movements were freed in 1961, and the 35 year regime of interest-bonding was ended in 1967. All types of banks were allowed to expand their field of operations into providing universal financial services. This enabled them to offer a range of investments close to money market rates, and to maintain their control over the intermediation of savings.
Still, banks and insurers remained exempt from competition law, and bank associations continued to coordinate policies on interest rates. This practice came under attack from the Bundesbank, which sought greater flexibility from banks. The Constitutional Court decided against the banks in the case of a client whose deposit had been credited one day later.15 The Cartel Office’ criticisms of the insurance cartel were given teeth with the passage of the EU directives liberalising the market. But the main factor impinging on banks and insurers, as the sectors’ representatives regularly recalled, was sharpening competition.16 The combined market share of the big German banks had been less than 4% of the EU’s internal market as measured by deposits.
The savings banks held their domestic market share at around 37% since the early 1960s, but saw their numbers fall sharply. As noted earlier, German savings banks are local banks, subject to strict prudential rules. The municipalities stand as guarantors of their deposits. Their statute is defined by each state according to general principles laid own in the federal law of 1969. This structure has proved to be a serious barrier to their merging in order to preserve market positions. Their main loan business is to local firms and households. In the 1970s, their important status helped the savings banks gain market share from the private banks, which had become deeply involved in the restructuring of large swaths of German industry. In the 1980s, the private banks, led by Deutsche Bank, responded by aggressively building the loan business for smaller firms. As the savings banks found credits to firms shrinking, they shifted to financing the states. They also placed deposits with the Landesbanken, accounting for 15% of German bank turnover. The Landesbanken, owned by the state governments and the savings banks, were therefore well placed to operate as house banks for the various state and local governments, underwriting their bonds and lending to them. But their statute enabled them also to expand into activities from which savings banks were excluded. The Landesbanken thus entered into direct competition with the private banks on trade financing, investment services, as well as money and capital market activities.
Once the way was open for Landesbanken to provide universal banking services, they rapidly emerged as a new pole of countervailing bank power to the private banks in Germany. They came to enjoy the backing of their governments, the trade unions, their clients, and EU and national law. In the 1970s, they spearheaded the expansion of the state governments into industrial policy, attracting criticism among competitors. With the introduction of uniform capital ratios across all banking sectors, pressure rapidly built for them to merge. One proposal advanced in July 1987 was for the 12 Landesbanken to consolidate into 5 or 6, and for the savings banks to seek out whichever provided the appropriate services for their needs. But the plan was vetoed by most regional governments, concerned to preserve their local financial services. The other proposal to privatise the Landesbanken, advanced by the Monopoly Commission,17 was categorically rejected by state governments,18 which typically pushed their banks to acquire industrial stakes.19 WestLB, the Landesbank of North-Rhine Westphalia, took the lead. The EU’s internal market provided a further spur to achieve size. Three groups subsequently emerged, structured around WestLB, Hanover’s NordLB, and the Bayerische Landesbank. WestLB in addition set up an abortive joint venture with Standard Chartered, with its presence in over 70 countries, later taking over its investment banking activities.
The cooperative banks represented the one sector that expanded its market share, from 8% in 1971 to about 20% by 1990. Rooted in the nineteenth century, the cooperative movement was helped by the postwar merger between the urban and rural branches. Over 23,000 cooperatives joined the new association in 1948. Their number was down to 3,000 by 1990. Several factors prompted this process. The two rural and urban branches were eventually merged in 1972. The banks pool their joint expertise and have a dense branch network with over 11 million members who pledge a formal guarantee for new capital up to a certain limit. They enjoy tax and refinancing advantages. They are supervised by their own trade association, not by the Federal Bank Supervisory Office. The cooperative banks receive their funds from personal depositors, and lend on to their regional institutions. The latter have the status of universal banks, and own the Deutsche Genossenschaftbank (DG Bank), the system’s central bank. The DG Bank is located in Frankfurt, also with the status of a universal bank. The cooperatives thus enjoy central liquidity and settlement services and have access to the stock exchanges. Through DG Bank, they participate in the Federal Bond Consortium, and are present on the international markets. In the reorganisation of December 1989, each regional bank was allowed to merge with the DG Bank, making it the fourth largest bank in Germany.
The German insurance sector is dominated by the five giants-Allianz, Munich Re, Colonia, Aachener und Münchner Beteiligiungs Gesellschaft (AMB) and Gerling. The German insurance market is the third largest in the world, growing rapidly from 3% GDP in 1960 to over 6% in 1990. Most of this growth came in the form of premiums on life and pension policies, which amounted to three-quarters of the total. This growth rate was facilitated by regulation requiring premiums to be priced at a generously high level, thereby ensuring that the stock of the major insurance companies listed on the stock exchange retained their attraction to investors. Generous premiums also underpinned the growth of the multi-purpose insurers, notably the Munich giant Allianz. Indeed, Allianz lies at the hub of the cross-shareholding typical of German capitalism. Allianz and Munich Re hold 25% of each others’ stock. Dresdner Bank and Deutsche Bank hold 30% of Allianz, and Bayerische Hypo has 25%. Both Munich Re and Allianz hold 76% between them of the stock in Hermes, the agency used by the federal government for export credit reinsurance. They also have extensive stakes in real estate, banks and industrial corporations, and as mentioned, provide technical advice, financial support and personnel for the Supervisory Office in Berlin.
