Efficiency of the Financial Sector

The evidence regarding the efficiency of the German banking system is mixed. For international comparisons, it is important to note that a large part of the German system consists of savings and cooperative banks that do not aim at maximising profits. Savings banks use part of their surplus to promote community activities and are also obliged to provide financial services to all customers, regardless of the profitability of the business relationship. Additionally, it seems that savings banks lend at rates below those charged by the private and cooperative banks. The primary aim of cooperative banks, in turn, is to benefit their customers and members. Local banks from all groups (private, cooperative and public) seem to be superior to the big nationally active banks in terms of efficiency. Among local banks, public and cooperative banks are found to be more efficient than private banks. There is therefore no evidence that opening up the public sector for private capital would improve the efficiency of the German banking system. Suboptimal size of German banks is not a significant factor either. Furthermore, since the optimal size for banks is not known, and the threshold where risk-return decisions are found to deteriorate is rather low, there is little evidence that a consolidation strategy would improve efficiency. There is also no evidence for the existence of significant economies of scope. This indicates that a separation of investment and commercial banking would not have a negative effect on efficiency.