Germany's banks .................

Over the past few months, the liquidity crisis storms have hit Germany as hard as any market. The German government had to bail out HypoReal Estate (HRE) and pumped €500 billion into the banks, a figure that is about to double.

The question this raises in my mind is whether there are some more surprises yet to come out of the German bank system - another Black Swan** - and, having investigated a little, it seems there might be one or two.

Germany’s banking system is unlike most, as there are few large commercial banks. The largest banks, such as Deutsche, Dresdner, Commerzbank, are known primarily because they have large overseas operations. Domestically, the banking system is mainly comprised of regional and private banks, and then there are the standalone savings banks, known as Sparkasse banks. Sparkasse banks are the German equivalent of American savings and loans institutions, except that they are owned by local governments rather than private investors. Hence, they are immensely trusted by Germans, and manage almost $1 trillion in deposits.

With 2,500 banks in Germany and 45,000 branches, Germany also has one of the densest banking networks in the world.

There are other differences in the German banking system and markets in that there are relatively few foreign banks. Although the number of foreign banks increased sharply during recent years, due to the growing globalisation of business activities, they cater mainly for firms from their home country.

For example, under the recent European legislation the Markets in Financial Instruments Directive, MiFID, any bank can offer investment services in Germany under a home-host passport. This means that the bank is regulated by their home country, with only their code of conduct of their branch operations regulated in Germany. This code of conduct relates to the advice they give to their client and the suitability of the products they provide to them in a German market context.

Therefore, there are few dealings in Germany where Germans are exposed to foreign bank dealings, and probably why only 1 in 10 Germans invest in the stock markets compared to half of Americans.

All of this paints a conservative risk avoidance society and financial structure.

No.

Not at all.

Unfortunately, for many Germans, their biggest banks have leveraged themselves to the point of collapse in this liquidity crisis, similar to the American, British and other banks.

This is disputed by German's bankers, but the “big banks” such as Deutsche Bank, Dresdner Bank, HypoVereinsbank, Commerzbank and Postbank, are all merging and consolidating as a result.