The bank federations have cooperated to keep foreigners out of domestic markets. German banks for years slammed the door on international credit card purveyors, such as Citibank or American Express, in favour of their own Eurocard, managed by the Gesellschaft für Zahlungssysteme (GZS), an organisation set up by all the domestic banks in 1982. The aim was to keep the business “in the family,” prevent foreign incursions into the domestic payments system, and avoid an uncontrollable explosion of credit. Both the Bank Supervisory Office and the Cartel Office gave the go-ahead for the GZS, which effectively monopolised the business on behalf of the three bank federations. When the retailers launched their own card, the banks squeezed their challengers by joining forces with the oil companies and gas stations for the market in electronic payments. Similarly, the banks pushed Visa to one side, and launched Eurocard as a mass-market credit and payments card in 1988. Foreign competitors sought to exploit rivalries between the federations, particularly in the area of travellers’ cheques, or to forge alliances with retailers and the German Automobile Association. Citibank eventually concluded a joint venture with Deutsche Bahn, the state-owned railway, to link its railcard into Citibank’s world-wide network. GZS made a counter-offer, but withdrew when the Cartel Office began an investigation.20 Citibank and American Express together have under one-third of the German card market.
Internationalisation of German Finance and State Unity
Lower growth in Europe’s leading economy in the early 1990s set the context for an internationalisation of German savings habits, and the internationalisation of Germany’s financial regulatory framework. One factor pushing Germany toward slower growth was its wealthy and ageing population, with household savings up by a factor of five in real terms over 1950. By the year 2030, nearly 40% of the population will be over 60, against 20% in the 1990s. This transformation in German society had a profound impact on business and banking. German savers became more demanding, asking for higher returns on their investments in addition to the stability which they cherished. At home, they sought more sophisticated assets to invest in, driving up the cost of funds to financial institutions just as competition in loan business sharpened. Commercial banks entered the market for life insurance in competition with the insurers. Brokers sought to by-pass strict regulations protecting the domestic market from foreign competition. Consumer organisations pressed their demands to reduce the cost of insurance and greater transparency in German accounting. And an ageing population looked to the higher return outlets available abroad to place their savings.
A further trend diluting the internal cohesion of German financing was globalisation. Domestic business has been a declining proportion of German banking and insurance activities since the early 1970s. As international monetary conditions became more turbulent and lucrative, the German banks ventured into Luxemburg, then joined international groups with other European banks, and by the 1970s, were actively participating on the Eurocredit markets. In the 1980s, they entered investment banking. By the end of the decade, they were buying subsidiaries in the United States, the United Kingdom, Italy and Spain, and negotiating cross-shareholdings with their major French counterparts.
This evolution was driven by the relative decline in domestic growth, compared to the attractions and risks of doing business on global markets. Already by the late 1970s, 7 out of 10 of Germany’s largest banks owed 25 to 40% of their profits and balance sheet assets to international operations.21 The trend was accentuated with the development of off-balance-sheet activities on world securities markets. Off-balance sheet activities meant that banks faced an accumulation of risks on loan commitments, swaps, interest rate and exchange rate contracts. They would have to be covered either by considerable increases in banks’ provisions, greater attention to risk management, and possibly full-blooded penetration of international wholesale banking markets.
This extroversion of German financial interests was accompanied by a further centralisation of regulatory powers, and attempts to export regulations tailored to German requirements into the international arena. Within Germany, all banks converged on the provision of universal services. Preserving the sectoral definitions for capital in the Credit Law would have meant allowing one sector to extend its loan business at the expense of another. Negotiations during 1982-84 on the Credit Law amendment were heated. The commercial banks feared high capital standards would victimise them alone. The cooperatives lobbied to keep their members’ guarantee for new capital. The savings banks proposed to count the own funds of the local governments which controlled them in their definition of capital. After the change in government in 1982, the Bundesbank won its demands for a uniform increase in capital.22
Another factor was EU negotiations on the internal market, that enveloped German financial mercantilism within EU law. Banks’ and insurers’ exemptions under national anti-cartel law was pulled into EU competition law. The Commission in January 1988 enthroned the German universal bank as the model for the EU, but the German banks had to scramble to defend their interests in the more fluid legislative environment opened-up by the introduction of majority voting to internal market matters. The public tone that was adopted suggested a stable and proven German financial system under siege from abroad. The banks defended their industrial shareholdings, and galvanised parliamentary support in Bonn against Brussels’ determination to harmonise legislation on insider trading.23
German unity came in a rush, interrupting the flush of excitement in 1988 and early 1989 over EU integration. The Berlin Wall was pulled down in November 1989. The State Treaty, laying down the terms for economic, social and monetary union between the two Germanies, was ratified by the two parliaments in June 1990. The Bundesbank took over full monetary powers on July 2. East Germany’s conglomerates were to be privatised and market institutions introduced. The Federal Republic’s tax and social security system would be adopted. All contractual obligations with COMECON trade partners would be met. Conversion from Ostmarks to DM was set at 1:1 for current payments and 2:1 for savings. A German Unity Fund, initially capitalised at DM 115 billion was set up by Bonn and the states. It was to issue Federal bonds, which the Finance Ministry initially reckoned could be financed easily out of German savings, DM 120 billion of which was exported yearly.
