The German Banking System: Lessons from the Financial Crisis

The German banking system came under pressure during the financial crisis, not least due to itssignificant exposure to toxic assets which originated in the US. In the short run, the stability of the systemhas been achieved, in large part through substantial government support measures. However, ensuringadequate capitalization of the banking system remains a major challenge going forward and may requiremore active government involvement. The underlying causes of the banking sector problems are related to:i) the activities of the Landesbanken which benefitted from government guarantees without a properbusiness model ii) weak capitalization and high fragmentation of the whole banking system, possiblyrelated to the particularly rigid three-pillar structure and iii) deficiencies in banking regulation andsupervision. The challenge is to address these three causes in order to raise the long-run stability of thebanking system. This paper relates to the 2010 OECD Economic Review of Germany(www.oecd.org/eco/surveys/germany).