Banking and Banking Regulations in Germany and China

Introduction

The financial industry plays an essential part in funding economic improvement. The productive outcome in the banking industry contributes to the boost in economic development index of any country. Empirical studies supported this debate globally. Hence, economic development theory considers that financial institutions are critical components for adequate capacity and its significant internal source of finance for the survival phases of economic expansion (Braun & Deeg, 2020; Chadha, 2016; Knaack, 2017; Kuznyetsova & Pogorelenko, 2018; Matthew, 2017). The banking process is valuable to financial development through its ability to collect and bring cash deposits from acquaintances. Bank operations function in supplying loans to promote production and investment (Matthew, 2017). The ability to generate economic growth in different business sectors such as manufacturing, agriculture, mining, human capital, oil, and gas creates a link between savers and debtors. The research covers distinct components that interrelate among these variables. The maturation of the non-financial industry forms the banking and financial system (Belaounia, 2016). The growth index is contingent on the respective state or regional economic situation, including the country’s institutional environment, economic stability, and political practice (Jakovljević et al., 2015). These attributes affect the banking structure of developed and developing countries. The interest from the monetary system results in its trade relations impact on economic development, which is the theme of this thesis.

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Banks refinance and allocate public funds and the efficiency by which financial institutions intermediate funding has substantive consequences on the economic operation. The theory provides conflicting predictions regarding the connections between banking structure, banking regulations, and fiscal efficiency (Chadha, 2016; Knaack, 2017; Kuznyetsova & Pogorelenko, 2018). A number of these differences occur due to differing beliefs regarding these concepts. One common opinion maintains that regulatory barriers to competition and monopolistic energy create a condition where a few strong banks stalemate the business contest with toxic consequences for performance. From that standpoint, a higher concentration of ineffective banking regulations indicates an uncompetitive market. Some surveys emphasize that aggressive environments create concentrated and effective banking methods. Bank consolidation demands effective surveillance, risk control, and management. Previous works of literature demonstrate some countries have institutions, which limit competition to safeguard specific business investments.

Under this perspective, banking regulations and banking structure represent comprehensive institutional characteristics aside from financial efficiency. To evaluate the influence of banking structure and banking regulations, the econometrician could examine independent banks operating in different regulatory and institutional regions. While the characteristics of financial crises may differ with time, such disturbance features remain the same. Kuznyetsova & Pogorelenko (2018) argues that the financial crisis affects bank institutions by creating disbeliefs to existing economic hypotheses on the monetary system’s risk guidelines. Although China’s financial policies mitigated the East Asian crisis’s impact, the structural banking problems remained especially the loan and credit vulnerability, real estate investments, and the risk of shadow banking method (Knaack, 2017). Comprehensive fiscal reform would influence sustainable growth with minimal fiscal expenses (Krahnen et al., 2017). However, financial systems are likely to remain exposed to internal and external meltdowns. To mitigate adverse outcomes, bank regulators must adopt a robust risk management framework, good safety nets, and strategic policies to achieve sustainable and stable development. It is likewise essential for fiscal reform policies to mitigate the probability of system distress and maintain a healthy structural environment. It highlights the compulsion of improving financial stability, especially in the banking industry, since weak structures and regulations influence bank distress. The obvious financial issues in China and Germany are the emphasis of this study. The quick rate of expansion is slowing, as relatively low consumer demand cannot substitute the shift of labor generation to become the instrument of expansion. As a result, complex infrastructure jobs and financial expansion are not indicators for growth due to government funds’ mismanagement.

The banking sector in China has a significant function in developing the economy. Therefore, banking rivalry creates more extensive risk-taking behavior of banks to pursue gains. The vulnerability of the banking industry caused by the inadequate functioning of businesses has become transparent. Crucial steps have been recommended to mitigate banking challenges by adopting deposit liberalization, effective regulation and monitoring, and modifying the banking structure (Jakovljević et al., 2015). Depending on the preceding summary, this thesis covers factors that give rise to the strengthening of fiscal stability, especially the banking system regulations.

Policymakers find it difficult to prevent any unintentional outcome, particularly issues that affect macroprudential regulations. Banks are subject to several kinds of regulation. The principal aims of banking law would be to influence operations, functionality, shape the banking marketplace transactions, and stabilize the banking industry. Policies regarding the sound performance of banks are known as macroprudential policies. The German banking systems offer a highly fragmented system compared to the Chinese structure. Under the banking classification, the ownership structure support shows that Germany liberalization policies support economic growth. Although china’s banking structure is one system organization, the shift in global banking is influenced by its large trade exports. This complexity is challenging for an analyst who relies on information from one country to identify challenges for banking structures and banking regulations. The objective of macroprudential law would be to attain the banking system’s soundness and encourage the financial stability of the entire system. Collectively, the banking structure and banking regulations guarantee the stability of the monetary system. Based on both countries’ empirical examination, prudential criteria such as provisioning, risk classification, and vulnerability standards form the cornerstone of microprudential guidelines. Due to the regulations’ modifications after the financial crisis, banking policies, and philosophical works of literature on the subject have been evolving rapidly. A better comprehension of a banking strategy’s durability to negative macroeconomic consequences is critical for the comparative empirical analysis of banking regulation, which is associated with the development of prudential instruments.

Banking Development and Regulatory Impact

Globally, there have been calls to restructure the framework for contemporary banking because of the fiscal crisis. These forecasts have contributed to significant governmental and administrative initiatives geared toward altering the structure of banks. The most noteworthy structural reforms include the Volker Rule and ring-fencing projects in Europe. The Vickers recommendations are being executed in the UK while the Liikanen framework remains under consideration in the EU (Penikas, 2015). Beyond these reforms, the structural activity will be possible in a recovery framework where regulators could impose fluctuations in financial structure when suggested recovery strategies are intricate and unfeasible. For example, the US financial law mandates bank investors to establish a transitional bank holding company funded and controlled to raise the capital criteria imposed on BHCs. These actions are counterproductive because of the suggestions for banking reform, which involve dividing large investments into smaller units. Reform advocates fail to consider the degree to which finance and banking arrangement has been debated through a mix of market reforms and existing. Regulatory reforms have a more profound influence on banks’ structure in the US, Europe, and Asia (Krahnen et al., 2019). The consequences of these reforms have been felt on a global scale. The impact of regulatory shifts facilitated the assessment of cumulative changes in the banking structure.

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Regulatory changes facilitate banking modifications by altering banks’ reasons to engage in certain actions or types of administrative arrangements. The Basel II regulation was the first set of modifications to risk weights caused by the global financial crises in 2008 (Penikas, 2015). However, the regulation caused the closure of many investments due to securitizations and other sophisticated credit procedures. Consequently, the regulation lowered the urge to transfer assets or funds from the trading portfolio’s banking portfolio. The banking law was modified to become the Basel III regulation. Economic analysts projected that these alterations would lessen operations that utilize funds and credit investments. This evaluation was supported by subsequent activities, as reflected by fewer operations in securitization. The arrangement altered the structure of price markets. Bank stress tests inflict huge capital costs, which otherwise meet solvency perquisites of conventional funds and leverage ratios. These requirements existed since the binding regulatory limitation for large banks. However, stress testing influenced a powerful element of regulatory threat for all banks. The assumption became evident with the schedule by the Basel III framework. Situations embraced in the macro stress testing tests vary with time (Biondi & Graeff, 2020). This elasticity enhances the operations of policymakers because it permits regulators to accommodate changing market conditions. However, macro stress testing creates uncertainty for banks’ capital operations, which are filed into the evaluation tests.

Additionally, while stress testing followed Basel II’s instructions, which permit banks to use patent frameworks to estimate the effect of situations, the approach decreased dependence on operational models. Banks use customized models, but realize it negates specific stress examinations when the calculations differ from those acquired by managers using unpublished test models. The reaction to the rise in regulatory instability would be to keep a capital buffer above the minimum benchmark necessary for solvency with supervisory buffers. Under this strategy, regulatory instability raises the funding costs of becoming a big and complicated lender. The majority of the qualitative regulatory criteria reforms can be known as the additional expansion of the compulsory regulatory capital program in Pillar 1 of Basel II (Gurrea-Martínez & Remolina, 2019). Thus, the scope of these reforms was foreseeable as a response to the negative financial meltdown. However, these reforms added massive scrutiny of fiscal conduct. Bank scrutiny emerged when questionable business practices were discovered after the financial meltdown. The trend shows that most banks provided false reports, including KYC regulations, benchmark ratings, and other banking operations. Sometimes, these violations contributed to penalties for the most flagrant abuse. The scenario was a signal that fiscal criteria must be substituted and energized. Nonetheless, in the context of this fiscal crisis, these instances were regarded as a systematic collapse of banks to comply with best practices in ethical culture.

Fiscal regulation covers diverse and varied markets, including participants, investors, and enforcers. Based on this premise, authorities’ targets, abilities, and methods vary between regulators and geographical locations. Banking structures and financial regulations have survived with a shifting financial system (Gurrea-Martínez & Remolina, 2019). Significant modifications are produced in response to the global meltdown. A country’s financial system suits savers and investors’ available capital, with loan seekers or borrowers trying to increase money in exchange for potential payouts. Under this framework, lending institutions link individual borrowers and depositors. Financial firms and lending institutions function as intermediaries that manage bank operations for depositors and utilize individual deposits to make loans or investments for profits.

Financial firms may also function as brokers with a custodial function, investing investors’ capital from isolated accounts. The framework, structure, tools, and markets utilized to ease this fitting are many and are controlled by a sophisticated system of regulators (Abuzarqa, 2019). To understand how the banking regulators are coordinated, financial actions could be split into different markets such as banking, insurance, financial market infrastructure, securities, and insurance. Fiscal regulation has evolved, with new jurisdiction added in reaction to r crisis in financial markets and prerogative reverted during fiscal improvement (Biondi & Graeff, 2020). Due to this development, abilities, aims, resources, and strategies differ between markets. Nonetheless, there are common features across regulators and markets, which can be emphasized within this comparative study. Regulators apply policies and legislations assigned by law. The financial regulatory power covers licensing, rulemaking, supervision, enforcement, and resolution. The banking regulation objectives include market efficiency, market integrity, customer protection, capital protection, fraud prevention, loan support, taxpayer protection, and financial stability.

Regulatory powers permit authorities to detect market participants’ behavior and to alter or prevent improper behavior. For example, bank monitoring incorporates periodic assessments and inspections. Regulators describe supervisory priorities and points of focus by devoting supervisory letters and advice. The type of financial regulation employed to marketplace customers are diverse and change with the administration, but maybe indulged in a couple of classes for analytical simplicity. Financial regulation could be prudential, information disclosure, competition, standard setting, and price regulations (Biondi & Graeff, 2020; ElBannan, 2017). The objective of prudential regulation would be to enhance financial stability and confidence. Prudential regulation concentrates on risk control and reduction. Financial disclosure regulations are supposed to make certain that pertinent financial data is accurate and accessible to the public and authorities (Deloitte, 2018). The accessibility of knowledge permits customers and investors to make well-informed fiscal decisions. Regulators prescribe criteria for transactions, trade, exchange reporting, and conduct within the banking or financial sector (Tanda, 2015). As a result, regulators set permissible actions and behavior of business participants. Standard-setting can be utilized to attain several policy objectives, including economy ethics, policies regulating conflicts of interest, customer protection, fair lending needs to stop discrimination, suitability, limitations on the selling of complex financial products to licensed traders, and confirmation that debtors can repay commissions.

Regulators make sure that companies do not monopolize the financial market. Regulators encourage competitive markets to encourage the aims of trade efficiency, ethics, customer, and investor protections. A distinctive policy concern linked to fiscal stability is assured that no company is ‘too stable to collapse.’ Financial regulators set pricing benchmarks, loan premiums, or interest prices (Hajer & Anis, 2018). Though price regulation is comparatively uncommon in federal law, it occurs more frequently in state law. Policymakers justify pricing legislations based on investor protections. Having introduced banking standards and regulations, this paper will provide a comparative study of Germany and China’s banking standards and regulations. Since financial institutions serve the growing population and facilitate economic development, this paper will expound on banks’ evolving history from a global perspective. The paper will also review several works of literature on banking structure and banking regulations.