But total public transfers from West to East Germany swelled to about 4-5% of western German GDP annually over the next five years. As the coalition government, returned in the October 1990 elections, was reluctant to raise taxes to fund the additional expenditures, it turned to the bond markets. The Bundesbank introduced new issue procedures, which improved the market’s efficiency but also preserved the existing bond underwriting consortium.24 Market participants could only be banks or non-banks registered in Germany, and fully subject to Bundesbank reserve requirements. Attractive yields on German bonds ensured that East German reconstruction would be heavily financed by borrowing on international capital markets.25
Finanzplatz Deutschland: The Impossibility of Being Cosmopolitan
A central feature of German stock exchanges is their diminutive size. There are two main legal forms of corporate ownership: (1) Joint stock companies, which separates management and ownership (AG); and (2) Private limited liability companies (GmbH). Between the signing of the Rome Treaty in 1957 and 1982, the number of joint stock firms declined through a process of market attrition from 2,545 to 2,140. Many remained under family ownership, with the families reluctant to go public. The number of listed firms declined from 600 to 450.26 Between 1983 and 1991, about 165 companies, mainly from the Mittelstand, were persuaded by the banks to go public. The main change came in the surge in private limited companies, from about 70,000 in 1970 to 300,000 in 1983,27 and a further 70,000 by the end of the decade. Over the whole period, equities were an unpopular form of holding wealth in Germany, compared to bank deposits, insurance and fixed rate securities¾see Exhibit 6-1. Furthermore, the structure of share ownership shifted. The proportion held by private households declined, to the benefit of insurance companies and foreigners. Enterprises and banks saw their holdings remain at about 42% and 10% respectively -see Exhibits 6-2 and 6-3. These figures suggest a narrow and illiquid market in corporate paper. They indicate that most Ags have stable corporate, as well as bank, participations, and they both show that the great majority of companies dislike going public, and German savers and firms prefer bonds.
Insert Exhibits 6-2 and 6-3 about hereex6-2,3
One reason for the restricted size of the official German equities market is the existence of an extensive shadow market alongside. The overwhelming proportion of German corporate investment between 1950 and 1989 came from internally generated funds, 61% of the total. Bank borrowing accounted for 18%, and new issues of shares for 2. 4% only.28 Legislation has helped companies build up their own reserves. High corporate tax, and allowances for accelerated depreciation, encourage firms to retain their funds and allows them to offset the cost of borrowing. By contrast, a stiff capital gains tax discourages the sale of shares by long term holders, and prompts cross-shareholding among corporations, banks and institutions. Companies turn for new funds to their own employees pension assets, which can be retained on the company books as capital. In similar fashion, banks have been able to stash away funds into hidden reserves, enabling them to ride out turbulent market conditions. Institutional and legal incentives thus give priority to corporate accumulation. Institutional shareholders have played a minor part in providing corporate finance. Germany’s state pension scheme has no surplus available for investment. It is a pay-as-you-go service for an ageing population, with any asset accumulations attracted by tax incentives into life insurance. These assets have grown rapidly, but only 5% are placed in shares. German contractual savings barely find their way to equity markets.
Another reason for narrow equity markets in Germany is the broad aversion to them. Germany is not a nation of shareholders. It is an industrial state under managerial or owner custodian. Only a fraction of total savings reach the equity market. Most privately owned shares are held by the banks, which advise their owners on how to vote at annual general meetings. Share turnover is limited, and dividend payouts are low. Shareholders in effect are invited to observe their investment gain in value in the longer term, rather than to take their profit and then decide what to do with them. Everything in the German institutional and legal environment for shares promotes shareholder patience. Management performance is assessed more in terms of growth, capital outlays or good citizenship than in terms of profits. At the same time, the Equity Law of 1966 provides owners and managers with powers to protect their companies from takeover by active minorities. The principle of one shareholder one vote cedes pride of place to preference voting for privacy. The great majority of larger firms are GmbHs because their owner-managers dislike going public, want to keep control over corporate policy, and prefer to plough profits back into the firm to paying dividends. The AG is not popular as a legal form, because it entails making results public and because it is subject to the two-tier board system under Germany’s 1976 co-determination law.
An international financial centre requires two things: A liquid securities market, and a strong foreign institutional presence. Frankfurt’s bond market, the fourth largest in the world, supplied the first. An Association of Foreign Banks was created in 1982 to secure the second.29 The Association has lobbied for market-opening measures, in line with international trends and EU legislation. At its origin, there were 230 foreign banks in Germany with only a 2% market share. Loans were costly as subsidiaries had to have their own capital base, and access to corporate business was tightly sealed. Their main presence was in the interbank market. Escape came in April 1984, when the Bundesbank sought to halt the drain of German savings to the United States by allowing foreign subsidiaries to lead manage DM bond issues for foreign borrowers. In October, the coupon which foreigners had to pay to buy bonds was abolished. By 1990, 272 foreign banks30 accounted for 5% of total German bank assets. American and Japanese institutions led the pack, with the French in third place. Foreign banks accounted for one-half of Frankfurt stock exchange members, with over half of new issues ending up in the hands of foreign investors. They also began to enter investment banking business, but were kept on the sidelines by Germany’s cross-shareholding structure.31 New share issues were restricted,32 and the authorities remained vigilant against the introduction of new financial products.33
As already discussed, the Bundesbank’s method of managing the trade surplus was to encourage the recycling of surplus funds to Luxemburg, London or elsewhere. This approach ran into difficulties whenever the Bundesbank was not able to have the DM’s value set by market forces, prompting it to intervene. One alternative was to make Frankfurt a cosmopolitan financial centre, in the manner of London. A starting point would be for the Bundesbank to meet the commercial banks’ demands and repatriate the Euro-DM bond market by ending the tax disadvantages weighing on domestic bond business. The Bundesbank could then promote a liquid secondary market, flanked by a short term money market. The latter would, however, encourage a flight from bank deposits, and create a constituency of savers with a vested interest in higher returns. The market’s liquidity would have to be supplied from mutual funds, including money market funds. Institutions on the market would lobby the Bundesbank to allow them to deal in all instruments traded on international markets. Foreign institutions would demand a slice of the action, and an end to the German bank bond consortium. The Bundesbank would be prompted to shift fundamentally its control of monetary aggregates. Dearer credit would encourage firms to move away from bank borrowing as the primary source of external funding, to the new issue of debt securities and equities. An enlarged primary issue market for corporate securities would in turn foster a demand for secondary markets among Anglo-American lines. National ownership would be diluted. Germany would become a major source of international capital, and possibly move to a regular deficit on trade account. European integration would be accelerated.
The founding legislation on German stock exchanges dates to 1896, and provides a framework law, predicated on the principles of limited state intervention in the market and self-regulation by banks operating as issuing houses and brokers. The 1934 Credit Law strengthened the regional exchanges at the expense of Berlin, and charged the states with the supervision of markets. After 1945, the reconstitution of the states entrenched this regional organisation within the structure of the Federal Republic. But rivalry proved endemic, with relations between them governed by a web of interstate treaties. In 1952, the Arbeitsgemeinschaft der deutschen Wertpapierbörsen was created to provide some minimum of cooperation between the exchanges. But the states refused to accept majority voting and provided the Arbeitsgemeinschaft with no full-time staff.
This arrangement lasted until the 1979-82 recession, when Frankfurt’s deficiencies became glaringly evident as an external provider of funds for companies. Frankfurt was home to the big three commercial banks, the leading regional banks, and the DG Bank¾the cooperative’s central bank. But the Frankfurt exchange accounted for only 44% of the turnover in German securities. There was no coordinated clearance and settlement system, little investment in data processing and information technology and no markets for new instruments, such as options and futures. There was no formal legislation to outlaw insider trading. The ownership of Mittelstand firms remained almost exclusively in private hands. Overall responsibility for supervision of the stock exchanges lay with the Economy Ministries of the states. The eight stock exchanges were regulated by their own executive staffs, and by their own supervisory bodies, but in practice these were dominated by the banks. The states appointed their official brokers, each specialised in a number of securities on the official market, which was only open for two hours a day. The more active market was the non-regulated free market, run by the banks in off-hours and by telephone. Trade in both markets was restricted to government and corporate securities.
The Bundesbank became convinced that German corporate financing was in urgent need of reform in the course of the recession of 1979-82. A Bundesbank study of about 70,000 non-financial enterprises34 pointed out that companies, which funded investments out of own funds or by bank loans were highly vulnerable to union wage demands and to interest rate changes. Wage demands between 1968 and 1975 had seriously eroded corporate profitability, but stabilised in the years 1975-79. Another trend in the 1970s was the sharp rise in public indebtedness as federal government outlays rose. During that period, banks borrowed cheaply and extended fixed interest loans, helping to finance a revival in manufacturing investment. In 1980, the Bundesbank raised interest rates in response to an unprecedented current account deficit, caused by a combination of government spending and the world-wide rise in oil prices of the previous year. Inflationary pressures were amplified by the weak DM. Corporate profits fell abruptly, and in 1982 12,000 bankruptcies were recorded. A lowering of interest rates became imperative.
For the Bundesbank, there were three policy options: The first was that Germany had to return promptly to trade surplus,35 and thereby enable the Bundesbank to lower interest rates. Germany’s return to surplus in the years 1981-90 saw a remarkable transformation in German corporate finances¾see Exhibit 6-4. Flush with cash, large corporations decoupled from their dependence on bank financing, and Germany moved to become a major net creditor with respect to the rest of the world. Germany’s external assets were invested more in foreign securities than in Bundesbank foreign exchange reserves.36 Along with OPEC until the fall of the world oil price in January 1986, and in the company of Japan, Germany fed the growth of the world financial markets.
Insert Exhibit 6-4 about here
The second policy option was to have the bond market switched from funding the public to financing the private sector.37 The change of government from a social-liberal to a conservative-liberal coalition in the winter of 1982-83 revolved around this structural debate on the German economy. The Bundesbank and the commercial banks gave unanimous support to the tax and expenditure-cutting strategy outlined by the Finance Ministry. The subsequent seven years until German unity saw slow growth and a continuation of the government deficits that began in 1973, despite a public policy aimed at budget reduction.
The lifting of restrictions on German capital markets was initiated in 1984 with a view to stemming the outflow of capital to the U.S., influenced by the deficit spending of President Reagan’s first administration. In April 1984, the withholding tax on securities was dropped as a counter to a similar move by the U.S. Treasury, hungry for an increased share of world savings. In October, the Bundesbank agreed to open the bond consortium for lead-managing bond issues to the subsidiaries of foreign banks as part of the wider negotiations underway in western capital markets on reciprocal access. But the Bundesbank rejected the banks’ demands to repatriate the offshore secondary markets in German securities.38 It was clear that nothing would be done to endanger the stability on which German capital markets depended.39 Germany would not be a testing ground for Thatcher-type policies.40
The Bundesbank’s writ did not run to tax policy. The Ministry of Finance, in negotiations with the states and the coalition parties, in 1988 announced a reintroduction of the withholding tax for 1989, accelerating an outflow of funds and further weakening a fragile bond market. The measure was taken as part of the ongoing negotiations in the EU on harmonisation of tax on capital. But the measure weakened the DM, and revived Bundesbank fears of imported inflation. Both Bundesbank and German banks welcomed Chancellor Kohl’s government reshuffle in April 1989, and the appointment of the conservative Teor Waigel to the Finance Ministry. Waigel immediately had the tax revoked, as part of his determined support for Finanzplatz Deutschland.41 But the tax was reintroduced in 1993, after a Constitutional Court judgement that the tax should not have been withdrawn in the first place.
