Are Universal Banks Bad for Financial Stability? Germany During the World Financial Crisis

Abstract

This case study explores the contribution of universal banking to financial stability in Germany during the recent financial crisis. Germany is a prototype for universal banking and has suffered from a rather small number of banking crises in the past. We review the banking literature and analyze the major institutional and regulatory features of the German financial system to establish a nexus between universal banking and stability. We focus on the following questions. First, which banks failed and did they because they were universal or because of other reasons? Second, which types of distress beside outright bank failures resulted from the crisis and how did German universal banks dealt with them? We show that only few German banks failed and these banks did so not because they were universal banks but because they were publicly owned. Most banks instead contributed to reduce the impact of the recent crisis.

Keywords: universal banking, Germany, banking crises

JEL Classification: G21, G24, G31