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Banking History and Development

The first concept of investment and business banks could be traced to Italy in the twelfth century. The weakening of civilization limitations on economic activity throughout the resurgence and the increase of marine ties facilitated Italian merchant financial institutions’ growth. As these coastline settlements became a significant channel for commerce with Europe, much bigger banks expanded their activities to other geographical locations with the objective of controlling global funds. However, family-owned companies have been seen as the forerunners of contemporary industrial banks. According to performance ratings, supervisors were paid with a huge share in division earnings than has been guaranteed with their equity investment. Prior to wage distribution, supervisors and managers make provisions for bad transactions and trades.

The balance statements of financial institutions were closed yearly, and supervisors moved their reports for a comprehensive audit. The branches of each institution worked closely in running its operations. The credit policy was devised and controlled by the board at Florence. Loans were short or medium-term and approved for retailers, producers, and European elites. However, clergymen and the elites were perceived as substantial risks, and loans were approved on a collateralized basis. The financial house sustained its operations and transactions using workable templates, which was complex and rewarding. In the first year of operations, the bank generated a 10 percent ROI (Penikas, 2015). However, as the financial house expanded its geographical services, its profit margin rose by 3 percent. Due to its accessibility to Papal deposits, the Rome operational house became the primary provider of liquidity to its Medici bank and generated half of the profits during the fifteenth century. Two other rewarding branches were Venice and Geneva, with a 65 percent and 35 percent return on investment (Krahnen et al., 2017; Penikas, 2015). The bank tool huge risk by approving controversy loans with higher interest rates. The bad debts written-off and resources were no longer enough to satisfy depositors’ demands. As a result, the Medici bank became bankrupt similar to its predecessors. Although high-risk loans without collaterals were a significant contribution to the meltdown, additional causes include poor operational management and issues in organizing its affiliates and subdivisions. As found in Table 1, Banking reforms and financial stability promote economic development. The table shows the list of 25 global largest banks.

Table 1. Top 25 Largest Banks

Banks Origin
Commercial Bank of China China
China Construction Bank Corporation China
Agricultural Bank of China China
Bank of China China
JP Morgan Chase & Co US
Bank of America US
Wells Fargo & Co US
Citigroup US
HSBC Holdings UK
Mitsubishi UFJ Financial Group Japan
Bank of Communications China
Credit Agricole Group France
BNP Paribas France
Sumitomo Mitsui Financial Group Japan
Banco Santander Spain
Goldman Sachs US
China Merchants Bank China
Mizuho Financial Group Japan
Norinchukin Bank Japan
Shanghai Pudong Development Bank China
Industrial Bank China
Postal Savings Bank of China China
China Minsheng Bank China
China Citic Bank China
Groupe BPCE France

As found in Figure 1, China had 11 banks out of the 25 largest global banks. The statistics reveal the Chinese financial sector’s stability and its impact on global financing and economic development.

Count of Banks by Origin
Figure 1. Count of Banks by Origin

German Bank Development

The rise of German financial institutions was fueled by significant economic development across Europe. German retailer banks increased value and dominated banking operations. Under this era, cities with high-value manufacturing and consumption demand were choicest locations for financial institutions. As a result, neighboring countries adopted a similar challenge in the financial industry’s growth and expansion. Italian banks continued to control global banking by shifting its operations to production centers and government institutions. The Fugger bank and the Hochstetter bank became prominent financial institutions in Germany. These banks played a more significant role as fiscal intermediaries for manufacturing investors and export companies. These banks’ resources and assets were composed of holdings of property, commodities, and debtors, including commerce investors from Germany and England. These resources were financed through equity funding, individual deposits, and loans. Although the bank gained significant profits from the royal link, the board entered an agreement to reduce interest rates and expand loan maturities.

Economic history shows that civilization and development evolved across different locations. Amsterdam experienced the advantages of its dealers’ maritime trade as early as the fifth century and emerged as the significant financial and economic hub in Europe. Thus, Dutch investors in financial institutions ruled finance and investments. Throughout Amsterdam’s financial downturn, two kinds of banking activity emerged. The financial authorities in Amsterdam permitted loan approvals and credit packages to foreign authorities. Consequently, Dutch retailers relied on commission retailers who dwelt in commercial centers and advertised goods without even owning them. As part of its marketing strategy, retailers sought the audience of large investment houses to endorse their commerce bills and boost approval by foreign shareholders and exporters. These financial giants were essentially requested to evaluate credit risk and provide guaranteed reports for investors and shareholders. Bills endorsed under this framework are called ‘acceptances.’ The maturation of the practice facilitated the rise of investment funding in England.

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The Rise of British Banking

The development of economic trade business and capitalistic venture enhanced banking investments in Britain. England developed its economy to challenge the Dutch’s dominance in international trade. The difference between the two narrowed, and later Britain emerged as the undisputed financial center in Europe. The strength of its exchange currency permitted London banks to participate in commerce financing and investment banking. Expanding investment deals with European markets facilitate short-term funding for investors. Specializing in the funding of specific commerce branches, the London financial institutions expanded its loan approvals for importers and manufacturers to ship products to major international ports (Penikas, 2015). The Baring Brothers led the transatlantic fund in the region. The actions of Baring Brothers and other prominent companies in exchange finance was instrumental in the evolution and expansion of significant economic development in London. Unlike an overseas exchange, which necessitated short-term funding, public and private debtors’ growing demands to get manufacturing and infrastructural growth required long-term funding. By subscribing to major financial markets’ securities, British banking giants funded a vast array of projects like railways, quarrying, mining, and plant construction. While local investors accounted for most of the contributions in assets and securities, foreign investors represented a significant section of the marketplace. The demand for sterling as a trade exchange contributed to the evolution of port activities in London.

US Banking Revolution

International banking activities gained momentum in the US after the First World War. The growing demands of allies the essential drive for export investments. Consequently, World War I sparked the entry of flight funds. The development facilitated the growth of New York as a global financial destination. After the War, the USA witnessed huge volume demands for fabricated products and other services. The economic recovery transformed US into a commercial and financial hub. America became a manufacturing nation, expanding its global operations and strategic presence. Like other banking operations, America’s financial system dominated global markets for many decades. However, there was a significant distinction in the mode of operations. The US financial banks transverse with its clients to industrialized and developing nations to ensure a global banking association system. The strategy strengthened the financial bond between investors and customers. For example, in 1960, America operated nine foreign banks with over 140 branches and subsidiaries. By 1970, American investors operated 80 US banks with over 600 branches and divisions globally.

The Rise of the Asian Economy

The rise of Asia banking reforms began as the US banks retreated from loan financing and other credit facilities. The Japanese banks took over the gap created by VS banks. Emulating the concept of its lead investor in corporate banking, Japanese banks copied the Keiretsu network’s developmental strategy in expanding their global operations and services (Okazaki, 2017). Funding at reduced profit margins allowed Japanese banks to attract a large market share, which reached 45 percent of international funding by 1989. However, the deregulation of the financial system and high-interest rates forced Japanese banks to raise their earnings. This strain prompted key players to shift from low-cost lending practices, which created higher yields and investment funds.

Japanese banks adopted a new banking regulation in accordance with the Basel agreement. Under the situation, Japanese banks applied funding raising activities via the issuance of equity, investment bonds, and sales from shareholdings. However, these advancements from market capitalization affected equity stakes in commercial businesses, funding positions, and shareholder influence (Okazaki, 2017). The global downturn led to the fall of Japan’s investment in domestic and international operations. European banks have been strong competitors for international dominance. European banks’ strengths consist of strong capital foundations, banking structure, banking regulations, information disclosures, and good governance. Economic integration and movement towards a monetary union made significant incentives to the consolidation of the financial industry. Banks are reliable because of the catalysts for this consolidation. The framework for banks under the European Community (EC) was modeled by German regulations, which integrated financial conglomerates by offering commercial banking, leasing, investment contracts, and insurance (Camfferman & Detzen, 2018). With many European nations having weak regulatory hurdles to a detailed financial solutions policy, the European banking process became a globally accepted model.

International Banking and Emerging Patterns

From the Florentine financial system’s rise to the Renaissance, the banking system has become an international business enterprise. Technology advancement and liberalization influenced the globalization of banking operations. Recent advances in communications and technology have diminished data transfer prices, recording, storing, and processing financial information. This price reduction makes it more economical to expand and preserve real-time control over international transactions. The rise in banking reforms led to the institutionalization of deposits (Chadha, 2016; Gurrea-Martínez & Remolina, 2019; Okazaki, 2017). As a result, individual traders evolved into institutional investors that offer professional management and best implementation practices for their clients. The rising importance of institutional depositors influenced global financial markets. Additionally, the competition for investment capital gave rise to selecting a viable market for business investments. Under this policy, countries with hash or restrictive fiscal regulations and banking structures were disadvantaged by countries with free banking legislations. As investment funding gravitated towards nations with the freest markets, countries with restrictive banking regulations were pressured to make reforms to suit global trends.

The origin of major international banks has shifted, but the trend of global banking remains constant. The rapid expansion of services provided and the number of banks offering these solutions have increased. Improvements in banking theory and technology influenced the evolution of new derivatives in financial operations and demand for these services. These improvements made it feasible for financial institutions to control investment risk enterprise. It also permits banks to provide financial ideas and risk control solutions to mitigate global exposures. As global markets became coherent, rivalry in global intensified with diversionary strategies. Recent modifications in US banking and financial regulations have ignited a wave of mergers with the dimensions and strength required to manage global banking’s competitive market. Additionally, the long-overdue regulatory reform involving monetary consolidation empowers US banks to provide a complete assortment of banking, insurance, and securities. However, the European community rivals the US in legal and financial solutions. Japan’s Keiretsu financial system operates as a universal entity providing global financial solutions. Financial experts believe that argue that banking reforms in the structure and regulatory practices would ignite the next wave of the financial revolution. International standing will require covering clients in important financial solutions and geographical markets across the globe. By implication, market segmentation must recognize individual consumers’ requirements and supply services aligned to customers’ demands. International banks must be positioned to intermediate the expanding global inflows while staying flexible transfer investments capital to economically viable locations and lucrative businesses.

The Structure of the Banking Regulation in Germany

The banking law is the legal framework for monitoring and banking compliance and financial solutions in Germany. The banking Act stabilizes banking practice and maintains free-market fundamentals. Therefore, the qualitative and regulatory guidelines cover general banking principles and include banks’ responsibility to allow the auditor for financial analysis and book checks. The liberalization of the banking sector creates new service demands and significant risk (Camfferman & Detzen, 2018; ElBannan, 2017). As a result, regulatory authorities have subjected the banking Act to several amendments. For example, the first banking reform in Germany occurred in 1961. The next reform was a response to the collapse of the Bankhaus Herstatt operations due to forex trading. The change tightened high exposure transactions and adopted regulations that allowed business operations with ornamentals and precious compounds. The supervisory ability of the BaKred was reinforced to authorize a compulsory audit and financial inspections by defining limits on financial losses that warrants compulsory liquidation or insolvency. The German banking Act was revised again in 1985 to coordinate and manage the rise of pyramid banking operations. Banking regulators became concerned with the rise of the credit pyramid without commensurate fund gains. Supervision after that centered on consolidated banking practices and structural management (Schnabl, 2019). The collapse of the Bankhaus Schröder and Münchmeyer motivated structural reform in the German Banking Act. Substantial losses from bad debt caused the collapse of the financial giant. The German banking regulators reduced huge exposures to 50 percent based on the investigative report on the Bankhaus’s collapse.