The third policy option was to have stock markets play a larger part in German corporate financing.42 The champions of this reform were the big banks.43 But their only vehicle for negotiation among the stock exchanges was a moribund working-group, created in 1952. It enabled local interests to delay or to veto legislation so as not to be sidelined by reformers. Talks among its members opened in 1986. A relatively non-controversial measure was chosen to lighten the stock-listing procedures, while reassuring the Mittelstand that their equity would not have to be widely dispersed. A third market was introduced in May 1987, alongside the official market for the Ags and the over-the-counter phone market for shares run by the banks. In July 1986, it was agreed to convert the working-group into a Federation of German Stock Exchanges, with a full-time staff, and headed by Rudiger von Rosen, a Bundesbank official.44 But the staff had a limited mandate.45 All major decisions had to be reached on a collective basis. Their expenses were covered by the eight stock exchanges. An expert group, dominated by the banks, provided advice.
Frankfurt remained a relatively unattractive market. Over one hundred companies listed within the first year, but many came from the phone market, and they were only a fraction of the 400,000 eligible firms. Germany’s principal new equity market was in London, when Deutsche Bank set the pace by moving its investment services operations there in 1984. The move signified Deutsche Bank’s recognition of “the preeminence of the London market in the domain of corporate finance and money management.”46 The London markets offered the liquidity that was lacking in Frankfurt. British regulators also allowed German banks to float new issues with restricted voting rights¾a privilege denied British companies.
The big banks were much less sanguine about Frankfurt losing the market for DM futures to London or Paris. One requirement was reform of the law. Futures trading had been outlawed in 1931 and legalised anew in 1971. This market was run by the banks under complex regulations, and the Bundesbank was divided over reform. Its main concern was that new financial instruments might escape regulation. Yet the cost of not having a futures market enabling financial institutions in Frankfurt to hedge their risks became evident in the equity market crash of October 1987. The Bundesbank’s change of heart was hastened when London and Paris in October 1988 launched their own markets in DM futures. A draft bill, presented to parliament by the Finance Ministry that November, was endorsed by the cabinet, and passed-on for examination to the two houses of the legislature. Resistance by the states was only overcome after the banks had appealed to the Chancellor’s office, and because both Hesse and NorthRhine Westphalia-as the home states to Frankfurt and Düsseldorf had much to gain by the measures.
Another requirement for making Frankfurt into a viable financial center was to computerise trading. Here, too, the reformers ran up against a host of vested interests. The state supervisors anticipated that a more centralised market would not be dominated by them. The brokers, organised in their own association, feared that reforms would lead to a two-tiered market structure, one for small trades during market hours and the other for large trades in computerised over-the-counter operations. The Frankfurt banks therefore opted for non-controversial initiatives, such as the joint production of statistics, and a joint annual report. Even these moves aroused latent suspicion that the whole exercise was designed to siphon business to Frankfurt. It was only in July 198947 that the Federation agreed on a plan to run computer trading on 30 securities in parallel to the official two-hour limit. The computer exchange was to be based on the market-maker principle. But the brokers insisted on preserving the floor-trading system, and the state supervisors opposed giving overall supervisory powers to the Hesse government.48 These political inhibitions precluded any U.K.-style “Big Bang,” led by computer technology, as all the interested parties had a say in the policy process. The Frankfurt banks eventually had to settle in October 1992 for a second-best solution, and accept the continuation of floor trading while restricting electronic trading to 30 securities.49
The Law to Promote Financial Markets passed parliament in June 1989 and came into effect in August. It widened market participation beyond professional traders on condition that all participants were fully informed of the risks. It implemented existing EU measures on listing, and allowed quotations to be made on the exchanges in foreign currencies. It allowed for the establishment of a computer exchange. The law ended the stock exchange turnover tax, which had restricted the growth of new financial instruments. But supervision remained a prerogative of the states. The EU directive on unit trusts that came into effect in October 1989 (UCITS), was implemented so as to channel funds into Germany’s new futures markets.50 In other words, EU measures combined with competition between financial centres prompted reforms fostering Germany’s national securities market integration.
The Bundesbank’s campaign against the development of money markets received a serious blow with German unity. The Ministry of Finance needed readier, and cheaper access to savings in order to finance reconstruction. Furthermore, the Maastricht Treaty severely limited the use of central bank credits to finance government deficits¾a practice in which both the Bank and the Ministry had indulged during the 1980s. Not least, the Bank’s Direktorium favoured the development of short term instruments that would help it manage the markets.51 In January 1992, Finance Minister Waigel proposed that investment trusts be allowed to operate in the money markets. The Bundesbank objected: “The possible shift of funds from bank deposits covered by the reserve requirements to a money market fund not covered by the requirement would lead to a reduction in the minimum reserve base and weaken the efficiency of minimum reserves.”52 The Ministry promptly withdrew its proposal. Government funding, though, remained urgent and in February 1993, the Bundesbank announced a reduction in reserve requirements, thereby releasing funds. In July 1994, further legislation was introduced allowing money market mutual funds. Deutsche Bank calculated that up to 50% of deposits and saving accounts would end up in money market funds.53 This posed a serious potential threat to German cross-shareholding, and to national managerial-cum-union control over German corporate assets.
“Standort” Competition: The National Solution
The national solution to retain control over the German corporate equity market required a determined bid to centralise direction in Frankfurt. A Finance Ministry round table In January 1990 was the first of a series on how to consolidate Germany’s position as a financial center in international competition. The comprehensive package of reforms was presented by Finance Minister Waigel in January 1992.54 The endorsement provided partial sanction for the big banks’ efforts to create a German stock exchange, and entailed an incorporation of EU directives into German financial law. It gave political support for the introduction of new technology. It proposed the supervision of securities markets by a national regulatory authority. It suggested improvements in investor protection, with a law on insider trading and measures to improve the transparency of markets. And it was accompanied by Finance Ministry proposals for sweeping reforms of money markets. Chancellor Kohl sanctioned the proceedings with his presence, and a promise to ensure that Frankfurt would be the home for the European Central Bank.
