What Makes German Banks Different

The past few years have seen a revival in the academic debate over the economic functions of German banks. This paper takes the position that large non-financial firms have become highly autonomous of the banks, and the corporate governance role of banks, while still important, is much less significant than widely presumed. German banks, however, do fulfill certain economic functions to a greater degree and in a different manner than banks in other countries. These bank functions of long-term commercial financing, comprehensive management consulting, and supporting diversified quality production strategies are made possible by the institutional character of the banking system itself and the institutional context in which it operates. A complex web of government laws, regulations, and government financial aid combine with bank group competition to create an extensive and successful financial support system for German SMEs. This system faces various adjustment challenges — from international financial market integration to EU regulatory harmonization — but it has thus far managed to adapt while sustaining its core functions.