Under the fourth amendment, the German regulators harmonized banking operations through the license legislation and country observation. In 1998, banking reforms modified the harmonization of investment banking, company supervision, and credit operations. Under the framework, investment supervision was mandated for shipping lines and other risk exposures associated with monetary instruments. Trading institutions are institutions that manage patented portfolios. Thus, the trading investment covers risk exposures on financial tools and assets taken by the establishment to achieve short-term profit from cost variations (Feridun & Özün, 2020; Schnabl, 2019). The German financial regulations recommended specific guidelines on risk exposures, liquidity, and bank portfolios. This section evaluates the structure of the German banking market and its impact on the economy. Under these presumptions, the paper will study structural details on the market level and a comparative analysis with different markets. The study will focus on banking structure and banking regulation from a legal perspective.

German Pillar Classification

German banks are usually classified based on three pillars model. The categorization provides a clear understanding of its structure and regulatory mandate. Under the German banking industry’s three pillars, financial institutions are classified based on ownership structure, range of services, and organizational structure. Under the ownership structure, banks are categorized as public or private entities. Under the range of activities, the bank could be specialized or universal. Based on organizational structure, banks are categorized as cooperative, commercial, and saving financial institutions. Public banks are financial institutions owned by the national or state authorities. Characteristically for German banks is a significant share of total resources under the command of banks within this class (Akhtar et al., 2019; Braun & Deeg, 2020; Park & Lee, 2017). Financial institutions belonging to this group are banks and managed by the European Land banks. Ownership of public banks could be exerted right where the government retains majority stock ratio of the investment. Most often, public financial institutions are owned via indirect shareholdings or warranties from the authorities. By comparison, private financial institutions are managed and controlled by private agents.

The German financial house is mainly universal, which means the banks provide several investment packages. Under this arrangement, the banks are permitted to conduct individual or corporate banking transactions and other securities. Specialized institutions conduct banking transactions and operations via regulated channels and specific bank contract. The number of specialized financial institutions in Germany is low. However, the German regulation does not limit participation in several banking activities. Compared to the US or UK’s synergy in market-based economies, states, or even the UK, prohibitive laws failed to attract specialized financial institutions (Braun & Deeg, 2020; ElBannan, 2017; Gabr & Elbannan, 2018; Gutiérrez-López & Abad-González, 2020). However, the development of specialized banks originated from opportunities provided by market requirements. The emergence of specialized banks triggered the enactment of regulations in accordance with the Banking Act.

The German Banking Act covers the three-pillar strategy, which remains the governing principle concerning laws, regulations, and market operations. The three-pillar model represents the current banking structure (Schnabl, 2019). The first pillar, according to the German banking category, covers the commercial sector. Financial institutions under this jurisdiction are universal with specific sizes. The second pillar denotes the business of economies and represents the public industry. The cooperative industry represents the next pillar. In comparison with the savings bank, cooperative financial institutions operate under few jurisdictions. As found in Figure 2, the composition of German banks follows the conventional classification. German banks are classified as universal or specialized banks. As found in Figure 2, universal banks could be commercial, saving banks or cooperative financial institutions.

Categorization of German Banks
Figure 2. Categorization of German Banks

Specialized banks could be mortgage houses, building investment, and special banks. The structure of the German banking system is the theme of this study. A comparative empirical study will be conducted to ascertain its impact on the economy. Under this perspective, this paper compares the Chinese banking structure and banking regulations with German banks. Therefore, the paper may sometimes take minor deviations because of alternate consolidation and aggregation methods. Additionally, the time for which information is available limits the comparative process. The financial institutions are allowed to conduct several business operations in accordance with the German Banking Act. The legislation regulating these banks has grown in reaction to market demand, global trends, and the desire to stabilize the economy.

Privately Owned Commercial Banks

Commercial banking has evolved with time and space. The need to satisfy customers has encouraged private investors to establish more financial institutions. Consequently, shareholders could not fulfill the growing funding needs of mass manufacturing industrial businesses. The German banking era noticed three financial giants, including Commerzbank, Deutsche Bank, and Dresdner Bank. These banks operative a universal framework because their operations are complemented by developing investment opportunities. The structure of commercial banking has shifted even more radically. Although the banks maintain a market share of approximately 29%, the shares of credits of non-banks stand at 58 percent (Jack et al., 2019; Lombardi & Moschella, 2016). Deposits from banks account for at least 60 percent of total liabilities (Braun & Deeg, 2020). The German banking reforms and other determinants influenced the financial sector. As a result, the ratio of non-interest income has risen steadily and attained its peak at 89 percent in 2017. During this financial period, net interest earnings over total assets remained low at 0.8 percent. The earnings before tax on equity were 5.6 percent in 2017 (Braun & Deeg, 2020; Lombardi & Moschella, 2016). The ownership of most German private banks has been one person or household group, sometimes together with spouses. Individual bankers might be connected in complex ways by blood and marriage connections, as were the Rothschilds. The number of employees and dimensions of private banks is imprecise because these investments were not incorporated. Occasionally, an individual or household participated in banking with additional pursuits. The structure of private banking reflects the character of financial activity in the areas of origin. The current account was the pivotal lending tool under the private sector framework. Under this structure, the bank derived interest on the outstanding balance for the given loan. As found in Table 2, HSBC Trinkaus & Burkhardt AG declared 24.5 billion Euros in 2018, while Bethmann Bank AG reported 8.9 billion Euros in the same year.

Table 2. German Private Banks

Private Banks Net Worth (EUR Billion)
Bankhaus C. L. Seeliger 0.7
Bankhaus Anton Hafner KG 1.2
Bank Schilling & Co. AG 1.4
Furstlich Castellsche Bank, Caredit-Casse AG 1.5
Bankhaus Neelmeyer 1.7
Merck Finck Privatbankiers AG 1.8
Merkur Bank KGaA 1.9
Internationales Bankhaus Bodensee AG 2.0
Max Heinr Sutor oHG 2.1
akf Bank GmbH & Co 2.2
Weberbank AG 2.3
Bankhaus Max Flessa & Co 2.4
Bankhaus Hermann Lampe KG 2.8
B. Metzler seel. Sohn & Co. Holding AG 3.7
Donner & Reuschel AG 4.4
Joh. Berenberg. Gossler & CO Gruppe 5.8
Bethmann Bank AG 8.9
HSBC Trinkaus & Burkhardt AG 24.5

The lending techniques designed for private banks functioned throughout its evolution from the traditional banking system. The distinctive quality of private banks relies on investment banking. As found in Figure 3, the paper shows top private banks and their position in the capital share.

 German Private Banks
Figure 3. German Private Banks

The Usury law prevented interest rates on loan deductions. As a result, the management derived income from commission charges for loan transactions. Private Banks provided extra loans through shareholders’ acceptance and bills of the trade from two transacting parties. The banks secured their investments by adopting distinct measures. For example, when the borrower’s assets cannot be guaranteed, the management would demand a mortgaged collateral.

In some cases, the banker would require one or more guarantors as a third party agent to approve the loan. Accounts estimate a dynamic correspondence among bankers regarding the viability and credit-status of prospective borrowers. The short term lending strategy was inspired by the banker’s anticipation that loans are used for business purposes, generating returns on investment. The German private banking system’s feature reflects legal limitations on financial services and the understanding that domestic service supports household demands (Braun & Deeg, 2020; Lombardi & Moschella, 2016; Penikas, 2015). Private Banks required residue, maybe not in the sense of contemporary demand deposits.

Private Banks act as disbursement brokers. Investors are represented in the business administration and informed to know when capital could be used for repayment. Thus, accounts held by such businesses have been utilized since information conceding its availability and withdrawals are transparent. The lending techniques designed for private banks functioned throughout its evolution from the traditional banking system (Macaulay, 2015). The distinctive quality of private banks relies on investment banking. The foundation supports intimate relations between banks and industrial companies in two forms. The arguments for the private banks’ excellence highlight its capacity for quality services and solutions by providing funds to acquire, maintain, and utilize client’s data (Arias et al., 2020). A private financial house could approve loans to an individual or corporate organization for several years, provided the contract’s mode would be sustained. The bank can maintain such a relationship with subsequent relatives of the individual or new shareholders or the corporate organization. Secondly, private banks motivate entrepreneurs as part of its incentives in generating funds. There are instances where a financial house plays a vital role in establishing a new venture by bringing together new investors or existing companies to sign a memorandum. Under this arrangement, the bank finances the project while generating commission charges and interest in financing the new business.

Public-Owned Savings Banks

The Prussian banking law of 1838 enforced the independence of public saving banks. To prevent the indebtedness of banks after the depression of 1929, banks were granted sovereign legal standing. Thus, the guarantee liability was introduced, enforcing accountability for third party creditors. The regulatory authorities established a maintenance responsibility framework to ensure public saving institutions could satisfy their fiscal obligations (Arias et al., 2020). Since the maintenance obligation rules out a default option of their savings bank, the assurance obligation was passively enforced. As found in Table 3, the top saving banks in Germany control about 35% of the financial market.

Table 3. Public Savings Banks

Saving banks (EUR Billion)
Nassauische Sparkasse 11.9
Ostsachsische Sparkasse Dresden 12.1
Sparkasse Pforzheim Calw 12.5
Sparkasse Hannover 15.6
Mittelbrandenburgische Sparkasse 15.9
Frankfurter Sparkasse 19.7
Stadtsparkasse Munchen 20.1
Kreissparkasse Koln 26.7
Sparkasse KolnBonn 27.3
Hamburger Sparkasse 46.6

As part of the consolidation reforms, most banks classified its credit risk to improve performance. Primarily because of the limited budgets of local saving banks and the avoidance of negative reputation controls, the maintenance responsibility has been passively enforced. As found in Figure 4, Hamburger Sparkasse tops the table with 46.6 billion Euros while Sparkasse KolnBonn ranks second with 27.3 billion Euros.

German Saving Banks
Figure 4. German Saving Banks

The savings bank legislation mandates financial houses to fulfill the credit needs of regional. Under this law, savings banks focus on worker requirements and midsize businesses. The legislation enables savings banks to operate on sound economic fundamentals, and profit maximization must not be the principal business goal (Georgoutsos & Kouretas, 2016). The legislation suggests that savings banks cannot own shares beyond its jurisdiction or partake in a consortium underwriting. Savings banks are prohibited from working outside their territorial space to avoid unhealthy competition. The banking structure of publicly owned savings banks is the foundation for its enduring development. The functionality of operations relies on regional principle, which mandates banks to operate within its locality. Due to the regional principle, savings banks and the board of directors sees other financial institutions as business associates. The association between public savings banks enhances business elasticity, sovereignty, and proximity to regional trade.

Cooperative Banks

During the 19th century, German agriculturalists and artisans faced financial limitations because private and public banks focused on trade finance. Consequently, commercial banks approved loans for production plants, transport business, and mining projects. Additional saving banks required guarantors or collaterals in approving loans. Credit facilities were established to provide self-aid to individuals without assets or investment securities (Lombardi & Moschella, 2016). Depositor’s capital is shared among members with financial demands. The cooperative legislation includes local financial institutions that offer retail-banking solutions to farmers and small income earners. Members of a cooperative group can exercise management rights through a supervisory board. As a result, cooperative banks act as clearinghouses, offer financial markets access, supply asset-liability service, and provide corporate banking functions. The combined asset base of cooperative banks in Germany amounted to 920 billion euros, making it marginally compact than the Deutsche Bank Group. The size of cooperative banks facilitates its competitive benefits of consumer proximity and decision-making. Nonetheless, in conjunction with the legal limit that its members may only increase equity, the organizational policy prevents profitable growth. As found in Table 4, the paper shows top cooperative institutions and their market value. The cooperative includes Sparda-Bank West eG, Sparda-Bank Baden-Wurttemberg eG, Berliner Volksbank eG, and Deutsche Apotheker-und Arztebank eG.