A major step to creating a German stock exchange had been taken in July 1990, when the banks announced privatisation of the Frankfurt Stock Exchange, and the transfer of its ownership from the Frankfurt chamber of commerce to the new shareholders¾composed of all bank groups¾and the brokers. A holding structure was to be created in which all eight exchanges would have a stake. The Frankfurt Stock Exchange came into operation as a private AG in January 1991. The next step was to win acceptance from the states for Frankfurt as the hub of the German Stock Exchange. But this required two years of negotiation with the state supervisors, brokers, and governments, as well as strong support from the Finance Ministry and Chancellor Kohl. The Frankfurt banks had to water down their maximum demands for a controlling say in the new organisation.55 The Frankfurt exchange, accounting for 70% of German securities business, was to be transformed into a holding company, with the local stock exchanges and brokers owning 10% each in the capital. The Deutsche Böurse AG came into effect in January 1993, under the chairmanship of Rolf E. Breuer, head of Deutsche Bank’s capital markets activities.
Technology had all along been a priority for the Frankfurt banks. Electronic trading was seen as the only way to overcome the disadvantages of fragmentation among the eight stock exchanges. The Deutsche Termin börse (DTB) was launched in January 1990, and operated from the start as a fully computerised futures market dealing mainly in Bund bonds. It linked market participants electronically, and connected into the supportive networks created in the previous three years by the banks. Its price information system, KISS, came to be flanked by an order-routing system, BOSS. Both fed into the DWZ¾the Deutsche Wertpapierdaten Zentrale GmbH¾developed by the banks to function as the exchange’s single centre for stock exchange information in the interbank market. This effectively squeezed the role of the official brokers in the price-setting process setters. The German share index, DAX, fielded financial futures alongside information on equities. It was flanked by REX, which provided instant information on 10-year Government securities. A crucial aspect of the whole package was the share settlement system, formed out of a painful merger negotiated between six operators in 1989¾the Deutscher Kassenverein¾and boasted a settlement delay of only two days. The heart of the computerised equity market was IBIS-the Inter Bank Information System-which was supposed to operate alongside the old trading floor up to 1995. But technology proved costly, and ambitious plans were shelved following the Taurus disaster in London (see Chapter 8).56
The Frankfurt banks had not grasped the potential of electronic trading as an aid to market supervision. They were satisfied with their “code of conduct,” and had opposed the EU insider trading directive. That directive required Germany to have a state supervisory office, but banks and states had agreed in the 1989 Law to Promote Financial Markets to keep supervision in local hands. The banks feared handing powers to a federal authority-such as the U.S. SEC-and were reticent to strengthen in-house rules against insider trading, a significant detail in view of the multiple opportunities in Germany’s universal banks for a sharing of information about clients’ affairs and performance.
None of these inhibitions were compatible with the banks’ ambitions for Frankfurt. There was not much comfort for investors in German exchanges that the state supervisors had caught only one insider between 1975 and 1990.57 But confidence was shaken in summer 1991, when 45 stock exchange members were accused of insider trading. Those under a cloud of suspicion included senior bankers active in promoting Finanzplatz Deutschland. The scandals coincided with the BCCI affair, and others in Japan, the United Kingdom, France or the United States.
It took until 1993, the completion of EU negotiations on investment services, and a further spate of scandals, for the Finance Ministry to present a bill.58 Long under preparation, the draft proposed revision to a number of existing laws on securities, as well as incorporating EU legislation into German law. It went to the two legislative houses for examination, and was ratified as the Second Law on Promotion of Financial Markets in November 1994. The Law held three major innovations:
• A Supervisory Office for Securities was created to operate as an independent body, based in Frankfurt and with 100 employees. It opened in January 1995. It reports to the Finance Ministry. It represents Germany in international negotiations on securities, thereby ending the banks’ representative role. The Office incorporates all three securities markets in its scope, and it is armed with powers of investigation and search. But the detailed structure of supervision was the result of a federal compromise¾(1) Each of the local stock exchanges retained an “independent trade supervisory authority;” (2) The states are to ensure orderly trading conditions; and (3) The Supervisory Office is to use its powers to prevent and to preempt insider dealing. This was far from the centralised authority which Pöhl had in mind when thinking of “the French model.” Nor was the law explicit about the position of the Office in relation to the Economics Ministry of Hesse which had built up a considerable capability to regulate securities markets. The Supervisory Office represented one more authority in an already crowded field.
• The Second Law criminalised insider trading, with a punishment of either five years in prison or DM 500,000, or both. The definition of insider trading codified the EU directive into German law, with the distinction between primary and secondary trading. The measures came into effect three years after the EU deadline. The banks had taken their own in-house measures earlier.
• The Second Law also aligned German corporate law on practice the EU. It introduced new rules of disclosure¾shareholdings were to be disclosed when they reached or exceeded 5%, 10%, 25% and 75% successively. This replaced previous requirements of disclosure obligations above 25% or 50%. The law also modified the Stock Corporation Act, allowing companies to lower the threshold of shares from DM 50 to DM 5, opening up the market for small investors. Money market funds, too, were permitted.
But the Law held a number of important deficiencies. The three-tiered structure for supervising the securities industry was cumbrous and complex. The Supervisory Office was untried. The federal structure of the markets fragmented their liquidity, while the open outcry trading system was an anachronism. There was no takeover code. Under existing practice, takeovers were negotiated with the German corporate nexus, and involved acquisition of a majority of shares or a blocking minority. There was not the obligation, as in the U.K. or the U.S., for an offer to be extended to all shareholders.
