The financing of small firms in Germany

In Germany, small firms are financed chiefly by small banks, which are grouped into two systems: the savings banks (Sparkassen) and the credit cooperatives. The government actively supports the financing of investments in small industry - especially business start-ups. The author explains how small firms are financed in Germany. The author contends that small and meduim-size firms contribute a lot to the German economy. Small firms are not subject to the control institutions - such as supervisory board seats, proxy voting and equity holdings - that shape the relationships between large firms and large banks. The author also points out that small banks, which are part of a decentralized market structure, over come imperfections in the financial market by building institutions that supersede the market mechanism. The savings bank and credit cooperatives systems have each developed an internal capital, not unlike those within large banks operating nationwide. Only central institutions participate in the domestic money market, to place the system's excess liquidity or to raise funds to cover the systems deficits. Also, the funding programs of the government banks can be seen as a refinancing mechanism that especially helps small banks. The same is true for rediscountable trade bills.