Table 4. German Cooperative Banks

Net Worth (EUR Billion)
Volksbank Mittelhessen eG 7.8
Sparda-Bank Munchen eG 8.5
Bankfur Sozialwirtschaft AG 8.9
Sparda-Bank Sudwest eG 11.2
BBBank eG 11.9
Frankfurter Volksbank eG 12.6
Sparda-Bank West eG 12.9
Sparda-Bank Baden-Wurttemberg eG 13.8
Berliner Volksbank eG 14.2
Deutsche Apotheker-und Arztebank eG 46.8

The banking structure of cooperative banks is built on the self-aid framework, maintenance obligation, or individuality of members, and democratic principles. Cooperative banks are self-governed, and its regulations differ by location and shareholders. Under the individuality regulation, the participants are customers and maintain direct communication with the bank’s management. Consequently, members must ratify annual meetings or emergency meetings where the board of directors submits its yearly operations for approval. As found in Figure 5, Deutsche Apotheker-und Arztebank eG controls 31% of the group’s financial market while Berliner Volksbank eG manages 10 percent of the market share.

Cooperative Banks in Germany
Figure 5. Cooperative Banks in Germany

Cooperative houses are coordinated as business clubs, which explains why the group participants are called members. The banking structure of cooperative banks is built on the self-aid framework, maintenance obligation, or individuality of members, and democratic principles. Cooperative banks are self-governed, and its regulations differ by location and shareholders. Under the individuality regulation, the participants are customers and maintain direct communication with the bank’s management. Consequently, members must ratify annual meetings or emergency meetings where the board of directors submits its yearly operations for approval. Each participant or member is entitled to one vote during elections or decision approvals irrespective of their share allocation.

The regulation describes the democratic principle of cooperative banks. This attribute has both positive and negative consequences since members cannot sell their shareholder status to another investor (International Monetary Fund, 2016; Schnabl, 2019). By implication, members cannot monitor the functioning of their supervisors for poor performance. The weak voting rights, irrespective of the shareholder’s volume, make it difficult to exert pressure on the administration (Braun & Deeg, 2020; International Monetary Fund, 2016; Schnabl, 2019). As a result, the mandate of supervisors to execute an effective business strategy is weak. This regulation negatively affects cooperative banks when compared to public and private banks. The power play of regional institutions influences the lack of cooperative management. These institutions control the audit process, operations, and management.

Special Banks

German’s specialized banks conduct special financial operations under its regulatory framework. Special banks account for 35% of Germany’s bank securities and assets. Specialized banking institutions were established for specific purposes such as housing funds, business societies, or capital investments. The Deutsche Ausgleichsbank and Landwirtschaftliche Rentenbank are examples of German Special banks. As stated by federal mortgage law, mortgage banks have been limited to awarding loans backed by exemptions on land, resources, and public authorities’ tax earnings. Consequently, specialized banks refinance loans on long-term deposits and bank debentures. Shareholders possess a pari-passu mandate of the investment. Mortgage management is liable for its operations and approvals.

Throughout the crisis, several market investors and managers assessed financial institutions’ capital placements and comparisons of their capital positions on a cross-analysis basis. The authorities’ interventions might have been useful if funding positions of the banks were reviewed. To guarantee that banks secure depositor’s money from risk exposures, the Basel III introduced regulations and demands to elevate the quality and uniformity of funding in the financial market. Additionally, Basel III developed strategic disclosure legislation to boost transparency of financial operations and enhance market control (Azeem et al., 2015; Gurrea-Martínez & Remolina, 2019). To improve investor’s decision-making about banks’ capital competence across regions, financial institutions must disclose the list of banking guidelines and regulatory adjustments. The strategy allows uniformity and simplicity of disclosures associated with regulative funding and minimizes the danger of inconsistent layouts undermining the objective of enhanced disclosure (Feridun & Özün, 2020). The Basel III regulation mandates banks to provide a summary of the significant attributes of its financial instruments for banking operations.

While banks are obliged to provide the terms of their regulatory capital instruments, these brochures’ size makes such extraction a tough job. The issuing bank is better positioned to undertake the job than investors and managers that requires detailed information about the bank’s capital framework. The Basel II regulation includes a need that financial institutions offer qualitative disclosure that lays out ‘summarized inventory’ of all financial instruments’ highlights (Azeem et al., 2015). However, the Basel Committee found that financial institutions do not fulfill this Basel II mandate consistently. The lack of standardization with information and the disclosure framework makes it challenging to evaluate and monitor its compliance.

The Banking Regulations in Germany

The evolution and growth of financial institutions show a broad overview of German constitutional, economic background, and banking legislation features. Before 1871, most issues of financial law and related regulative challenges were managed by specific states. Under the Zollverein treaty, German investors and shareholders could create and market products at locations under the free-trade zone. Lenders utilized the government framework to mitigate constraints on financial tasks. For example, if Frankfurt’s legislations prohibit a financial institution charter, entrepreneurs can establish an investment house in nearby Darmstadt and supply the same services to companies in Frankfurt. As Feridun and Özün (2020) noted, this capacity to redistribute income was possible under the joint-stock credit bank. Another legal challenge that shaped financial history was that much of German financial institutions’ alleged function was linking directorates.

In the mid-nineteenth century, it became clear that there was a need for companies that could raise funds by releasing equity shares to shareholders that consequently would bear the limited obligation for the company’s responsibilities. The difference between private financial institutions and credit banks is that the latter were joint-stock investments. Most German states did not have liberal and general unification legislation until the 1860s (Schnabl, 2019). Enterprises that wished to operate as a joint corporation with limited liability had to seek specific federal government consent. Several German states viewed joint-stock consolidations with suspicion and either rejected consent or granted it only on terms that made the offer hostile. One factor was that limited liability allowed business owners and investors to evade debts and circumvent tax deductions. Another reason for such disapproval was the state’s decision to extract leas by billing business owners to incorporate the limited liability status. The modified German banking code in 1861 encouraged the consolidation of joint-stock incorporations; however, the regulation was granted on a case-by-case foundation. As found in Table 5, economic development and recovery stimulated the expansion of the financial sector. The table shows the growing number of credit institutions in Germany between 2008 and 2019.

Table 5. Number of Credit Institutions in Germany

Year Number of Institutions
2008 1990
2009 1949
2010 1929
2011 1988
2012 1869
2013 1843
2014 1808
2015 1774
2016 1775
2017 1673
2018 1586
2019 1553

As found in Figure 6, 1553 credit institutions were established in 2019, while 1586 was established in 2018. The rise in new banks can be attributed to the ease of doing business and new entry freedom. The findings show the correlation between economic recovery and bank assets. The role of credit institutions cannot be isolated from the country development. By implication, German industrialization was influenced partly by the banking sector. These financial institutions provide loans with little collateralization risk to support the growing economy.

 Credit Institution in Germany
Figure 6. Credit Institution in Germany

The German financial institution was investor-driven, while the banks’ corporate administration codes and micro-prudential guidelines shifted to the public interest. Consequently, investor’s value maximization strategies enhanced customer value by organizing shareholders’ equity. As a result, the investor’s contribution to the financial regulations for company administration and equity requirements enhanced the banking structure to mitigate the financial crisis and improve stability. Thus, the deposits became a component of the bank’s risk control to the extent that the investor’s payment and the return of investment were restricted to avoid the financial house’s monetary instability. This scenario described the evolution of the German banking structure and financial regulations. Up until 2002, the financial supervision was divided amongst various establishments. There were supervisory offices for each of the three primary financial sectors, including insurance coverage, securities, and banking services (Feridun & Özün, 2020; Schnabl, 2019). However, a new framework for a single regulator’s authority has been adopted for the three financial sectors. By 2013, the Financial Regulators Commission was mandated to monitor, manage, and control macro-prudential administration. Besides those supervisory agencies, state-level managers conducted regulatory compliance. In 1973, the management of construction and funding association was moved to the Federal Council. Detailed financial supervision was established after the banking financial crisis in 1931 (Schnabl, 2019). A more encompassing regulation was established in 1934 under the Financial Act, which marked the German banking structure’s revolution. Under this mandate, the government assigned a supervisor for banking operations. As an executive body, the assigned supervisor controls the implementation and compliance of the banking reforms. However, after the bank’s collapse in 1939, German’s ministry of economic affairs became the banking arbiter.

Under § 6 of the Banking Act, the supervisory office was mandated to monitor banking operations and mitigate financial abuses. The commission was empowered to interfere with the organized conduct of financial service and manage the impact of criminal conduct against the nations’ economy. The Bundesbank functioned as the primary supervisory agent under the network of states. Consequently, bank branches and their affiliates continued trade supervise and financial disclosures. In complying with global banking review, the BAKred was established to improve financial development. The review covered the expansion of institutions falling under its guidance and the conditioning of its investigation and intervention authorities (Huber, 2018). Thus, banking regulations were created in a supportive approach. When financial rules were established in particular locations, managers were obliged to provide inputs and terminate the collaboration among ministries, committees, and investors from other locations. After establishing banking standards and guidelines, supervision was entrusted to customers and investors to guarantee compliance to the regulations with their corresponding organizations. This technique of handing over compliance supervision permitted the BAKred to manage limited funds and workforce while closing the gap between regulatory authorities and the regulated organizations.

By the end of 1997s, the European influence affected the German banking policy towards separated supervision, which the financial organizations could not adopt. The BAKred assumed an increasing range of managerial jobs under its statutory mandate. However, the German financial market needed BAKred as a global representative. Based on this structure, financial groups and associations lost their relevance while administrative supervision became more pertinent (Feridun & Özün, 2020; Huber, 2018). The government’s decree established the regulation of the securities industry in 1995. As a result, the government shifted the executive powers of German securities markets to a national firm. Its supervisory jobs and mandate were based on the Securities Trading Act.

The regulation enhanced banking integrity and clarity of capital markets. The capital market operations include avoidance of insider interchange, checking disclosures, and other financial obligations. The Federal Supervisory Office controlled business takeovers, market adjustments, and manager’s operations, which is still in German states (Huber, 2018). The regulatory responsibilities highlight the German’s financial and banking revolution. By the end of 1999, it was oblivious to banking supervision as weak and inefficient. The challenges in financial operations pushed the discussion for another set of banking reforms. The instituted parties modified the banking framework based on securities, compliance checks, and financial operations. Although the Bundesbank lost the capacity to integrate banking regulations within the institutional structure, it retained crucial placement in the managerial process. The main disagreement to involve the Bundesbank in financial monitoring was that it allowed banking managers to use local enforcement officers. In October 2008, the German government established FMSA to provide bailout of failing financial institutions and restore the economic markets.

The German government established a uniformed banking framework that covered financial requirements. The regulation was termed Principle I, which requires that financial house must maintain equities and asset holdings. Under this guideline, German banks were allowed to use the risk weighting process. As a result, the risk weighting constituted 50 percent of their value. Upon approval, financial institutions that needed to comply with the equity demands were expanded. The risk weighting was improved to ensure that local banks and international financial institutions’ funding reflected a risk weighting between 20-50 percent (Huber, 2018; Schnabl, 2019). The third review of the Banking Act altered the suitability benchmarks for bank equity. The equity conception was still oriented along the three concepts introduced over. Financial institutions’ demands to recognize the public guarantee were declined because the assurance did not fulfill the principle of full payment for investment losses. Additionally, it would be challenging to measure the impact of such regulation, which positions banks at a competitive advantage.

The Basel I Accord

The German banking reforms were conducted to energize and transform financial operations under market trends and international standards. The banking reforms modified operational structures and activities under the transformation agenda (Azeem et al., 2015). The Principle I regulation was modified to the Basel I. Basel I focused on the bank’s weighted assets and credit risk operations. Thus, Basel I mandated financial institutions to classify assets based on the risk of operations. The Basel I suggestions was translated into German regulation with the Act for the modification of Principle I. The changes of Principle I covered the risk status of assets, properties, the financial interchange, guarantees, option rights, and lending obligation. As a result, the regulatory committee reviewed all property items and uncompleted transactions with the existing regulation. The Basel I review held securities and book loans under the asset items guidelines.