Political support for an open market in corporate assets was minimal. The most ambiguous of all political parties was the SPD. Its representatives called for disclosure above 3%, but the party was not ready to cut back on the secretive activities of Landesbanken. The SPD, said the Liberal leader Lambsdorff, were like directors of a schnapps factory who preach abstinence.59
Furthermore, the practice of multiple voting rights was not ended, nor were the de facto barriers to foreign takeovers, which had been stiffened in the 1970s. A German “equity culture” could not be conjured into existence by a wave of the legislative wand¾note the cross-shareholdings depicted in Exhibit 6-5. But it was already present in London. That is where the Deutsche Bank¾the Finanzplatz’ leading champion, and the other major banks continued to place much of their business.
Insert Exhibit 6-5 about here
The spirit underlying the creation of Finanzplatz Deutschland was captured by two statements, one on the urgency of preserving national ownership and business practices, and the other on the threat to politics in modern states posed by world financial markets. In Bundestag hearings of May 1990 on the theme of “bank power,” the representative of German industry stated that there was a need in the light of internationalisation,” for a strong domestic anchoring of capital and investors.”60 After the widening of the bands in the exchange rate mechanism in August 1993, Wilhelm Nölling, member of the Bundesbank Council and president of the Hamburg Landeszentralbank from 1982 to 1992 said, “It is no exaggeration to speak of an abdication of the democracies in the face of anonymous, uncontrolled market forces.”61
The firm intention of German political, business or labour leaders was to ensure that capitalism in Germany would remain a national brand of its European variant. Continuity along the beaten path of proven practice was the thread around which policy was woven. The regulatory institutions and laws set up in the 1930s, or earlier, were adapted by the authoritative institutions set up under the Federal Republic to police the markets. Liberal social market doctrine and practice juxtaposed competitive markets with systemic stability. Custodianship, whether private or managerial, was secured by preserving narrow equity markets, encouraging the development of a shadow capital market, providing state support for cross-shareholding, and by extending membership in supervisory boards as symbols of the stakeholder culture. Inclusiveness was a feature both of corporate governance of the corporate sector and of federal and state politics, where interested parties had multiple points of access to policy. It ensured that change came slowly, and as a function of the multiple interests to be reconciled in negotiations, rather than by any national or technological imperatives. Conservatism was the inevitable product. Reforms were partial, and always incomplete. The consequence for German policy was to grasp for the familiar methods that had succeeded in the past, rather than to jeopardise a functioning financial system by experimentation. These characteristics of continuity, custodianship, inclusiveness and conservatism had already been coming under strain in the 1980s as the international system ground towards the great transformation of the years 1989-91. In the early 1990s, German faced the double threat to established practice from the shock of German unity and implementation of the EU’s new financial services regime. There was no assurance that the ongoing process of German adaptation to the changing context of world financial markets would not end in a victory for the latter.
1. Richard Tilly, “An Overview on the Role of the Banks Up to 1914,” Finance and Finances in European History: 1880-1960, in Youssef Cassis, (ed.), (Cambridge: Cambridge University Press, 1966).
2. J. Riesser, Die Deutsche Grossbanken und ihre Konzentration, 1905; translated into English (Washington: Government Printing Office, 1911). Barrett Whale, Joint Stock Banking in Germany, (London: MacMillan, 1930).
3. Klaus Schubert, Interessenvermittlung und staatliche Regulation (Opladen: Westdeutsche 2 Verlag, 1989).
4. Marcello Clarich, “The German Banking System: Legal Foundations and Recent Trends,” (Florence: E.U.I., 1987) Working Paper # 7-269.
5. David Marsh, The Bundesbank:The Bank That Rules Europe (London: Heinemann, 1992) “Monetary Stability and Industrial Adaptation in West Germany,” in Monetary Policy, Selective Credit and Industrial Policy in France, Britain, West Germany and Sweden (Washington, D.C.: Joint Economic Committee, Congress of the United States, 97th Congress, 1st Session, 1981), pp.92-131.
6. Henry James, “Banks and Bankers in the German Interwar Depression,” Finance and Financiers in European History, 1880-1960 in Youssef Cassis, (ed.) (Cambridge: Cambridge University Press, 1966).
7. Deutscher Bundestag, Anhörung:. Macht von Banken und Versicherungen, December 8, 1993 (Bundesaufsichtsamt für das Kreditwesen, November 26, 1993).
8. “Die Älteste Verbraucherschutzbehörde Deutschlands,” Handelsblatt, April 26, 1991.
9. M. Krakowski, (ed.), Regulierung in der Bundesrepublik Deutschland (Hamburg: Verlag Weltarchiv, 1988).
10. Bericht der Bundesregierung über die Ausnahmebereiche, BT Druck, 7/3206, February 4, 1975.
11. Deutscher Bundestag, Anhörung: Macht von Banken und Versicherungen, December 8, 1993.
12. Deutscher Bundestag: Anhörung: Macht von Banken und Versicherungen, op. cit.
13. “Crackdown on Cartels,” Financial Times, October 14, 1974.
14. Quoted in Yao-Su Hu, National Attitudes and The Financing of Industry (London: PEP, Broadsheet No 559, Vol.XLI, December 1975).
15. “Sous la tutelle des banques,” Le Monde, January 31, 1989.
16. For instance, “Wir Müssen in Globalen Dimensionen Denken,” Der Spiegel, July 14, 1986. “Der Scharfe Wettbewerb in der Kreditwirtschaft Verhindert das Entstehen von Macht,” Handelsblatt, July 12, 1989. Also in the hearings on banking power in 1990 and 1993.
17. “Der Staat als Unternehmer Ungeeignet,” Neue Zurcher Zeitung, July 4, 1992.
18. “Die Sparkassen und Landesbanken Sind für Fast Alle Bundesländer Unverzichtbar,” Handelsblatt, July 23, 1992.
19. Deutscher Bundestag. Öffentliche Anhörung: Macht von Banken und Versicherungen, Helmut Geiger, President of the Savings Bank Association, Protokoll Nr.74.
20. “Germans Flexible at Last on Credit Cards,” Financial Times, November 11, 1994.
21. “The German banks’ Reluctant Rise to World Power,” Financial Times, February 20, 1979.
22. “Banken Müssen Eigenkapital Erhohen,” Frankfurter Allgemeine Zeitung, December 8, 1984.
23. “Les Délits d’Initiés au Regime de l’Honneurj,” Journal de Genève, January 28, 1989.
24. “Bundesbank in the First Move to Update Issue Practices,” Financial Times, July 10, 1990; “Reality Dispels Euphoria,” Financial Times July 17, 1991; “Liberalisierung des Deutschen Finanzplatzes,” Neue Zurcher Zeitung, July 5, 1992.
25. Net transfers from 1991-93 to eastern Germany totalled DM 352 billion, according to the Ministry of Finance, compared to DM 437 billion invested by foreigners in domestic securities. See OECD Economic Surveys, Germany, 1994.
26. Ellen R.Schneider Lenné, “Corporate Control in Germany,” Oxford Review of Economic Policy, Volume 8, No. 3.
27. “Moving Towards Graduation from the Kindergarten,” Financial Times, July 4, 1984.
28. Jeremy Edwards, Klaus Fischer, Banks, Finance and Investment in Germany, (Cambridge: Cambridge University Press, 1993).
29. “Foreign Banking: Nation Provides a Complex Market,” International Herald Tribune, April 12, 1983.
30. “Mehr Marktorientierung der Bankenaufsicht Gefordert,” Handelsblatt, January 24, 1991.
31. “Nur der Verband der Auslandsbanken ist für einen Beteiligungsabbau per Gesetz,” Handelsblatt, December 8, 1993.
32. Deutscher Bundestag, Anhörung: Macht von Banken und Versicherungen, op. cit.
33. “Im Vergleich Schneidet Frankfurt Nicht Günstig Ab,” Handelsblatt, August 30, 1990.
34. Deutsche Bundesbank, “Jahresabschlüsse der Unternehmen in der Bundesrepublik Deutschland, 1965-1981,” Sonderdrücke der Deutschen Bundesbank, Nr. 5, Frankfurt, 1982.
35. Otmar Emminger, “La République Fédérale d’Allemagne: Cheval de Trait de l’Europe?” in Ralf Dahrendorf, La Crise en Europe, (Paris, Fayard, 1981).
36. “Germany as a World Financier,” Financial Times 15 May, 1989.
37. “The Dangers of Bank Finance,” Financial Times, November 24, 1981.
38. “Banken für Verzicht auf Spätförderung,” Frankfurter Allgemeine Zeitung, March 27, 1985.
39. “Surge of New Issues”, Financial Times, November 11, 1986.
40. Interview with State Secretary Tietmeyer, “Enlightened Orthodoxist,” Financial Times, July 6, 1987.
41. Norbert Hellman, “Les Habits Neufs des Bourses Allemandes,” Eurépargne, June 1989.
42. “Stock Markets Need to Play Bigger Role in Equity Finance,” Financial Times, June 9, 1982.
43. Michael Moran,”A State of Inaction: the State and Stock Exchange Reform in the Federal Republic of Germany,” Changing Agenda of West German Public Policy, in Simon Bulmer, (ed.) (London: Aldershot, 1989).
44. “The Wallflower Takes Third Place,” Financial Times, July 7, 1986.
45. “In Frankfurt, dem Zentrum des Finanzplatzes Deutschland,” Hat die Arbeitsgemeinschaft der Deutschen Wertpapierbörsen Ihren Sitz,” Frankfurter Allgemeine Zeitung, September 20, 1988.
46. Alfred Herrhausen, speaker of Deutsche Bank, quoted in Financial Times, November 28 1984.
47. “Grossbanken Einigen Sich auf Computerbörse,” Frankfurter Allgemeine Zeitung, July 21, 1989.
48. “Widerstand Gegen Hessen als Landkontrolleur,” Handelsblatt, November 13, 1989.
49. “German Bourses Combine to Take on Europe,” Financial Times, October 8, 1992.
50. “Les Allemands dans l’Attente d’Une Plus Grande Liberté,” Les Echos, February 20, 1990.
51. Frankfurter Allgemeine Zeitung, January 7, 1992.
52. “The Bundesbank Opposes Money Market Funds,” Financial Times, March 19, 1992.
53. “Fund Raising,” The Economist, August 27,1994.
54. “Waigel-Konzept Sieht eine Zentrale Börsenaufsicht Vor,” Handelsblatt, January 17, 1992; “Germany Plans Shake-up of Stock Markets,” Financial Times, January 17, 1992; “Politics Comes to Finanzplatz,” Financial Times, January 24, 1992.
55. “German Bourses Combine to Take on Europe’, Financial Times, October 8, 1992.
56. Financial Times, February 18, 1994; Handelsblatt, February 18, 1994.
57. “Himmlische Zustände,” Die Zeit, April 13, 1990.
58. “Cabinet Drafts Draft Financial Law,” Financial Times, November 4, 1993.
59. Begrenzung des Individuellen Beteiligungsbesitzes der Banken,” Handelsblatt, May 30, 1994.
60. Deutscher Bundestag,” Wortprotokoll der Öffentlichen Anhörung zur Macht von Banken und Versicherungen, December 8, 1993.
61. Quoted in “The Dangers of Capital Mobility,” Financial Times, October 22, 1993.