How has the banking system developed

Germany in data

Richard Tilly

Professor emeritus Dr., Chair of Economic and Social History, Westfälische Wilhelms-Universität Münster - Money and Credit

The development of the German banking system shows a pattern typical of market economies: the banking sector grew faster than the German economy as a whole. Only in the two world wars did growth collapse.

Figure 4: Bank assets - as a percentage of GDP License: cc by-nc-nd / 3.0 / de / (bpb)
At the beginning of the 19th century there were very few banks in the modern sense; By 1913, the number of banks and bank-like institutions rose to over 5,000 according to estimates (precise documentation is not possible). [1] In the Federal Republic of Germany the number of independent institutes stagnated, but with around 40,000 branches the German banking system had become nationwide and the vast majority of private households and companies had been integrated into the system. A good measure of the economic weight of banks is the value of their financial assets, shown in the development of their assets in relation to GDP in Figure 4. (see Figure 4)

Here you can see the growth pattern typical of all market economies: in the long term, the banking sector is growing faster than the economy as a whole, with the exception of the two war-related slumps. The relationship is by no means insignificant and can be used for international comparison and for assessing the potential fragility of banking systems. [2]

Figure 5: Bank loans to non-banks - as a percentage of GDP License: cc by-nc-nd / 3.0 / de / (bpb)
The importance of the banks as administrators of payment transactions in the economy has already been pointed out above. With the economic agents' mobilized savings - their deposits (partly created through credit creation) - they have satisfied a large part of the economy's credit needs. Figure 5 clearly shows the weight of this loan. (see fig 5)


Table 2: Bank license: cc by-nc-nd / 3.0 / de / (bpb)
You can see here not only the significant weight of the volume of bank loans, but also the disproportionate increase of the same size, which is typical for peacetime, and finally also the effect of the great slumps caused by the world wars and the shrinkage of GDP in the world economic crisis. (see Tab 2)

In the course of time, the German banks have developed into so-called "universal banks" that have played an active role in the capital market: the credit banks (and private bankers) primarily on the stock exchange and the savings banks on the market for mortgage loans. [3] The fact that the banks provide their customers with access to the stock exchange and that they were also able to refinance themselves on the stock exchange supported their importance as lenders in the economy. However, the importance of capital market developments was by no means limited to the banks alone. Long-term industrial investments, urban growth and public investments by the state in infrastructure require a well-functioning capital market. It is well known that this market went through difficulties and caused problems at times, but in the long times of peace before 1913 and after 1945 its importance and weight in the German financial sector tended to increase.

Figure 6: Circulation of domestic bonds and shares - as a percentage of GDP License: cc by-nc-nd / 3.0 / de / (bpb)
In the two longer periods of peace, as was to be expected, the importance of securitized debt, i.e. debt documented by securities, increased. The big slumps after the two wars are also plausible, since in both cases currency reforms destroyed German financial assets on a large scale. However, questionable evaluation work could also be the reason for the extremely low value for 1950. During the currency reform of 1948, there was leeway in converting the Reichsmark debt to the D-Mark, which led to a possible under-valuation. Nevertheless, when comparing banks' loans and deposits, it can be seen that in the German money and credit system during the period under review the capital market as a source of finance apparently had a lower weight than in comparable other countries (such as the USA or Great Britain). This is especially true for the stock market. [4] (See Fig. 6)