Additionally, the law mandated the inclusion of tangible assets without default risk to credit extensions. The revised standards prevented the circumvention of tangible assets and reduced unassessed risk exposures. Risk assessment models categorized conventional assets and liabilities. Under the Basel I, the risk weighting of guarantees or warranties were calculated at face value while various other assets in lower-risk groupings were computed at twenty percent ratings. The support of counterparty risk from monetary swaps or option rights was based on the EC mandate.

The Basel I included contracts with other price risks. The risk weights for counterparties, types of contacts, and collateralized financings were adjusted according to the EC regulations. Additionally, under the Basel I framework, the minimum funding coefficient was raised to eight percent of the risk-weighted properties. With the induction of the risk-weighted percentage, the Banking Act separated financial capital into core and additional funds. The approved percentage of risk-weighted capital (8%) covered the additional and core capital funding. However, the clause proved that the eligibility of ‘additional capital’ must be lower than the core funding (Azeem et al., 2015). Thus, the minimum amount of core funding was pegged at four percent of the risk-weighted assets (Azeem et al., 2015). Under this regulation, risk-weighted assets were those offered for instant and unlimited access to cover investment uncertainty and exposures. The core capital composition under the Basel I include reserves, transfers, paid capital, and general funds (Abuzarqa, 2019). Consequently, the capital composition includes contingency reserves, allocations from credit facilities, unrealized reserves, and preferential shares. Specifically, the recognition of the unrealized reserves was raised in legislative conversations. The Bundesbank opposed the recognition of unrealized reserves, considering that it anticipated pro-cyclical effects (Abuzarqa, 2019; International Monetary Fund, 2016). The disagreement was that the expanding capital base encouraged financial institutions to allocate more funding, while a drop in revenue may create a financial crunch.

Although financial houses argued that such a measure affected their global standing among other financial institutions, the committee approved a relaxed regulation for unreserved funds. Under the review, banks must hold 4.4 percent of risk-weighted properties as core funding (International Monetary Fund, 2016). The optimum of additional capital, including unrealized reserves, was pegged at 1.4 percent of its risk-weighted possessions. Financial institutions must deduct the approved percentage (56%) from the unrealized due to tax obligations. Thus, the financial review led to significant banking and financial laws changes, and it expanded asset eligibility for regulatory capital (Schnabl, 2019). In 1995, the managerial authorities provided the minimum criteria for FX trading. The new policy eased the existing standards with internal policy. Under the new framework, the risk monitoring standards for financial products were applied. The recommendation suggested that banks are mandated to establish risk-management systems for all trading accomplishments. The risk management systems include a supervisory capital framework and an internal risk assessment model (Shen & Chan, 2018). The framework of financial regulation in Germany was reviewed based on a suggestion of the Basel council. The review consolidates the Basel I requirements for banking services and financial operations (Gurrea-Martínez & Remolina, 2019). The review of the financial reforms led to the formation of Basel II.

Basel II Accord

The Basel II review modified the loan financing criteria, benchmarks for risk assessment, and solvency law. The primary focus of the review centered on banking available capital.

The available capital funds describe the bank’s solvency status and estimation for capital adequacy. The ‘available capital’ was replaced with the solvency requirement. The primary modifications under Basel II include credit risk assessment and operational risk evaluation. Financial institutions can compute the operational risk using the indicator technique, standardized method, and the advanced measurement approach (Feridun & Özün, 2020). The three-year standard benchmark is suitable for computing the indicator technique. The indicator technique increases the ‘pertinent indicators’ across the board with 15 percent. Under the standard approach, the operational indicators are categorized into eight business sectors and assigned with varying weights. The weight ranges between 12 and 20 percent, depending on the operational risk.

The BaFin permits banks to apply advanced measurement but must conform to specific regulatory demands. The computation of risk-weighted assets can be achieved with the internal rating approach (IRB) or the standardized approach. The standard technique uses the external ratings of rating companies. Under the Basel framework, only approved internal ratings must be used for the RWAs. The financial officer can apply different risk weights of the assets, which depends on the borrower’s external assessment. The standard ratings could be AAA to AA-, A+ to A-, BBB+ to BBB-, BB+ to BB-, B+ to B-, below B-, and unrated positions. For unrated positions, the financial officer must risk the assets’ weights without considering the debtor’s external rating position. Under the Basel II review, the risk-weighted rating for retail investments and small-scale investments was reduced to 75 percent. However, the risk-weighted rating for estate investors was pegged at 35 percent (Azeem et al., 2015). The new mandate presented two options on the assessment of the bank’s risk weighting ratings.

Financial regulators could compute the asset risk weighting ratings by the ratings of the financial or the external ranking acquired for the nation of residence. The German regulatory council adopted the resident country’s risk-weighted ratings because the bank’s rating score provided an inaccurate value. The regulation assigned the internal model method (IMM) and the SA in determining the credit equivalent for exposures. IMM, regulators can calculate credit equivalent by assessing the internal ratings that examine the diffusion of market standards of products based on market cost movements. Regulators utilized this technique to estimate the base for counterparty credit risk occurring from non-derivative contracts with guaranteed margin and risk from repurchase deals. An organization is permitted to apply the IMM after the authorization by the managerial authorities.

In the new strategies, the variety of identified risks-based insurance is prolonged compared to Basel I (Belaounia, 2016). The adoption of the IRB-approach reduces the risk of insurance claims or properties. Organizations utilizing the innovative approach can use several securities based on the trusted price quotes on the property values. Although the management for securitization contacts was not defined, the solvency guideline covered the funding requirements (Belaounia, 2016; Elsayed & Wahba, 2016). The capital needs of market risk and capital demands were unaffected by the Basel II review. Additionally, Basel II covers financial demands for economic and macroeconomic variables.

Basel III Framework

The German regulatory committee reviewed the Banking Act to pave the way for Basel III modifications. The securitization of assets, direct exposure regulations, and capital demands were the focus of Basel III. In the area of capital demands, the market risk framework was the area of significant interest. Besides, there were adjustments for securitized properties and disclosure needs. Basel III reviewed the trading books, which affected the bank’s adoption of internal risk assessment models to resolve financial requirements and capital allocations of securitized properties (ElBannan, 2017; Feridun & Özün, 2020). Under this framework, investors must provide insurance coverage in the form of capital positions to guarantee a stressed VAR.

Basel Equations

  • Under the Basel framework, Risk-based capital = Eligible capital/ (credit + market + operational risk-weighted assets)
  • Credit comprise credit valuation adjustment
  • Non risk-Based capital, Leverage ratio = Capital measure/ exposure measure
  • Liquidity coverage ratio = Liquid assets/ net cash outflow.
  • For long-term liquidity, Net stable funding ratio = available stable funding/ required stable funding.

Under Basel III guidelines, financial institutions must use the SA to compute its operational risk capital. The approach restricts a bank’s influence over ORC to a value known as the inner loss multiplier (ILM). As a result, financial investors must maintain stable ILM data to guarantee accurate analysis. This capability will permit risk managers to lower the ORC by concentrating on managing and reducing the bank’s operational losses. To ease the impact of ILM variable in computing ORC, financial institutions must concentrate on improving the quality of its loss data, redefine ORC, and enhance case identification. Many financial institutions categorize internal operational risk occurrences as inescapable costs of investment. Under Basel III, financial institutions can alter their operational behavior by integrating functional losses with service systems and efficiency. The primary aim of Basel III improves monetary security. The critical term in banking operations is liquidity. Financial institutions and managers have encountered challenges with the liquidity variable (Shen & Chan, 2018). When liquidity became challenging, financial institutions had insufficient reserves to meet their responsibilities. The Basel framework was implemented to increase the quality, amount, consistency, and openness of financial position to guarantee that banks can absorb losses. The framework enhances the financial framework’s risk coverage by strengthening the funding needs for counterparty debt and direct exposures. Basel III introduced the leverage ratio as a determinant for risk-based capital. The framework presents procedures to promote financial buffers’ accumulation and enforce minimum liquidity criterion for active financial institutions that includes a 30-day liquidity insurance coverage.

Basel IV

The implementation of Basel II introduced challenges with financial assessment. Financial institutions use the SA and the IRB technique to calculate credit risk requirements by leveraging risk measurement data. This discernment created negative options on the incomparable analysis of risk weights across financial institutions. Some banks have been hostile in using a complex hypothesis to lower its risk-weighted assets. Under the Basel IV proposal, these problems are resolved by limiting the IRB technique, enforcing benchmarks in reducing risk weights assets, and improving the SA to become risk-sensitive (Feridun & Özün, 2020). The current SA changes are not injurious to financial institutions because the risk level of sensitivity can be assessed in all business positions. Some managers may find the regulation on information capture and due diligence for exposures more challenging than the adjustments in capital demands. The lending status of banks influences the funding requirements of most banks. By implication, banks with direct exposures to high investment financing will encounter funding needs. The cash reserve ratio (CRR) replaced the solvency regulation governing establishments’ capital competence, groups of organizations, and economic holding groups (Feridun & Özün, 2020; Gabr & Elbannan, 2018). The CRR controls the regulative capital and the minimum benchmark to guarantee capital risk. The CRR framework permits banks to determine their internal credit ratings using the IRB approach and the CRSA.

Article Review

The article studies the impact of bank regulations, the rising cost of living, and national organizations on financial institution net interest margins using banks’ information across 72 countries. The findings indicate that banking structures and regulations, such as investment entry operations, improve revenue margins (Tanda, 2015). Consequently, the rising cost of living applies a durable, positive impact on financial institution margins. Tanda (2015) designated capital guidelines as a catalyst in organizing and controlling funding and financial institutions’ risk levels. The findings revealed that the regulative framework and banking structure adjustments affect the banks’ decisions and operations. The author studied the pragmatic contributions funding policy in the decision of banks’ capital ratios and direct exposure to review bank habits. The findings show that capital positions and risk exposures are influenced by banking guidelines and regulations, although outcomes may vary with geographic location. Based on an evaluation of the literary works, the paper selected the attributes of financial institutions and policies most likely to affect the level of financial advancement.

Consequently, the approximated econometric model linking the level of financial development with procedures banking regulators was examined. The results showed that the central bank’s policies and regulations influence currency fluctuations and enhance financial stability. Tayssir and Feryel (2018) examined the influence of reserve bank features and financial policies on the degree of monetary advancement. Based on an evaluation, the outcomes reveal the substantial influence of central financial institution characteristics on economic growth for the three groups of countries. Elkhuizen et al. (2018) assessed the relationship between banking development and financial liberalization among European counties. The researchers discovered that the dominating level of social funding enhances the integration of monetary liberalization to influence financial growth.

Reviews show that banking regulations and banking structures influence economic development and financial stability. Several surveys suggested that economic development is restricted in economic climates where interest teams apply significant pressure on legislators to recommend banking policies (Elkhuizen et al., 2018; Georgoutsos & Kouretas, 2016; Howarth & James, 2020; Singh & Sharma, 2016). Banking analysts argue that executives’ policy influence on economic development might be damaging if business and financial transparency are motivated. Hofbauer et al. (2016) assume that capital availability is a significant factor in economic growth under a specific level of legal and institutional advancement. The effect of monetary liberalization on financial development is accomplished in numerous operational directions (Okazaki, 2017). (Schäfer, 2016) argues that economic liberalization influences financial development by boosting banking investment and performance. The authors believed that risk-weighted assets influence the clear connection between economic liberalization and economic development. Jones and Knaack (2019) assert that financial stability facilitates economic performance and the quality of monetary solutions boosting financial advancement. The authors studied the connection between macroeconomic instability and financial development. The findings show that financial growth reduces the impact of market volatility. The researchers recommend that the degree of economic growth depend on structural qualities, regulations, and institutional elements.

