Author: Hee-Sik Kim(The Bank of Korea)

Abstract

This paper examines structural features of German financial system’s internationalization process and draws implications. It finds the structural features as follow. First, big banks and community banks such as savings banks and credit cooperatives have different approaches to internationalization of their businesses, resulting in a division of labor between them for internationalizing the financial system. Big banks expand businesses globally to realize economies of scale and scope. Meanwhile, community banks maintain their roles in supporting innovation efforts by small and medium-size enterprises. The paper finds that, through relationship banking and networking, the community banks could overcome constraints imposed by the ‘regional principle’ and were able to provide long-term loans to small and medium-size firms for the benefits of their regional economies including themselves. This helps make regional industries internationally competitive and regional innovation systems strong. Second, German firms, banks, and insurance companies absorb the excess of savings over investments stemming from booming exports and stagnant domestic demands to invest in foreign markets. This helps prevent the persistent current account surpluses from expanding domestic credits and appreciating non-tradables including real estates. This mechanism underscores stability of property prices and rents and, through these, international cost competitiveness of German firms. By channelling trade surpluses to overseas investments, the country seems to have established new income sources for the ageing population in years to come albeit at some costs of increasing exposure to the global financial risks. Last, foreign direct investments by German financial and non-financial firms largely complement rather than replace innovative capabilities of domestic firms, partly due development of community banking.

Thus, the German financial system has set an exemplary path for the countries that have gone through export-led growth and capital account liberalization like Korea to follow suit in internationalizing their financial systems. In particular, it has shown financial integration compatible with the strengthening of manufacturing prowess.