Alternative Routes to Banking Stability: A Comparison of UK and German Banking Systems

Abstract

The banking systems of Britain and Germany are among the most stable in the world. In both countries bank failures are exceedingly rare, and even periods of difficulty among more than a few banks very uncommon. Yet the two systems are very different. They differ both in structure and in how banks in the two countries behave. In this chapter we compare the two systems, so as to bring out the key features which have contributed to their stability and to see if anything can be said about the prospects for their continuing stability in the future. We start, though, by looking at recent periods of major instability — not in Britain and Germany, where there have been no such episodes for many years but in other countries, so as to highlight the kind of events which can bring serious disturbances to a country’s financial system. Then we turn to describing the systems of Britain and Germany, showing how both have experienced substantial liberalisation in recent years. This leads to a comparison of banking profitability in the two economies, and to an appraisal of the factors which may have contributed to the radically different experience of the two countries in this regard. This enables us to offer some suggestions as to the impact of liberalisation and of inflation on banking sector stability.

We are indebted to Clive Briault, Professor Otmar Issing, Professor Harold James and Dr Anna J. Schwartz for comments on an earlier draft.