A significant correlation exists between the monetary policy framework and financial growth, which depends on the predicted level of inflation. The global financial meltdown has renewed concerns about mother banks’ capacity to manage asset rate inflation, which endangers monetary security (Spendzharova, 2016). Hajer and Anis (2018) discover that government independent financial agencies like the central play a vital role in the financial industry by mandating private and commercial banks to improve the credit systems and lower default rate. Krahnen et al. (2017) studied the impacts of the rising cost of living on macroeconomic stability. The authors suggest that the financial plan enhances monetary security and advancement via inflation targeting. The authors assert that the effect of a lower cost of living is uncertain and relies on economic growth, banking size, and sector development. Werner (2016) suggests that nations with a low level of the financial system and securities market development experience a high cost of living and inflation. The author argues that stability in the currency exchange rate promotes financial growth. The findings show a significant connection between monetary advancement, forex stability, and economic development. Thus, nations with lower levels of monetary advancement adopt a consistent exchange rate.

Basel Regulatory Framework

Asymmetric details define bank activity since depositors cannot determine the quality of banks’ properties. The occurrence of monetary instability would promote massive financial withdrawals by depositors and shareholders, which will trigger a liquidity situation or solvency for the investment house. Doubts relating to one financial institution’s solvency could create fears regarding the soundness of other financial institutions, leading to a generalized panic. This assumption was demonstrated by the global financial crisis, where financial institutions encountered bank run by investment financiers, shareholders, and customers. To avoid financial bank runs, banking regulators must produce implicit or specific guarantees to secure depositor’s funds and shareholder’s capital. Prudential authorities enforce banking regulations to limit RWAs as it relates to financial stability. Although capital regulation might cause financial institutions to comply with the authorities, each party’s purpose differs in operations and trade. Therefore, banking structures and banking regulations could influence distortions in banks’ behavior (Camfferman & Detzen, 2018). For example, financial institutions with balanced leverage can moderate their capital and risk appropriately when increasing funding demands. Consequently, the bank may increase the riskiness’s limits to comply with new regulations and maintain ideal leverage ratios. These financial strategies can be modified if regulatory establishments enforce actions to limit riskiness and improve supervision.

The introduction of the Basel framework has encouraged compliance with local and international banking regulations. The Basel framework established the benchmark of regulative capital and RWAs (Azeem et al., 2015; Feridun & Özün, 2020). The introductory regulation considered the bank’s market risk and credit risk. These regulations stabilized financial markets but created challenges within its structures due to evolving trends. The Basel regulation provides a uniform framework on funding policy to react to the internationalization and capitalization of global financial institutions.

Empirical proof reveals that RWAs funding improved with the introduction of the Basel Accord. However, researchers could not ascertain whether banks complied with the financial legislation by adding funds or lowering the capital risk. The fixed approach to risk-weighted assets forced financial institutions to move from exclusive lending to government borrowing to reduce regulative capital. According to Vives (2017), a risk-based capital policy created the situation whereby small investments with few opportunities to raise resources lowered its risk-based by customizing their portfolio’s composition. Parise and Shenai (2018) argue that Basel capital proportions created financial instability in the US due to high loan demands. Given the restrictions and weaknesses of the capitalist law as designed for Basel I, Basel II did not modify the interpretation of capital presented in its earlier version. However, Basel II provided a complex framework, partly caused by the objections from regulatory authorities.

The era was marred by financial irregularities, instability, and underdevelopment. In the layout of the German’s Basel framework, regulatory authorities permitted excessive participation of banks in the decision-making process (Abuzarqa, 2019). As emphasized by Abuzarqa (2019), Basel implementation was not uniform and restricted effective compliance and performance. The author suggests that the technique used to incorporate risk offered flaws and could not integrate exposures from different risk assets. This imbalance influenced financial institutions to hold a degree of capital, which was insufficient to ensure their stability. Procyclicality of funding requirements represented another shortcoming of German’s Basel II regulation (Abuzarqa, 2019; Biondi & Graeff, 2020; Gabr & Elbannan, 2018; Schnabl, 2019). If the designs used to compute capital demands become too sensitive, funding demands grow as economic stability deteriorates. Based on this assumption, financial institutions face an increase in funding needs and market capitalization. Raising new funding in unstable conditions could be tested on the economic markets because of enhanced uncertainty and the high recapitalization cost.

Banks that comply with the Basel Accord did not adjust its lending power but instead strengthened the funding base by preserving excess income and considering investments with lesser risk. This assumption shows that the bank’s operations cannot determine the functionality or compliance with financial legislation. The global financial regulations attempted to consider other facets of banking tasks, contributing to economic system stability. The liquidity coverage ratio determines a bank’s capability to overcome liquidity stress within 30 days. The Net Stable Funding Ratio allows financial institutions to have a sustainable maturity framework of possessions and obligations over a more extended period.

Banking structures and regulations consider financial operations and organized monetary administrations, establishing the basis for guidelines of SIFIs, enforcing strategic capital demands for international and local investments. Banks’ expanding size provides additional challenges for banking regulators as it manages poor financial stability and lower capital ratios (Howarth & James, 2020; Jia, 2016). During the global financial crisis, most countries provided bank bailouts and other recapitalization strategies to ensure financial stability for local and international transactions. These inputs were strategically conducted to prevent the total collapse of investment opportunities, especially with cross border investors. While the majority of the steps were domestic, German, and Chinese authorities established new reforms. The situation highlighted the problem of ‘shadow investment’ that exposed informal connections amongst financial institutions and economic institutions that are not supervised by the managerial authorities.

Funding and risk choices in banking are affected by the law, private motivations, and market stress. The articles conduce a comparative empirical study on the impact of banking structure and banking regulations. The paper considers the German and Chinese banking reforms as it affects financial stability and economic development. The findings provide the empirical proof on the effect of prudential regulation on capital risk and an assessment of the evolution of the mechanisms driving financial institution’s regulations in Germany and China. The banking system’s reliability is a crucial aspect of applying the prudential framework, particularly regulations that control risky transactions and operations.

Bank choices on capital proportions can have repercussions for financial stability. Understanding how these choices are taken is of utmost significance. Risk-weighted assets have been a core subject in the banking reforms. Academic studies have been complementary due to financial instability. This study concentrates on comparative empirical research examining the function of banking structures and regulations as it affects financial operations and provides recommendations on developing academic findings. Empirical investigations reveal that banking structures and banking regulation influence financial stability from the investor’s perspective and aids the understanding of the variables motivating funding adjustments (Dadzie & Ferrari, 2019; Howarth & James, 2020; Jia, 2016; Tayssir & Feryel, 2018). The information helps regulatory authorities calibrate and modify regulation based on market trends and reactions to hostile banking operations.

The findings of the effects of structural and regulatory reforms for financial stability include banking resilience and risk sensitivity. Banks have improved their flexibility to potential financial meltdown by creating liquidity assets and generating capital. The adoption of stress testing enhances bank resilience, encourage financial outflows. Moreover, the developed market moved to secure funding sources and participate in less complicated assets. Empirical evidence suggests that banks have substantially strengthened their risk control and internal management practices. Although these modifications are tough to assess, managers point to the considerable scope for additional improvements, mainly due to the inherent uncertainties concerning risk-weighted assets. Even with the signs of recovery, investors remain skeptical towards financial institutions with a low-profit margin. Surveys indicate that some financial institutions must implement additional structural and reconstructive alterations to stay afloat (Jia, 2016; Liang, 2016). Assessing the effect of structural regulation is more challenging than with the commercial bank’s financial interactions. Nonetheless, banking structure modifications align with the aims of public governance and the reform procedure. Banks have become more concentrated with a global strategy and intermediate with domestic operations. As a result, direct relations between bank financing and derivatives have diminished. However, while the diversity of business models originating from banks’ repositioning has not been evaluated, market trends show a more stable global banking. Changes in banking resilience must be measured against the effect on business solutions.

Comparing Banking Structures and Regulations in Germany and China

By analyzing the banking structures and financial systems of developed and developing economies, the German banking system could benchmark financial stability. The German monetary system is seen as a bank-based, similar to the banking operations in China. Although the fragmented German banking business is categorized under the three-pillar system, this paper compares and contrasts banking operations as a component unit. The banking system of Germany is unquestionably one of the most secured financial institutions. However, the poor operation of the banking sector is not an excuse for financial equilibrium. Germany and China are committing themselves to enhance bank functionality and shift to profit-oriented institutions. The structural and regulatory comparison between the German and Chinese financial systems reveals specific outcomes (Jia, 2016; Knaack, 2017; Liang, 2016). The similarity is that the banking arrangement of both counties can be classified into distinct groups.

The German banking sector consists of special banks, cooperative houses, private banks, and commercial banks. However, the Chinese banking sector comprises cooperatives, state-owned public banks, and commercial banks. As stated above, the Deutsche Bundesbank comprises industrial banks, regional banks, private banks, and international banks classified as unaffiliated groups. Under this banking structure, the Chinese market stocks are uneven while German’s market shares are closely contested. In China, state-owned commercial banks (SOCB) occupy half the entire market share (Knaack, 2017). However, it has been reduced consistently because of the Chinese fiscal reform. Other industrial banks, which occupy the next most crucial share of the marketplace, constitute joint-stock industrial banks. Credit cooperatives houses constitute about 15 percent of the market share. Additionally, other monetary institutions become compensatory elements of the Chinese banking system. Foreign banks have 5 percent of the overall monetary assets. As found in Table 6, top banking markets with billions of Euro investments characterized Germany’s economic recovery route.

Table 6. German Banking Markets

Germany Banking Markets (EUR Billions)
Norddeutsche Landesbank 154
Landesbank Hessen-Thuringen 164
ING-DiBa AG 169
Byaerische Landesbank 221
Landesbank Banden-Wurttemberg 242
Unicredit Bank AG 289
COMMERZBANK AG 464
KfW Bankengruppe 500
DZ Bank 520
Deutsche Bank AG 1350

The banking industry revolution introduced several banking reports to avert sharp practices that negatively affect customers and the market environment. Several investors sought to establish a business presence using practical approaches that support performance. As a result, financial houses and investors were mandated to comply with banking regulations and avoid economic recovery practices. The expanding market influenced the development of all sectors of the German economy. The banking markets contributed to the growing economy with notable contributions. As found in Figure 7, Deutsche Bank AG declared 1350 billion Euros, while DZ Bank reported 520 billion Euros in 2018.

German Banking Markets
Figure 7. German Banking Markets

The case in Germany is different because the pillar of banking shared equal market power. It is critical to clarify that international financial institutions have been categorized as a single element of industrial banks, representing 15 percent of its market share. The number of the financial house has been developed over time. The above assumption accounts for changes in banking structure and regulations. In comparison with the 1970s, there has been a remarkable reduction in banks’ numbers with the private ownership structure. A range of studies has found that the ownership arrangement of finical institutions directly links with its profitability because the administration and control vary with the ownership structure. Another survey by Lasak (2015), revealed a reverse relationship between government ownership structure and financial performance. In another instance, the author showed that SOCBs generate more income that privately owned banks. The authors emphasized that capital funding, investor’s integrity, banking structure, and regulations contributed to the bank’s performance based on the ownership structure.

Under this perspective, the findings show that the ownership structures of banks differ between China and Germany. Germany’s private ownership structures control 45 percent of the market share, including regional banks, big banks, and specialized banks. China’s commercial banking structure is classified under government-owned, stage owned and, private management. The introduction of a private license law paved the way for private banking growth. Currently, privately-owned financial institutions in china account for 23 percent of the market share. The Chinese unique political situation has significantly influenced its banking policies and regulations. The government control a massive section of the banking system, and such influence enhances its domestic growth. The ongoing banking reforms in China will enhance privatization, corporate governance, and risk management. As a result, many public banks, particularly joint-stock industrial banks, are developing China’s banking sector. Although both countries have a large state in state-owned banks, Germany’s private possession is a vital part of the banking system compared to the Chinese ownership structure.

Banks Concentration and Competition in Germany and China

The subject bank concentration becomes prevalent with the consolidation of global banking reforms. Germany represents a case for bank convergence. Under this feature, the concentration ratio provides an in-depth analysis of the impact of banking competition and concentration between China and Germany (Kotz & Schmidt, 2017). Industrial organization (IO) permits various approaches to estimate the attractiveness of the banking industry from the conventional SCP model to advanced strategies. Therefore, the differences or similarities in Germany and China’s banking structure can be assessed with bank convergence and competitiveness. Germany’s banking structure has attracted foreign and local investors, while Chinese banking formation excludes foreign shareholders. Although the status of China’s economy is encouraging, Chinese regulations restrict internationalization (Dadzie & Ferrari, 2019; Knaack, 2017; Kotz & Schmidt, 2017). The political structure and governance in China have negatively affected its banking reforms in terms of global coverage. The Chinese administration adopted a flexible strategy to attract foreign intervention to save weak financial institutions. The findings show that capitalized banks do not switch off credit facilities when financial authorities pursue strict fiscal policies. The presence of foreign banks creates the needed competition for national banks unburdened with foreign exchange loans. Consequently, competitive pressure encourages local financial institutions to improve administrative and management policies. As found in Figure 8, the number of foreign credit institutions in China rose to 1100 while having over 2000 credit intuitions. As of 2006, the number of foreign banks was under 300 in China. The change in the number of foreign investors indicates the impact of the banking revolution and liberalization.

Foreign Banks by Concentration
Figure 8. Foreign Banks by Concentration

The German restructuring reforms improved the banking sector after the financial meltdown. The banking reforms on interest rates were manually set to enable convenient debt rollover. The efficiency in banking reforms facilitated a wide spread between deposit and lending rates to sustain fiscal profitability (Liang, 2016). However, the outcome created an inefficient allocation of funding. Financial markets’ growth has enabled the German regulatory bodies to maintain a secure financial-based but with limited investment options. For government-owned banks, credit intervention is stabilizing the ease of doing business. This approach has been effective in preventing financial stress. However, depositors are forced to reduce business investments, representing a significant redistribution of assets from an individual system to the banking industry. The German banking reforms suggest that financial liberalization agendas could prevent administration interference with its interest rates or ownership structure. In contrast

China’s fiscal liberalization reforms were founded on four specific pillars: the ease of doing business to encourage competition, financial innovation, free flow of cross border transactions, and liberalization of interest rates on loans and credits. Additionally, the interest rate is a competitive factor among financial associations. The current limitations negatively affect the most influential banks. The Chinese reform process has been accompanied by advancement in law, thereby creating a robust financial system that aligns with global practice (Liang, 2016). With the invention of the CBRC, banking reforms have been hastened credit quality, asset risk management, regulatory standards, and supervision. The Chinese banking reforms witnessed the introduction of the five-tier credit grouping following a global practice. These arrangements position the country on the global front as a major financial destination. As a result, Chinese banks have to reclassify loans following the global classification system. Parallel to the development of fiscal regulations, insolvency processes were enhanced. A new bankruptcy law created a more secure legal framework for security guarantees. The CBRC coordinated an intensive nationwide inspection of bank accounts to local government funding schemes steps were employed to maintain the LGFV loans and mitigate financial risks. Banking supervision was reinforced to avoid fraudulent practices for creditors and borrowers. The objectives of the Chinese banking reforms are similar to the German regulation on fiscal stability. The reform agenda shows that both countries seek greater cooperation with other financial institutions. As found in Table 7, the Chinese banking industry’s evolution began with reforms that focused on capital adequacy and operations.

Table 7. Number of Banks in China

Year Number of Banks
2008 3000
2009 3858
2010 3770
2011 3900
2012 3747
2013 3949
2014 4089
2015 4267
2016 4498
2017 4532
2018 4590
2019 3049

The Chinese unique political situation has significantly influenced its banking policies and regulations. The government controls a massive section of the banking system, and such influence enhances its domestic growth. The ongoing banking reforms in China will enhance privatization, corporate governance, and effective risk management. As a result, a growing number of public banks, particularly joint-stock industrial banks, are developing China’s banking sector. As found in Figure 9, 3000 banks were established in 2008, while 3049 banks began operations in 2019. The number of new banks explains the impact of banking operations on the Chinese economy.

Number of Banks in China
Figure 9. Number of Banks in China

This paper shows mixed outcomes on the effectiveness of liberalization in stimulating financial development. While the aggregate effect of financial liberalization appears to be favorable, there is a considerable divergence in results between countries and periods. Based on these findings, empirical literary works must identify the requirements of the effective liberalization process. Several investigations have concentrated on the relevance of efficient financial institution policy and supervision. Elkhuizen et al. (2018) argue that financial liberalization on banking efficiency depends on the quality of the financial system’s regulation and structure. This outcome is consistent with Krahnen et al. (2017) views that economic development is directly proportional to the effectiveness of the regulative banking framework, as gauged by compliance with the Basel Accord on financial supervision and insurance coverage. These outcomes support the analysis of appropriate monetary market regulation and guidance to prevent fraudulent practices (Jack et al., 2019). Thus, the German banking reforms prevent these establishments in competitive environments from handling more business risk than is officially approved.

A weak institutional setting and the lack of appropriate regulation or supervision portends danger and economic instability. The authors suggest that institutional quality and supervision are significant prerequisites for economic liberalization (Braun & Deeg, 2020). As a result, capital and interest rate liberalization promotes financial development. However, this conclusion can only be achieved in developed economies was reformed, financial institution policy and supervision are enforced and utilized. For emerging economics with reduced institutional quality and bank guidelines, interest rate and credit liberalization may not promote financial development. Thus, this finding recommends that without strategic banking reforms and a stable institutional environment, financial liberalization might not satisfy the economic growth assumptions. As found in Table 8, the top five state-owned banks include Landesbank Saar, Norddeutsche Landesbank, Landesbank Hessen-Thuringen, Byerische Landesbank, and Landesbank Banden-Wurttemberg.

Table 8. State Owned Banks

Germany State Banks EUR Billion
Landesbank Saar 15.9
Norddeutsche Landesbank 156
Landesbank Hessen-Thuringen 164
Byerische Landesbank 221
Landesbank Banden-Wurttemberg 242

As found in Figure 10, stated-owned banks contribute to the financial stability of the banking industry. These banks provide financial solutions, loans, and other securities. The slow pace of global development and the high level of unpredictability has affected the German economy, which is highly integrated into international trade and manufacturing chains. Germany’s financial system comprises private, cooperative, and public financial institutions. Commercial banks are the largest sector by possessions, representing 65 percent properties in the financial system. China’s monetary system is controlled by an inefficient and large financial market (Akhtar et al., 2019). The availability of data exchange channels sometimes destabilizes the market dynamics. Economic experts and financial professionals gather details from resources, including personal data and income projections that assist lending institutions in the decision-making process. These practices regulate and provide data that affect and change stock prices for gainful operations. However, for bank-based organizations in Germany and China, the opposite is achieved because bank managers gather insufficient data due to competitive operations’ secrecy. While economic markets provide more information to financiers in market-based structures than in bank-based arrangements, information dissemination is compromised with Basel regulation.

 German State Banks
Figure 10. German State Banks

Data efficiency, which can be accomplished in organized financial markets, does not necessarily indicate positive economic performance. Data disclosure enhances stock cost volatility, creating lower living standards in an economic system with active monetary markets. The compromise between allocative performance and risk sharing is essential for the structure of banking systems. Although there may be allocative benefits, the existence of price data from supply markets does not favor of a market-oriented system over a bank-oriented structure. In strong financial structures like Germany, publicly listed firms provide little details. The lack of data presentation is a strategic advantage of risk-sharing ratings. There is no academic assumption that data availability creates positive financial stability for allocative performance. Chinese reforms are encompassing and it affects data disclosure requirements. However, the significance of improving audit requirements cannot overshadow the relevance of a reliable financial system (Lasak, 2015). This assumption is a proof that China’s audit system makes it difficult to boost market data and efficiency. The Chinese banking reforms began with the implementation of regulations that controls FDI, which provides the required accounting framework to aid companies in attracting foreign investors.

The aim of banking reforms, regulations, and policies would be to discover and block liabilities in the fiscal system that might climax to a systemic threat. Collectively, banking policies guarantee the stability of the monetary system. Prudential criteria such as provisioning, risk classification, and vulnerability standards form a macroprudential guideline’s cornerstone. The quality of Basel III is the recognition to prevent financial risk via macroprudential strategies (Hofbauer et al., 2016). While monetary stability is an essential requirement to attain different financial sector policies, growth, and macroeconomic equilibrium, it is not a condition to accomplish these aims.

A loose fiscal policy might cause substantial financial sector concerns. Flawed monetary inclusion policies might raise indebtedness and destabilize the banking structure. The German banking structure has been characterized by the innovative deregulation data performance of financial companies under the premise of market efficiency (Biondi & Graeff, 2020; Hofbauer et al., 2016; International Monetary Fund, 2016). Dimensions of the banking reforms comprised the operational removal limitations on the banks’ capacity to conduct its responsibilities, including international banking, allowing non-bank entities to allocate funds and enhance collaboration of banking transactions. The fiscal innovation, such as organized funding and derivatives, was adopted by the nominal use of invasive supervisory guidelines to assume that regulation suppresses improvement.

Another characteristic of the German banking structure is the focus on institution-specific guidelines with poor macroprudential policies on the size and sophistication of large financial houses’ actions, banks’ vulnerability to unlawful activities, expanding leverage, and collaboration of financial institutions. This investigation recognizes the challenge of separating the need for bank services and supply drivers. However, under the aims of regulatory reform, financial institutions are becoming more risk-sensitive across borrowers. The comparative study shows that bank lending has expanded emerging economies by increasing sustainability issues and promoting macroprudential measures. The recommendations for policymakers must cover credit sustainability, profitability, banking consolidation, and information sharing. Low profitability concerns would deprive banks of the catalyst for economic development and promote risk-taking, thus encouraging aggressive risk control and supervision. Bank consolidation demands effective surveillance, risk control, and management. The findings show areas of progress and sectors that require change. The government should monitor the adaptation and development of risk-weighted assess.

Challenges for Regulators

After the financial crisis, the goal of banking regulations was to enhance the stability of the monetary system to defy macroeconomic consequences and minimize the odds of recurrence.

These measures increase banks’ oversight, set supervision of financial markets, protect shareholders, encourage reimbursement practices, and supply supervisory authorities with resources to prevent financial crisis. Although the aim of these measures facilitates economic growth, it creates outcomes such as high credit demands and liquidity criteria. Therefore, policymakers must safeguard against monetary imbalances by adopting traditional and macroprudential strategies. The rapid expansion of capital demands increases the risk of financial instability. Thus, regulators must assess the soundness of the balance sheets using economic capitalization approaches. Empirical studies have examined how financial tools such as capital requirements, deposit insurance, and banking operations regulations influence banks’ functionality. The investigations sometimes concentrate on one specific or examine the ramifications of many regulatory indicators. The most influential surveys within academic writings are investigations across multiple regulatory indicators and countries.

Minimum funding requirements are designed to alter the capital requirements for banking operations. However, the empirical analysis’s overriding conclusion is that the impact of monetary regulation could change with the amount of capital when it surpasses the regulatory. Consequently, regulatory demands might be enforced for banks with low credit buffers and approach the regulatory minimum. Though capital alterations are more successful when achieved on the liability, it becomes faster when done via risk modifications. Market restraint influences the size of funding buffers. Thus, uninsured financing and data disclosure are complementary elements of market regulation that include credit ratios of financial institutions banks. Another survey utilizing bank-level information correlates market restraint to management protection approaches, uninsured obligations, and risk exposures (Azeem et al., 2015). Capital reserves are higher when government assistance is reduced, and market discipline for riskier assets and data disclosure is higher with appropriate intervention. Other supervisory measures could have an impact on capital reserves by changing market restraint approaches and market dynamics. For example, bank practices and supervision negatively affect market restraint, which reduces capital researches but raise market authority.

Consequently, regulatory quality may decrease capital reserves since the adverse impact on market authority might cancel the constructive effect on market power. Parise and Shenai (2018) discover that the impact regulatory approach on capital reserves is optimistic. However, the overall influence is negative. Thus, the impact of banking regulations and its outcome on capital reserves depends on the structure of financial institutions and indirect types of supervision. To examine the effect of banking reforms on financial competitiveness, the authors utilize the adjusted Panzar-Rosse plan and discovered that the ease of foreign entry, banking restrictions positively influence financial competitiveness in the banking industry. The authors found a negative relationship between performance and bank competitiveness. The study shows that operational restrictions mitigate a negative correlation, while market discipline exacerbates it. The analysis showed that banking regulations influence the establishment of affiliates and divisions. (Krahnen et al., 2019) revealed that the US had few financial institutions due to restrictions on entry and the regulation for capital adequacy. Empirical results about the ramifications of microprudential guidelines have not been convincing. Bank analysts examine if regulatory policies influence banks’ risk-taking and financing behavior because these components affect business structures.

Empirical results do not present conclusive solutions about the policy consequences for a real economy. Bank reforms shifted its focus to deposit insurance because of the attributes that encourage risk-taking credit schemes. The findings show that explicit deposit protection facilitated risk-shifting operations in regions with political instability, poor economic autonomy, and high-level corruption. The impacts of regulatory strategies depend on the reform content and framework because it determines the consequences of policy execution. By implication, the. Therefore, an imbalance with regulatory standards for content and design can adversely influence the effectiveness of imposing regulations. The comparative strength of national regulators led to more excellent funding rates, but loan indebtedness and reduced returns on assets. The comparative tolerance of state authorities influences the probability of banks’ financial distress. Therefore, financial institutions change their compliance allegiance from administrators who restrict banking operations. Thus, the results of regulatory strategies might have restricted coverage or functioning in undesirable directions. Although regulatory goals seek to lower risk operations, studies have discovered that financial institutions adjust the capital reserves by increasing operational risk. Furthermore, banks’ capital creation could be procyclical because investors may lessen its credit reserves, which has a negative impact on economic recovery.

The review of Basel regulations focused on the impact of such changes on banking operations and growth. The recommendations of such reviews cautioned against the effect of regulatory deficiencies and the long-term impact on economic recovery. Further refinements of Basel regulations were accompanied by the specific calibration of the possible effect on banks and credit risk burdens. Studies have demonstrated the complementary function of market limitations for regulation and banks’ propensity to adapt their funding criteria to high capital alterations. A review by Kusairi et al. (2018) expands the evaluation of this literature to the consequences of capital demands. Further conclusions link to the effect of regulation in facilitating monetary shocks, aggravating banks’ procyclical nature by enforcing risk-based protocols, and fiscal policy impacts. The authors assert that financial institutions shifted their resource or credit composition from mortgages bonds after a new capital condition. Consequently, loan discounts from small banks harm the economy than discounts by big banks. Thus, generating instructions for a stable banking environment may attain more than composing extensive necessity lists.

The German banking system has evolved with the competition, securitization, global incorporation of economic markets, and improvements in technology. The German banking industry exhibits a range of features such as depositors’ relevance and harmful bank concentration. Although banking reforms create pressure for structural modifications in the German financial platform, significant disruptions or structural fractures seem somewhat improbable. The principal forces motivating the need for non-profit businesses like the legal platform for industries may be expected to change slowly. The fundamental tendencies ought to be strong institutionalization of economies and a prominent part of financial markets and securitization. The diminishing value in monetary intermediation and the expansion of industry volume shows the significant predisposition in German banks. The predisposition triggers an increase in interbank operations with other monetary intermediaries and securities markets. Based on these assumptions, financial policy would focus on the rate of interest regulations. With the growing significance of securities trade and other banking portfolios, interest rate fluctuations and policies will affect credit and capital assets.

Outlook

The comparison study explored the implications of financial regulations on operations and growth. Apart from financial stability and structure provides the structure for economic development and investment opportunities. Since internal regulations, systems, control, and policies disrupt banking operations, operational risk management is critical for financial stability. A practical operational risk management approach under Basel regulation begins with accepting modifications and new approaches. A financial institution’s facilities for functional and operational risk assessment must utilize automated operations to assess emerging trends and improve information flow to appropriate individuals for timely decision making. Banks can likewise discover recent advancements in robot procedure automation (RPA) and cognitive innovation to restructure and automate activities such as data pool, transmission, and safety. Armed with information regarding internal losses, financial institutions will be positioned for advanced capabilities in big data analytics and predictive risk intelligence.

Under the modified SA-CR, the regulation of RWAs has a direct effect on capital requirements. Prospective effects of the banking structure and regulations include moderations in capital requirements and bank exposures. Alterations in capital demands depend on SA usage, exposures, and the quality of risk with it each capital position. Many European nations regulate the percentage to which SA can be applied because the risk weighting for direct exposure is a critical component that requires careful revision. Thus, the German Banking reforms prevent and block liabilities in the fiscal system that might climax to a systemic threat. Collectively, the banking structure and banking regulations guarantee the stability of the monetary system. Based on both countries’ empirical examination, prudential criteria such as provisioning, risk classification, and vulnerability standards form the cornerstone of microprudential guidelines. The impact of banking structure and banking regulations on the economic outlook can be evaluated based on risk-based assets and liquidity terms. The shift from Pillar1 has been daunting for financial investors. Some of the new regulations are relatively obscure in banking operations.

Although the requirements are enhanced with the adoption of funding buffers and interpretation of the CET1 needs, the regulations are not differentiated for specific risk exposures. The distinction among entities relies on the CAR level, RWAs estimation, credit history, operational risk, and market requirements. For example, under the CVA framework, financial institutions with considerable OTC derivatives should be affected, and it validates the impact of banking structures and regulations on banking operations. As a result, financial institutions are adopting collateralization methods and improvements in the netting capability under the new regulations. The strategy encourages financial institutions to use CPPs in clearing OTC risk exposures. The economic outlook shows that market risk developments may influence banking organizations such that those that conduct high volume exchange would encounter difficulties in complying with the FRTB framework. Although the consideration for correlations and diversification could improve the bank’s risk sensitivity ratings, its design will create challenges in the operational implementation. The modification of the banking structure and regulations are based on traditional models. A credit adequacy view might positively impact some organizations that are experts in a specific array of items. However, for financial institutions with models that are less active in trading and rely on considerable maturation and rate improvement, the prospective shift to Pillar 1 might be significant. The non-risk-based asset is delicate to the investment model of a financial organization. Non-risk capital model is structured to mitigate the impact of failed leveraged financial houses. The framework counteracts the impact of sensitivity failures that causes massive collapse across other business investments.

The Basel Accord implementation comes with various challenges. Harsh regulations do not cause these challenges, but the complexity of the framework. Therefore, the comparative study between China and Germany must evaluate the Basel framework to understand the complexity of the regulatory process. The evaluation will highlight the challenges of the approach itself and the difficulties of implementation. The gaps in the Basel Accord create difficulties for emerging economies. The availability of liquid possessions for financial institutions may not comply with the liquidity requirements of Basel III.

Consequently, Basel II and III regulate monetary risks that are irrelevant in less complex monetary systems. As a result, the guidelines of global requirements become too rigid for emerging economies. Basel II may not regulate macroeconomic challenges to economic stability. Another challenge of the Basel Accord raises from the aggravated information exchange between regulators and bank officials. Basel implementation requirements for information exchange have not been successful, given the limitations of resource agents. Internal ratings and macroprudential components of the regulation. The intricacy of these requirements intensifies data exchange between authorities and bank officials that locate gaps for supervisory arbitrage. These problems are significant where salary differences encourage compliance issues for regulatory authorities (Kusairi et al., 2018; Tanda, 2015). Regulators recognize the requirement to boost corporate administration, enhance regulatory freedom, and strengthen the framework for prompt banking supervision, restorative action to secure monetary stability.

Basel regulations symbolize a complicated monetary governing routine, which may not mean a practical framework (Braun & Deeg, 2020). The Basel implementation may create a decline in the quality of credit compositions because bank managers may avoid risk sectors that could induce economic growth. The Basel III liquidity regulations could raise the cost of ending because the rule mandates banks to match such exposures with long term responsibilities (Abuzarqa, 2019). International financing creates motivations for regulatory authorities beyond the Basel framework to adopt best practices, even when there is a huge void between international criteria and the practical laws that are optimal for domestic supervision. German and Chinese regulators acknowledged this gap and adopted the best practice for international criteria. Nonetheless, since the process of adjusting global standards is challenging, it is preferable to engage investors with several phases of implementation.

Conclusion

Banking reforms and regulations and policies would aim to discover and block liabilities in the fiscal system that might climax to a systemic threat. Collectively, banking policies guarantee the stability of the monetary system. Prudential criteria such as provisioning, risk classification, and vulnerability standards form the cornerstone of microprudential guidelines. The quality of Basel III is the recognition to prevent financial risk via macroprudential strategies. While monetary stability is an essential requirement to attain different goals of financial sector policies, growth, and macroeconomic equilibrium, it is not a condition to accomplish these aims. While practical guidelines enable financial expansion, additional procedures must be conducted to achieve development. Sometimes it becomes challenging to balance these concerns because financial industry policies can affect financial equilibrium. The effect of changes and reforms in the banking structure and banking regulations of both countries concerning the sector’s stability is a topic for further research. There is a need to conduct comparative research on the impact of financial policy GDP and cost equilibrium. Among the comparative indicators in Germany and China, this thesis found a correlation between the banking structures and regulations. The implementation of the Basel accord and global financial standards has been achieved. The banking reforms among commercial banks, savings banks, and the Chinese Central Bank shifted adjustments from observed variables. For example, the pressure on expansion after-tax earnings would strongly influence the bank’s interest margin. The banking businesses in both countries are comparable according to the funding adequacy assessment.

Dimensions of the banking reforms comprised the operational removal limitations on the banks’ capacity to conduct its responsibilities, which include international banking, allowing non-bank monetary entities to tackle monetary intermediation, allocate funds, and enhance collaboration of banking transactions. Collectively, banking policies guarantee the stability of the monetary system. This paper shows mixed outcomes on the effectiveness of liberalization in stimulating monetary development. While the aggregate effect of banking structures and banking regulations on financial liberalization. Based on these findings, empirical literary works must identify the requirements of the effective liberalization process. Several investigations have actually concentrated on the relevance of efficient financial institution policy and supervision.

This investigation recognizes the challenge of separating the need for bank services and supply drivers. However, under the aims of regulatory reform, financial institutions are becoming more risk-sensitive across borrowers. The comparative study shows that bank lending has expanded emerging economies by increasing sustainability issues and promoting macroprudential measures. The recommendations for policymakers must cover credit sustainability, profitability, banking consolidation, and information sharing. Low profitability concerns would deprive banks of the catalyst for economic development and promote risk-taking, thus encouraging aggressive risk control and supervision. Bank consolidation demands effective surveillance, risk control, and management. The findings show areas of progress and sectors that require change. The government should monitor the adaptation and development of risk-weighted assess.

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Paperroni. 2022. "Banking and Banking Regulations in Germany and China." July 10, 2022. https://paperroni.com/banking-and-banking-regulations-in-germany-and-china/.

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