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Barriers to Foreign Banks’ Entry

Germany’s below-average economic performance has acted as a brake on Europe. German banks- savings, cooperative and private- are still at the bottom end of the profitability scale, stuck at the level of the 1990s. The gap by which German banks trail others in European countries and the US has remained more or less the same. Given the growing European and international competition, this gives cause for concern. The blurring of responsibilities between the different levels of government also plays a role. The bank sector is also being stifled by a steadily growing layer of regulation and bureaucracy, as well as high taxes.

At almost 40 per cent of GDP, the taxation ratio is still higher than in other countries. There has been little improvement in conditions for doing business in Germany. The European Commission has regarded Section 40, which permits only public banks to use the name “Sparkasse”, as inconsistent with European law and an obstacle to competition both in the German and the European banking market. There has been a growing demand from the European Commission, the European Central Bank and the International Monetary Fund for a level playing field and modernistion of the system.

“The regional principle is outdated in the age of the European single market. Action is also urgently needed to reform taxation of private investment income. A flat withholding tax would make the German financial marketplace more attractive in the competition for international investors and provide a stimulus to growth. The timing of its introduction should be seen in the context of the reform of company taxation scheduled for 2008 (Dr. Manfred Weber, quoting Banking Survey 2006: Facts, Opinions, Outlook)”. German Banking Regulations and Policies

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Government agencies can limit or even bar entry by the requirement of licenses and permits. In international markets, host governments commonly limit foreign entry and must approve all foreign investment applications. The beginning of banking regulation in Germany dates back to 1931, when licensing requirements and bank supervision were introduced on a general scale and a supervisory authority was set up. Like in many other countries, bank regulation in Germany can be interpreted primarily as a response to the banking crises. The 1932 Banking Act was enforced as a form of bank regulation.

In 1961, a new German Bank Act- Kerditwesengesetz- was passed and created the Federal Banking Supervisory Office. According to the Banking Act, the FBSO is required to draw up principles allowing it to assess whether a bank’s liquidity and capital is adequate. From 1961 onwards, German credit institutions were subject to requirements of holding an appropriate amount of capital relative to the sum of risk-weighted assets. A number of amendments were introduced during the 1990s such as the Capital Adequacy Ratio, Basel II requirements, and the inclusion of European Union Laws into the German Banking Act.

Saunders and Walter (1994), Allen and Gale (2000), and Beck (2000) have pointed out that the German banking industry has been stable but not very competitive. While the banking industry has been operating smoothly since the end of World War II to the early 2002, many observers believe that Germany’s financial system and regulations had achieved the stability goal mainly by restricting competition and sheltering universal banks from competition with foreign banks and non-bank suppliers of financial services. Furthermore, regulators and politicians are believed to have fostered cartelization of the industry and favored national champions.

With the entry of Germany to the European Union, important measures towards deregulation of the banking industry were taken at the European level and adopted by Germany. Anti-competition regulations have been abolished and the remaining regulatory structure directly addresses the primary goal of regulation, that is, reduction of risk of bank failures. As a consequence of deregulation, there is little doubt among industry observers that banking all over Europe, and in Germany as well, has become significantly more competitive (Vives 1991; Cerasi et al 1998).

Established Strong Local Competitors Inducing a customer to switch loyalties is an arduous, costly enterprise in the cutthroat banking world. A foreign bank seeking entry would undoubtedly face very strong local competition, mainly in the arena of access to customers. German retail banking is controlled by top local banking companies such as Deutsche Bank, HVB Group, and Commerzbank AG, who have through years established a network of branches. They command retail banking and investments.

Deutsche bank, headquartered in Frankfurt, is one of the world leaders, with an international footprint in European countries, North America and the Asia-Pacific Region, offering a range of financial services such as asset and cash management, securities issuance and trading and conventional banking. As of the fiscal year ending December 2005, the bank recorded revenues reaching $31. 9 billion and a net profit of $4. 4 billion (http://www. db. com/index_e. htm). Bayerische Hypo- und Vereinsbank AG (HVB Group) is engaged in retail and corporate banking, real estate finance, capital markets and asset management.

The company is a subsidiary of the Italy-based UniCredit Group. Headquartered in Germany, it has operations primarily in Germany, Austria, Central and Eastern Europe, ‘other Western Europe’, Americas and Asia. As of the year ending December 2005, the company registered $27 billion in revenues and $798 million net profit (http://profile. hypovereinsbank. de/cms/profile/). Dresdner is Germany’s third-largest bank, in terms of revenue, providing lending, securities and commodities brokerage and investment banking services.

The bank has global operations and subsidiaries worldwide, and is one of the current leaders in European Asset Management. The bank is currently headquartered in Frankfurt. For the fiscal year 2005, the bank reported a net profit of $2. 125 billion (http://www. dresdner-bank. de/). Commerzbank AG is engaged in a range of services, including corporate banking, retail banking, institutional banking and investment banking services. It primarily operates within Europe and is headquartered in Frankfurt. For fiscal 2005, the company reported a net profit of $1,448 million (https://www. commerzbank. de/).

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