Changes In German Finance: Introducing More "Market" Into A Bank-Based System (download PDF 208 Kb)

Sigurt Vitols

Abstract
Germany has long been known as having one of the most "bank-based" financial systems in comparison with other countries. Recently, however, major changes have been made in Germany in both the business strategies of the large universal banks and in the regulation of the financial system. This paper describes these changes and their consequences for company finance in Germany. The primary conclusion is that, despite legislative reforms and other changes, the bank-based financial system remains quite strong, and is the primary source of external finance for most types of firms. The development of a large and viable "New Economy" sector in Germany, which would both demand more risk capital and also reward the appetite for a higher level of risk with a higher return, is not something which takes place in a few years but rather over decades. Public policies meant to help plug the capital gaps for different categories of firms need to take these factors into account and plan for the long-run.

JEL classification: G24, G28, L23, O38.

Keywords: new economy, venture capital, German economy, new technology based firms