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Germany's Banks Confront The World

FRANKFURT: Corporate governance is very much an issue of the day, both in the East and in the West. In the countries emerging from the communist block the question of who will ultimately replace the state as the monitor of company performance is one on which the viability of the new market economies might very well depend. Given the complexity of the institutions underpinning the financial markets in the developed economies and the difficulty of establishing them in the transition countries, many have looked to the German "universal banks" as a model for the postcommunist countries.

The origin of the universal banking system goes back to a situation facing the 19th century Germany that was in some ways similar to that confronting the transition economies today: the financial needs of the rapidly growing heavy industries which -- in the face of the underdeveloped capital markets in Germany-- could only be met by commercial banks, many of which were founded by industrial leaders themselves. The tradition that developed as a result, in which banks were the main source of finance to industry, is very different from both the more capital-market-oriented financial systems of America and Britain, and the system of state-led credit-rationing and capital allocation that has been historically prevalent in France and Japan.

Ever since the 19th century, Germany’s economy has been characterized by close relations between business and finance. These links were not confined to credit relations, but also extended to direct and indirect shareholdings by the banks and their representation on the supervisory boards of firms. Combining their role as creditors and corporate monitors, banks developed stable relationships with industrial firms which substantially added to long-term corporate stability. Disruptive and time-consuming bankruptcy proceedings could be avoided as banks often provided the necessary fresh funds to support corporate restructuring.

But at the very time that many countries in the East are looking to German universal banks as a model, new competitive pressures in the West are rapidly transforming the German prototype, leading to new patterns of commercial relations between German business and finance. Three major forces drive this process forward: