Daniel Mertens
Liberalising Credit? The Political Economy of Retail Banking and
Household Debt in Germany
Paper prepared for the ECPR General Conference,
Glasgow, 3-7 September 2013
Please do not cite or distribute without the author’s permission:
mertens@mpifg.de
Abstract
In contrast to most other advanced capitalist societies, household indebtedness in Germany has
stagnated for most of the 2000s. While several political economy accounts point to the country’s
export-led growth regime as an overall explanatory theme for this development, scholars have
systematically missed to embed personal indebtedness within the institutional changes and
continuities in the German banking sector. This paper follows the trajectories of household debt
and retail banking in Germany since the 1970s and reveals the contradictory political and
economic processes of ‘muted financialisation’ of private households in the biggest European
economy. By analysing the logic of bank competition, the contestation of securitisation as a
major financial innovation, and the domestic and European deregulation and liberalisation
agenda around personal credit, it contributes to our understanding of the varieties and
commonalities of financialised capitalism.
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I.
Introduction
One of the most salient aspects of what has come to be known as financialisation is the dramatic
rise of household debt over the past decades and particularly in the years preceding the Great
Recession. While this trend has become visible in most advanced capitalist economies, a few
outliers exist. Prominently, household debt in Germany stagnated in the 2000s, after a thirty-year
period of almost continuous debt growth. This deviation has not received much attention from
Comparative Political Economy (CPE) scholars so far and rather distant explanations often do
not go much deeper than pointing to economic variables such as the absence of house price
increases or overall recessionary tendencies in the economy (e.g. OECD 2010). At the same time,
recognising the importance of loans and mortgages for the flourishing and crisis of national
economies, some conceptual works have emerged that emphasise the export-oriented character
of the German political economy. Contrasting the German mode of accumulation with a regime
of privatised Keynesianism (Crouch 2009) or an Anglo-liberal growth model (Hay 2011),
however, does not much to shed light on the mechanisms involved. By putting welfare state
arrangements related to export-orientation centre stage, it is only Prasad (2012) who has argued
that German households have less demand for credit than those in Anglophone economies.
While there certainly are specific demand-side factors that play a role in the limited expansion of
credit to individuals and households in the 2000s in Germany, it remains baffling that supply-side
issues of credit and specificities of the German financial system have played only a minor or no
role at all in scholarly attempts to give fuller explanations for the puzzle at hand. It is baffling
because much of the literature on (credit-based) financialisation and changes in households’
borrowing behaviour that focus on Anglo-America have highlighted several aspects of the
transformation of contemporary banking with issues ranging from deregulation and liberalisation
to the increased application of technological devices, financial innovation and the reorganisation
of retail business to obtain new revenue sources. The question posed in this paper, therefore, is
to what extent the debt trajectory of German households can be explained by the continuities
and changes in the financial system. What are the features of the German banking system that
apparently have not fed into a credit bubble in the past decade and what can possibly be derived
from this for our understanding of how financialisation as a perceived commonality of
contemporary capitalism is refracted differently in national institutional settings?
By asking these questions I mean to approach different strands of the political economy literature
and bring them into conversation. On the one hand, there is a growing literature on the causes of
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financialisation, which evolves around the relationship between banks, public policies and
households (e.g. Dos Santos 2009; Krippner 2011; Langley 2008; Lapavitsas 2009; Montgomerie
2007). The bulk of this work focuses on Anglophone economies and, even if it goes beyond
them, is primarily occupied with general trends and less interested in variations between
countries. On the other hand, a relatively small but visible body of work has been pushing for a
CPE of banks and financial systems in order to understand national trajectories of economic
development and societal organisation in which Germany has played a prominent role (e.g. Deeg
1999; Hardie et al. 2013; Zysman 1983). However, this literature is mainly concerned with the
interactions between banks, governments and nonfinancial corporations. Practices and
transformations in lending to firms can be useful starting points for the questions posed above,
but the main CPE work has largely ignored retail banking, particularly on the credit-side of
things.1
I maintain that merging both research strands can hold great insights for current investigations
into the varieties and commonalities of financialised capitalism, not least because it allows
combining institutions and bank strategies analytically, as has been recurrently demanded by
scholars in the field (Mügge 2010). In order to give a supply-side account for the stagnant
tendencies in the German debt trajectory after 2000, the paper proceeds as follows: Section II
engages with the literature on credit-based financialisation and the related transformations of
contemporary banking, thereby outlining the major concepts and hypotheses this paper adheres
to. In Section III, stylised facts on the development of consumer loans and mortgages as well as
retail banking in Germany are presented and set into the historical and economic context. Section
IV, then, will trace empirical evidence on the political economy of retail banking and household
debt, particularly since the late 1990s. In short, this section will show how political attempts on
the national and the supranational level to foster credit expansion by liberalisation and financial
innovation have taken place, but the timing and character of reforms, varying coalitions and –
most crucially – the specific form and setting of bank competition have prevented a dramatic
growth of household debt comparable to other OECD countries. Despite pressures on German
banks with regard to declining profitability and increased competition particularly from abroad,
German bankers did not see lending to individuals and households as a remedy to these.
Nevertheless, there have been trends on the supply-side that let the German case be perceived as
one of ‘muted’ financialisation, on which Section V will conclude.
The buzzword here certainly is corporate governance, which has been the main focus of CPE studies on banking
systems over the past 20 years – mainly due to their attachment to the Varieties of Capitalism-framework.
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II.
Banking and Credit-Based Financialisation: Concepts and Hypotheses
It is useful to start this section with briefly clarifying what is meant by financialisation and creditbased financialisation, given that the term has seen a fair degree of conceptual stretching. This
paper is mainly concerned with the observation that individuals and households – which is the
macroeconomic entity on which most statistics are built – have accumulated an increasing
volume of various sorts of debts through mortgages, student loans, credit cards, and instalment
loans, to name the most significant. This growth of liabilities that has taken place towards
financial institutions manifests a trend through which a greater share of households’ income has
become a “systematic source of financial profit” (Lapavitsas/Powell 2013: 364) and through
which the dependence of households on creditors has increased in their daily lives.
Encompassing this development, van der Zwan (2014: 101) has defined financialisation as a “web
of interrelated processes—economic, political, social, technological, cultural etc.—through which
finance has extended its influence beyond the marketplace and into other realms of social life.”
Besides the sole impact of growing payments towards the financial sector based on credit
relationships, another facet of credit-based financialisation is added by the integration of
household finance into the workings of global financial markets through the sale of loans, either
directly or via their securitisation (Aalbers 2008; Deeg 2010; Montgomerie 2006b). The major
dimensions of credit-based financialisation that can be applied from the literature are therefore
those of massification and innovation in financial services (Erturk et al. 2008; Leyshon/Thrift 2007).
They are interrelated in the sense that massification, understood as the emergence of financial
products and opportunities for social groups that heretofore could not access formal credit,
largely depends upon the innovative potential of finance with regard to products and business
organisation.
In the search for the causes and mechanisms that have fed into financialisation, scholars focusing
on the U.S. and UK experience have highlighted that banks should be understood as agents of
this process just as they are subject to public policies that have impacted on their strategic
orientation. It is important to note that putting banks centre stage is not about blaming them for
aggressive marketing, but about the fundamental transformations that allow them to make
lending to households an increasingly profitable business.2 As far as I can see, there are three
It is important to note that putting banks centre stage is not about blaming them for aggressive marketing, but
about the fundamental transformations that allow them to make financing households a profitable business.
Montgomerie (2007) has rightly criticised the demonisation of banks in extending credit, but they remain crucial
actors, because they are, in Minsky’s terms, “merchants of debt who strive to innovate in the assets they acquire and
the liabilities they market” (Minsky 1994: 156).
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linked mechanisms at work that have fuelled the process of credit-based financialisation via retail
banking:
1. Major impact has been attributed to political reforms that have stepwise removed regulatory
barriers to the expansion of credit. The abolition of interest rate regulations stand out as well as
the removal of capital controls and a number of permissions for banks to conduct business with
households they were previously not allowed to. In the U.S., cross-class coalitions in the 1970s
had lobbied for the reduction of direct state intervention and with the Depository Institutions
Deregulation and Monetary Control Act of 1980 interest rates were liberalised (Krippner 2011). The
Garn-St. Germain Act of 1982 opened up new business opportunities for banks and savings &
loans through lifting restrictions on the types of credits that could be offered to consumers and
homeowners (Coleman 1996; Montgomerie 2006a). Despite a high interest environment, both
reforms produced a surge in household borrowing as they had made credit more accessible for
individuals (Campbell/Hercowitz 2009). These reforms freed up competition and were linked to
wider deregulatory activity in the two decades to come that also connected those lending
activities to global financial markets. As Helleiner (1994) has noted, in way of competitive
deregulation, the liberalisation decisions in Anglo-America triggered reform activity elsewhere in
the OECD, as can be read from the IMF Financial Reform Database between 1980 and 2000
(Abiad/Detragiache/Tressel 2008).
2. Along with these reforms, banks increasingly came under pressure to compete with capital
markets in lending business. Nonfinancial corporations in particular turned away from more
traditional ways of raising funds from banks and either managed to fund their activities from
internal reserves or via bonds and shares. This development triggered all sorts of readjustment in
banking operations, but the main point for credit-based financialisation is that to “protect interest
income in a world where corporations tend to raise funds in capital markets, banks increasingly
targeted loans at households” (Rethel/Sinclair 2012: 3). The elevated importance of lending to
individuals and households is commonly understood as a direct consequence of shifts in
corporate finance (Dos Santos 2009; Lapavitsas 2009).
3. Finally, and following directly from the above processes, financial services have been
redesigned and innovated, not only to protect interest income, but also to generate fee income,
for instance through the expansion of mortgage and credit card business. The seminal
components of this mechanism or, following Erturk and Solari (2007), “retail revolution” are: the
application of technological devices to standardise credit products and price them according to
risk-based models, allowing economies of scale (DeYoung 2010; Langley 2008); the emergence of
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adjustable rate loans (specifically mortgages) and shorter lives of loans, allowing banks to pass on
interest rate risks on borrowers (Hyman 2011; Lapavitsas 2009); and the diffusion of credit
insurances and secondary markets – promoted by quasi-public institutions –, allowing for higher
loan-to-value ratios (LTV) (Burton 2008; Carruthers/Ariovich 2010; Fligstein/Goldstein 2012).
Profitability through risk transformation and the loosening of credit standards was particularly
achieved by the securitisation of loans. Asset-backed securities (ABS) based on auto, credit card
or student debt all grew in volume up until the mid- and late-2000s as did residential mortgagebacked securities (RMBS) (SIFMA 2012; see also Deeg 2010; Montgomerie 2006b). Securitisation
had a major impact on credit availability for non-prime borrowers and established the nexus
between local retail banking and global financial markets.
In short, these developments made bank strategies and products targeted at individual and
household borrowing increasingly fundable and profitable. There are indications that these
transformations have not been confined to the U.S., or the UK for that matter, but that has not
been reflected thoroughly in the literature yet. For instance, the European Commission, in its
attempt to push the integration of financial services further has “inferred that retail banking
profitability has risen over the long term” in member states (COM(2007) 1696). However, to get
a grasp of these developments in other countries, and here particularly in Germany, one has to
ask how banking competition and strategies look like in national and European context; which
steps have been taken towards the liberalisation of credit; how consumer and housing finance
have been developed; and particularly what role has been played by securitisation. With the
premises of CPE in mind it seems reasonable to assume that some of the pressures and
transformations outlined above have been very similar in Germany, but have probably been
filtered through the institutional set-up and specifically through what Trumbull (2012) calls the
logic of bank competition.3 These might regularly produce different banking strategies
(Story/Walter 1997; Bakir 2013) as a response to common pressures.
Engelen and Konings’ (2010) typology of national trajectories of financialisation – consensual,
contested or compartmentalised – may serve here as an explanatory starting point. They argue
that Germany’s banking sector was not able to find profitable opportunities in deregulation and
technological change, because of the lack of class coalitions or government support. New
financial products and actors were rather contested as foreign intruders, as was the case with
hostile takeovers (ibid.: 618). The fragmentation of the banking sector itself has therefore led to
In explaining the differences of consumer credit expansion between the U.S. and France, Trumbull has argued that
part of these can be derived from the differences in the post-war regulatory environment that has led American
banks to offer revolving credit accounts to attract new depositors. The “logic of bank competition” in France,
however, did not create incentives for banks to expand further into consumer lending.
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singular agents of financialisation, such as Deutsche Bank. It will be a minor objective of this
paper to see if this evaluation of the German case can be applied to the credit-based
financialisation of households and retail banking in general. Methodologically, this paper builds
on reconstructing the recent evolution of retail banking with the help of expert interviews4 and
specialist literature as well as official documents and statistical sources.
III.
The Logic of Bank Competition in German Retail Banking
As mentioned before, CPE of financial systems and banking is relatively silent on the workings of
retail banking. Given that retail banking accounts for 50 per cent of total banking activity in
Western Europe (Friesendorf 2010: 44) and that credit to individuals has seen a growing impact
on the economic performance of advanced capitalist countries (Burton 2008; Crouch 2009), this
may come as a surprise. Banks’ relationships with nonfinancial corporations mostly took
analytical precedence, particularly in Germany where the Hausbank-principle was identified as a
major pillar of its industrial organisation. Since it is commonly categorised as a bank-based
system, the role of households in the German financial system was only considered with regard
to their savings behaviour, which guaranteed high deposits and thereby cheap funds for
corporate bank credit.5 Even Hardie et al.’s (2013) fundamental critique of the dichotomy of
bank-based and capital market-based systems has not significantly expanded the focus.
Nevertheless, because of the fact that 97 per cent of German banks are universal banks, much of
the institutional continuities and changes that existing CPE literature points to have also
explanatory potential for other branches of banking business and only need to be put into the
context of lending to individuals and households.
First of all, lending to households had increased significantly in volume since the late 1960s up
until the early 2000s. As a share of GDP, household debt in the same period has almost
constantly risen, too, but with a decline at the end of the 1980s, when GDP growth was
particularly high. After 2000, however, the nominal and real value of outstanding household
liabilities first stagnated and then even declined, independent of GDP growth. Therefore, figure 1
reveals two periods of extensive credit growth: firstly, the early-1970s to mid-1980s and,
secondly, the 1990s. Both periods of expansion reflect that lending business with individuals had
These have been conducted with representatives of the German financial industry and the German consumer
association between March and September 2013 and mainly helped in gathering background information on the
institutional set-up of the German retail banking business.
5 Vitols (2001: 192) for instance has noted that “[s]ince the household sector accounts for the bulk of savings in
industrialising countries, one of the key problems for bank-based systems is to limit household investment in
securities (i.e. to limit the flow of households savings into the market segment of the financial system).”
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received major impulses that were strong enough to overcome profitability issues inherent in the
logic of bank competition in German retail banking. In the 2000s, however, attempts to make
lending profitable failed because they either clashed with that very logic or could be countervailed
by alternative profit strategies.
Figure 1: Household Debt in Germany, 1970-2010
Source: Bank for International Settlements; own calculations
The main features of the German banking system that give substance to these claims are a
relatively high degree of competition with comparatively low margins in lending to households, a
market structure dominated by not purely profit-oriented financial institutions, and a specific
regulatory setting that constraints credit expansion for some bank groups. With regard to the first
aspect, despite the fact that a secular process of concentration is underway, there are still more
banks than in any other European country, mainly due to a high number of savings and
cooperative banks.6 Additionally, the German banking system can still be considered “overbranched”, meaning that each bank branch in Germany has to serve a lower number of
inhabitants than in most OECD countries (Goddard/Molyneux/Wilson 2010;
Hackethal/Schmidt/Tyrell 2006). This has led to the emergence of a highly competitive retail
market in which the large commercial banks only operate at the fringes. Related low profitability
of credit products for households is therefore also due to the fragmentation of retail business.
For most years of the past four decades, savings and cooperative banks stably controlled more
Germany has a three-pillar banking system, consisting of private commercial banks, public savings banks and
cooperative banks. Each pillar also has a set of specialised financial institutions such as building societies.
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than half of the total lending business to households. Mortgage and commercial banks together
had a market share of below 40 per cent, with the former losing and the latter winning market
shares (Figure 2).
Figure 2: Market shares of bank groups in lending to individuals, 1980-2010
Source: Deutsche Bundesbank; own calculations
The importance of that division is that savings and cooperative banks by and large have different
rationales and objectives in the market, which is the second aspect mentioned. Savings banks are
legally obliged to serve the local economy7 and have financial back-up by states and
municipalities, which made it possible for them to “emphasize market share over profit”
especially in the early years of the federal republic (Deeg 1999: 49). Cooperative banks’ main
objective is to provide financial services to their members, historically farmers, craftspeople, and
individuals. Just like savings banks, they have profited from favourable tax conditions and large
deposits from members and local communities. Both banks, therefore, are not purely profitoriented, but face several constraints on their business operations, and have lower cost of capital
than banks that raise a greater share of funds on capital markets. On average, this gives both
bank groups more leeway to operate on a smaller margin, which makes it difficult for other banks
to compete in this business. However, smaller commercial or regional banks have managed to
expand into household lending through lowering their costs by providing credit via online
platforms or by getting cross-subsidies from their parent company, as in the case of automobile
producer banks or of commercial banks in foreign ownership. Without going deeper into the
Historically, savings banks of course aimed at promoting the savings capacity of poor and later middle-class
households. However, it is safe to say that since the 1980s at the latest, savings banks have put their moral objections
against consumer credit largely to rest (see e.g. Belvederesi-Kochs 2012).
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various banks’ strategies for now, it shows that lending to households takes different roles in
different bank groups. Lapavitsas’ (2013: 234f.) statement that lending to households as a share
of total bank assets has remained flat in Germany over the past thirty years conceals the
divergence within the German banking sector, as can be seen in Figure 3. As we will see, the large
commercial banks and state banks have gone the way of internationalisation and big time
investment banking, with mortgage banks having oriented towards government finance since the
late 1980s, paying less attention to household financing.
Figure 3: Loans to individuals as share of total bank assets, 1990-2012
Source: Deutsche Bundesbank; own calculations
Essentially, that is the third aspect, behind these figures also stands a regulatory regime that not
only binds savings banks to their regional sphere of activity, but also enforces a specific division
of labour in housing finance – which naturally is the bulk of household lending. From covered
bond legislation to the national amendments to Basel II: housing loans enjoy regulatory
advantages as secured loans and can be used for bonds only up to an LTV-ratio of 60 per cent of
the asset value, the house price. Further, the determination of an asset’s value underlies strict
rules that are arguably the most conservative in Europe and do not allow continuous
reassessment (Ahlswede 2013; Green/Wachter 2005). This is most important for mortgage banks
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and savings banks since their business is very much bound to several specific regulations8, but it
also has enormous material and symbolic power for the whole financial system (Kofner 2009).9
Usually, building societies in Germany offer second-order housing loans that make up another 20
per cent beyond the 60 per cent regulatory limit.10 Although their market share is only around a
stable 10 per cent of all loans to individuals, their actual involvement in credit relations is much
higher, making them a crucial pillar of the German housing finance system with a firm position in
the bank division of labour (Westerheide 2012). Altogether, average LTV-ratios are therefore
between 60 and 80 per cent, which puts them among the lowest in the OECD (Ahlswede 2013;
Andrews/Sanchez/Johansson 2011).
These features of German retail banking competition do not in itself give a supply-side answer to
why household indebtedness stagnated over the 2000s, but they are crucial for understanding
why specific paths towards credit expansion that had been taken in other countries were either
closed or inappropriate to overcome profitability problems. They are crucial for understanding
why the European Commission’s “DG Competition Report on Retail Banking Sector Inquiry”
(SEC(2007) 106) saw Germany considerably deviating from the overall trend of rising
profitability in retail banking identified in the Commission Report mentioned in section II.
However, commercial banks had a lot more trouble with declining profitability than did savings
and cooperative banks – which is part of the story about common challenges and different
responses in financialised capitalism to which we turn now in more detail.
IV.
Muted Financialisation in Germany: Common Challenges and Different
Responses
The following section will proceed along the lines of the three transformative mechanisms
highlighted by financialisation research and depicted in section II. As suggested, a clear separation
between them is rather arbitrary, but will help to clarify the dynamics of retail banking and
household debt within the context of the wider transformations of banking.
Freeing up credit? Liberalisation and expansion
Mainly the Hypothekenbank-, now Pfandbriefbankengesetz and the regional states’ Sparkassenverordnungen.
According to many experts, this very much fits the long-term orientation, visible in other more VoC-inspired
descriptions of the German financial system. It entails for example the prevalence of fixed interest rates and the long
maturity of loans.
10 The law regulating building societies (Bausparkassengesetz), however, forbids them to go beyond an 80 per cent LTV.
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What distinguishes the German credit liberalisation path from other countries is the uncommon
timing of decisive reforms. One has to realise that since the early 1930s the German banking
sector had in place a pact that tightened competition through the prohibition of advertising and
through limits on debit and credit interest rates (Massari 2006). The latter were even reasserted in
the 1961 Banking Law (Kreditwesengesetz) and fed into the restrictive conditions for credit
expansion to households in a period of reconstruction and economic catching-up. However, in
the Keynesian interlude of German economic policy between 1966 and 1974, the Federal
Minister of the Economy at that time, Karl Schiller, intended to liberalise interest rates as part of
fighting the first post war recession. In 1967, he coalised with the savings banks and the
consumer interest organisation to push his plans through against the will of the commercial
banks and, by the way, also repealed the restrictions on advertising and competition (Beier/Jacob
1987).11 Only a couple of years later, in 1974, the regulations for cooperative banks were subject
to reform, after which the banks were allowed to hand out loans to non-members. Both reform
stages fundamentally altered the credit business with households and gave massive impulses to
credit expansion that even overrode the Bundesbank’s monetarist turn. However, with the rise of
the cooperative banks into competitive loan business, the reforms manifested the very logic of
bank competition and its pressures on loan profitability that was mentioned above.
In the mid-1980s, therefore, the initial impulses for the credit market slowed down and profit
margins, particularly in mortgage lending, decreased considerably (Working Group of Consumer
Associations 1995). While most regulatory constraints on financial services activity had already
been removed12, banks and insurances tried to become more cost-efficient by merging businesses
and offer financial services from a single source (Allfinanz). Although this improved performance
in other branches of the retail sector, lending to households needed a renewed opportunity for
elevating profits, and that was German Unification: “For the West-German banks the monetary,
economic and social union posed a sudden enlargement of the – fiercely contested – domestic
market and as a result of this considerable potential for growth and expansion”, explains
Büschgen (1998: 446; own translation), and they were indeed successful in drawing East-German
households relatively quickly into the West-German capitalist credit system.13 But with the fading
of these Unification effects and the parallel boom and bust of the New Economy, the old
It was also in the 1960s when state-set lending limits in the consumer business were successively lifted and finally
disregarded (Stücker 2007).
12 A look at the IMF Financial Reform Database reveals that Germany before 1980 already had achieved a high
degree of financial liberalisation, second only to Switzerland (Abiad/Detragiache/Tressel 2008; also see Coleman
1996).
13 One should note that the West-German banks profited immensily not only from the catch-up needs of the EastGerman population, but also from a massive, politically enforced privatisation and homeownership program under
the chancellorship of Helmut Kohl.
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profitability problems had arrived in the East just as the competitive market for financial services
had fully taken hold in the East-German Länder. What followed was that average profitability of
German banks came down to a low single digit Return-on-Equity, while other countries’ banking
sectors had double digit ROE (Goddard/Molyneux, Wilson 2010: 828).
Domestic financial reform by then had primarily taken a focus on international financial markets
and aimed at further promoting the stock market through private investment instead of further
loosening credit constraints for households. This was mainly due to the role of the large
commercial banks and the political aim to foster strong national players in an increasingly
internationalised business (Deeg 1999; Mügge 2010). Contrary to the deregulation experience of
other countries, this meant that the most crucial liberalisation steps in German retail business
were temporally uncoupled from the intensive fostering of global financial markets in the 1990s
and early 2000s. More decisive at that time were the progress of European integration and the
opening of the financial industry to greater competition from abroad.
Fundamentally, European integration materialised in retail banking through the implementation
of the Second Banking Directive in 1992 and its sequel directives on capital requirements,
solvency and large exposures. Particularly the single passport, allowing banks to expand into
other European countries with a home country license, facilitated market entry of foreign banks
into domestic markets. Because of the “extroversion of German financial interests”
(Story/Walter 1997: 171), this did not raise fundamental objections from German banks, but it
dramatically intensified competition after the third stage of the EMU. Foreign banks (in the
figures above subsumed under small commercial banks) gained considerable market share,
because lending to households was conceived as the best strategy to enter the market, attract
customers and attempt cross-selling. While the market share of foreign banks in consumer
lending rose from 4.2 to 6.8 per cent in the 1990s, it jumped up to 23.3 per cent in the 2000s, in
mortgage lending it rose from around 1 per cent to almost 10 per cent in the 2000s.14 In the face
of this development, incumbent banks had become warier about price competition and
profitability in an already highly competitive environment, but in terms of mortgage lending
became ready to defend their national division of labour and regulatory regime.
On the one hand this was because some foreign banks had started to offer mortgage products
that challenged precisely that regime, for instance through standardised full financing of home
purchases. On the other hand this was because the European Commission had amplified its
attempts to harmonise mortgage lending in the European Union, which in effect would lead to
The statistical source here is Deutsche Bundesbank; own calculations. Visible market entries came for example
from Unicredit (Italy), the ING group (Netherlands), and Santander (Spain).
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an undermining of the covered bond system and the competitive positions of mortgage banks
and building societies. Both the green paper on mortgage credit (Com(2005) 327) and the
following white paper (Com(2007) 807) saw large efficiency gains for mortgage markets if a
variety of product features – particularly those prevalent in liberal housing finance systems –
became a regulatory fundament in all member states. However, with a mix of appeals to financial
stability and intentions to safeguard national economic practices and their executive financial
institutions, the German government in line with the panel of the top German banking
associations (Zentraler Kreditausschuss) objected these plans heavily (e.g. BR-Drs. 744/05; BR-Drs.
35/08). Particularly the dominance of fixed interest rates and penalties for early repayments were
not up for negotiation, because it was assumed to undermine the important covered bond
system.15 In the end, the German demands were accepted, but not least because the role of
mortgages in the financial crisis had become clear and altered the power relations in the
negotiations (cf. Dübel/Rothemund 2011). The “battle of systems”, to borrow from Story and
Walter (1997) here, was very visible in this process.
While the European liberalisation agenda was successfully blocked by German banks in this case,
there were others that fitted better the interest of the financial actors, as is suggested by the
outcome of the Payment Services Directive (2007/64/EC) that supposedly contributes to the
liberalisation of credit card business. Altogether, this fits well to Quaglia’s (2010: 1011f.)
assessment of financial services integration, in which Germany always changed between “marketmaking” and “market-shaping” positions, depending on the issues at hand. This leads us to the
broader role of bank strategies in German retail banking.
Internationalisation, EMU and the adjustment of German banks
While the above description makes clear that German retail banking was affected by wide-ranging
liberalisation policies that have followed a specific national trajectory, the following shows that
another mentioned transformative mechanism was also at work in the German banking system.
During the 1980s changes in the tax code led large firms to increasingly rely on their own
reserves while at the same time capital markets opened up to them as external sources of funds.
Very similar to the experience of Anglophone economies as outlined in section II, profitability in
corporate financing started to come under pressure (Deeg 1999; Mügge 2010). The story goes
that banks were unable to find sufficient growth potential in retail banking and instead turned to
capital markets, lobbying themselves for reforms that would allow them to obtain new (feeIndeed, the market share of fixed interest rates in mortgage lending in 2003 was almost 100 per cent
(Bertola/Hochguertel 2007). Remarkably, the outlined division lines were already visible in the Commission’s first
attempts to harmonise credit markets in 1987.
15
14
based) sources of profits from internationalisation. But this is the (well-known) story of larger
commercial banks. Naturally, the changes in company funding did affect savings and cooperative
banks less since they mainly financed companies that had difficulties in switching to alternative
sources of financing anyways: small and medium enterprises. Both bank groups had it easier to
maintain these relationships, even though they experienced more competition now from
commercial banks.
As can be told from figures 2 and 3 above, some commercial banks did something to win market
shares in lending to households. However, it is reasonable to assume that credit expansion in
Germany would have gained large momentum due to the assumed mechanism only if the big
players would have put their weight into the retail market. Analysts actually suggested to
Deutsche Bank in the 2000s to get back into retail (Erturk/Solari 2007: 384), which was in
Germany fuelled by reports about smaller commercial banks making surprisingly good profits
with consumer credit (FTD of 24. April 2003). But for most of the 2000s, Deutsche Bank and
other large institutions were hesitant. On the one hand, because an expansion into the
competitive lending business would have preconditioned a loosening of the relative conservative
assessment of creditworthiness, which banks were reluctant to do in an overall recessionary
environment; on the other hand, because EMU opened up an alternative business strategies that
allowed banks to forego domestic expansion. It is worth to look at this in more detail.16
Story and Walter had already noted in 1997 that the “extroversion of German financial interests”
was particularly visible in the “full-blooded penetration of international wholesale banking
markets” (171). Already in the 1960s, German banks started to accompany their business
customer into foreign markets and were eager to develop strong credit relations with banks and
non-banks in other countries. But while lending abroad accounted for only 2.5 per cent of bank
assets in 1980, it grew to 5.8 per cent in 1990 and 10.8 per cent in 2000. By 2008, however, it had
reached a stunning share of 23.9 per cent, with the highest increase in lending to countries of the
European periphery (Detzer et al. 2012: 64f.). Table 1 reveals the discrepancy between domestic
and foreign lending of German banks in the 2000s. The fact that funds for this lending were
raised domestically suggests that the banks tried to profit from higher growth rates and credit
demand in other European markets, stemming from banks, non-banks and governments. In
other words, under the conditions of European Monetary Union foreign lending became more
profitable than domestic lending. Because much of this was handled on short-term credit,
16
I will however not delve into the involvement of German banks and particularly the Landesbanken in the
asset-backed commercial paper market and other investment strategies that went bust with the financial crisis
(see on this e.g. Bakir 2013).
15
German banks did take relatively low risks and could cut lending quickly if necessary, as
happened when the financial crisis hit (Allen et al. 2011). It is important to mention that lending
to the European periphery did not introduce new credit constraints for households in Germany.
But it did ease the pressure for some banks to soften rather conservative assessments of
creditworthiness or to loosen credit standards, in order to obtain new profits from indebted
households. This nexus plays also into evaluating the last mechanism proposed, the rise of
financial innovations.
Table 1: International Business of German Banks in the 2000s
Outstanding volume in
Change since 2002
2007
Billions of
as percentage
Billions of
% per year
Euro
of total assets
Euro
Lending to domestic banks
1222,5
16,0
149,9
2,7
Lending to foreign banks
1105,6
14,5
530,0
13,7
Lending to domestic non-banks
2647,9
34,7
-65,5
-0,5
Lending to foreign non-banks
492,5
6,5
217,8
11,7
Holding of domestic securities
828,7
10,9
-23,4
-0,6
Holding of foreign securities
702,1
9,2
421,8
19,9
Source: German bankers’ association (Bankenverband)
Securitisation and other financial innovations
The record of innovation in retail finance is hard to grasp and it remains vague which innovations
sum up to have visible impact on credit availability and economies of scale. For Germany, the
heretofore described developments must raise the issue if certain innovations were not
implemented that otherwise could have solved some of the profitability issues – especially at a
time when overall conditions had put constraints on expansionary policies. The German
economy has by and large the reputation to produce adverse effects on radical innovation and it
seems that particularly (product) innovations in retail banking are rather rare. Either because of
the long-term involvement of customers in savings and cooperative banks (Friesendorf 2010) or
because of regulators’ fear certain innovations could put monetary stability to a test (Vogel 1996).
In any case, it is not that standardisation, the application of technological devices and scoring
techniques have not found its way to the German credit market. To the contrary, it has made
16
possible a flourishing cooperation between retailers and (small commercial) banks, in which the
latter approve loan applications while the customer is still in the store. Almost 70 per cent of all
instalment loans in 2008 were such point-of-sale procedures, a growing number of which have zero
interest (Moll 2008).17
Furthermore, credit card business in Germany has grown considerably since the early 1990s, but
it had relatively little impact on overall borrowing. The reason is that credit cards in Germany are
usually charge cards and tied to a checking account through which outstanding debt is balanced,
mostly within a month. Therefore, much of the debt associated with card payment is, if at all,
reflected in overdrafts. This also means that less credit is given since limits of around three times
of monthly income are customary.18 Bank federations in Germany have long kept businesses like
American Express and ‘true’ credit cards out of the domestic market in order to “prevent foreign
incursions into the domestic payments system” and possibly “avoid an uncontrollable explosion
of credit” (Story/Walter 1997: 170). With the 2007 payments directive things have changed, but
‘true’ credit cards in 2010 had a share in payment cards of mere 3 per cent, while the share in the
UK was 34 and in the U.S. 71 per cent.19
The main impact on the aggregate household debt trajectory should however stem from
innovations in mortgage lending. Most studies find that product innovations in German housing
finance are rare occurrences (e.g. Girouard et al. 2006)20. As briefly mentioned above, impulses in
this field mainly came from foreign banks with regard to product flexibilisation and lower down
payments, but were objected by most incumbent banks as became visible in negotiating
European mortgage credit harmonisation. Yet the crucial constraint to credit expansion in the
2000s was clearly the lack of an ‘adequate’ securitisation market – provided this is not an
oxymoron in the German case: When the average profitability of the German banking sector
began to slow down in the late 1990s, the government-owned development bank KfW21 chose to
establish platforms for promoting the securitisation of loans to SMEs (Promise) and to individual
homebuyers (Provide). They were explicitly brought to life in order to stabilise credit availability
and to increase profit margins, but were only ‘synthetic’ securitisations, meaning that the loans
For the banks involved, this is again rather about cross-selling than about the profitability of the credit product
itself. For the retailers, it is all about pushing sales.
18 One should add that overdrafts can be understood as a functional equivalent to ‘true’ credit cards. They also have
similar high interest rates, which is why caps on these rates are currently under discussion.
19 Numbers are calculated from national statistical sources: Deutsche Bundesbank, UK Cards Association Summary
Figures and U.S. Statistical Abstracts 2011.
20 For instance, variable interest rate contracts in mortgage lending are unusual, mortgage insurances virtually nonexistent.
21 It is noteworthy, that not only securitisation but also subsidies for first-home buyers and student loans were
promoted by the KfW, giving substance to the idea that one can carefully draw comparisons with U.S. governmentsponsored enterprises such as Fannie Mae, Freddie Mac or Sallie Mae.
17
17
remained on the banks’ balance sheets. Given that particularly the ‘true sale’ securitisation of
mortgages still had to face several regulatory impediments that lay in property and bankruptcy
law, the German government and the financial industry joined forces in the early 2000s to
establish a fully functioning securitisation market. Although that goal had been achieved by 2005,
the market for ABS consisting of loans to households and individuals remained remarkably small,
as figure 4 indicates. Even the large RMBS transaction in 2008 by the Dutch-led ING-DiBa was
part of a repurchase agreement with the ECB in the context of the financial crisis.22
Figure 3: Securitisation of loans to households in Germany, 2000-2009
Source: DZ Bank; own calculations
Cut down to size, the only really relevant and reoccurring securitisations of personal loans were
handled by the banks of automobile producers. And the few instances of RMBS transactions
were not remotely related to savings and cooperative banks that dominate the retail market. The
main reason for this underdevelopment of the securitisation market – not to speak of an
‘originate-to-distribute’ model – is not simply the prevalent regulatory regime. It rather lies in the
same logic of bank competition that had been defended against the European liberalisation
agenda: the incumbent banks in the lending business with households are either funded mainly by
bank deposits (savings and cooperative banks), contract savings (building societies) or covered
bonds (mortgage banks). Additionally, the large fragmentation and branch density in these bank
groups were somehow ‘natural’ impediments for securitisation as they implied low turnover and
small balance sheets per bank. Securitisation, therefore, could not be seen as a remedy to the
22
However, it consisted of loans that had much lower down payments on average than domestic banks.
18
profitability issues in the retail banking sector, which encourages one to follow Mügge (2010: 20)
on technological progress: financial innovations should be seen as instruments “that purposeful
actors use to attain their own ends” and not as automatic mechanisms producing certain
outcomes, in the present case either facilitating of constraining credit expansion.
V.
Conclusion
The previous sections presented a close-up of the German retail banking market and offered
several rationales on how its set-up has constrained credit expansion to households during the
2000s, thereby producing an outcome that deviates from most other advanced capitalist
economies. The evidence presented clearly confirms one of the premises of CPE for the
mechanisms of credit-based financialisation, stating that “national regimes continue to evolve
within their own logic, rooted in specific historic constellation and the cumulative layers of
reforms and adaptations through which they have passed” (Story/Walter 1997: 314). Indeed,
while manifold liberalisation processes were underway, common pressures on traditional banking
business were unfolding, and financial innovations were fostered – however limited –; they
played out against the background of a very firm logic of bank competition and within specific
time frames with changing coalitions.
Nevertheless, the German financial system incorporated specific practices that intensified with
the completion of EMU and the entry of foreign banks as well as with political attempts to foster
credit expansion and connect local to global financial markets. That all these have remained in
the shadow of incumbent practices of savings and cooperative banks until now only allows
judging the recent trajectory of household indebtedness as part of a quite ‘muted’ financialisation.
Neither housing nor consumer credit taken by itself were perceived by bankers as exceptionally
promising segments of a profitable financial service industry, but rather as means for cross-selling
other products and binding customers for, ideally, a lifetime. Moreover, the international position
of the German economy reinforced other banking strategies than domestic expansion towards
household lending. Some of the modernisation and liberalisation processes taking place further
threatened the established division of labour in the German housing finance system.
Paradoxically, what German banks defended on one battle ground led to a defeat on a different
one, securitisation. Financialisation, therefore, seems to be more complex than presented by
Engelen and Konings (2010), although much of their “contested” trajectory reappears in the
workings of the credit market for households. German banks, depending on their position and
19
interest in the market segment, can be understood as agents, subjects and opponents of creditbased financialisation.
In the end, practices and reforms that were conducive to credit expansion remained minor in
scale or partial, particularly because they were lacking new impulses to overcome profitability
issue in retail banking. Nevertheless, one should not suppose that the supply-side explanation
offered in this article is the sole story about the muted – one might even say periodically absent credit-based financialisation in Germany. The reorganisation of labour and housing markets or
the transformation of the welfare state: they all play a great role in understanding why households
and individuals make use of credit. How they relate to the commonalities and varieties of
capitalism is a question to which scholarship just yet has embarked.
20
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