School of World Economy and International Affairs
Foreign Languages Department
Comparative analysis of the banking systems in the United States and Germany
Emma A. Mkrtchyan
Prof. Valentin M. Kudrov, PhD
Prof. Elena V. Anashkina, PhD
The paper compares the banking system of the United States of America and Germany. It is aimed to state differences in banking structures and reveal their efficiency. The first part of a research examines the banking structure and the financial crisis in the United States of America. The second part is dedicated to the similar subjects in Germany. The third part of the paper emphasis the striking points in efficiency of both banking systems based on the method of a comparative analysis.
Key words: banking system, Federal Reserve system, regulation, central bank, crisis Contents
Introduction…………………………………………………………………….…4 1. The United States of America………………………………...………….…5 1.1. The structure of the banking system………….……………………….…….5 1.2. Financial Crisis in the USA…………………...…………………………....6 2.Germany……………………………………………...…………………….7 2.1.The structure of the banking system…………………………..……….......7 2.2.Financial Crisis in Europe…………………………………………………9 3. Striking points……………………………………………………………10 Conclusion……………………………………………………………………….11 References……………………………………………………………………….13
Banking systems have always played an important role in any economy, as they are an essential part of stability and welfare of a country. The question of efficient banking systems is especially topical today because of the unstable situation on the global market. Firstly, the financial crisis that started in the United States in 2006 rapidly acquired global scale. Then it was followed by the European crisis in 2009, starting with Greece revealing its economic problems. The paper takes a closer look at the banking systems of the United States and Germany, as countries with the strongest economies in the world and analyzes the details of the above-mentioned crises. Many researches are dedicated to this topic in order to find out the causes of the crisis, which makes this paper relevant. The paper brings novelty by providing comparative analysis of two absolutely different banking systems. The subject of the paper is banking systems in developed countries. The topic goes for banking systems of the USA and Germany. Comparing two banking systems is the main purpose of the paper. To achieve this purpose the following objectives are set: * describe the srtucture of banking systems,
* analyze causes of crisis,
* compare the taken measures,
* provide forecast.
The thesis of the synopsis is that despite America’s economy being so strong, Germany’s financial system is more stable. This paper can be used as a source during the classes, which defines her practical applicability. The methodology of the paper is the method of a comparative analysis based on library and Internet recourses. As for literature review - except for two books that describe the basic structure of banking systems, all information is from 2010 to 2012 as economy has been trough several crises lately.
1. United States of America
1.1 The structure of the banking system.
The Federal Reserve System is a central banking system of the United States that is composed of five parts: 1. The Board of Governors
2. The Federal Open Market Committee (FOMC)
3. Twelve regional Federal Reserve Banks
4. Numerous other private U.S. member banks, which own required amounts of non-transferable stock in their regional Federal Reserve Banks. 5. Various advisory councils
The Board of Governors consists of 7 members appointed by the President for 14 years. It is the main body of the Federal Reserve System whose main function is overseeing 12 regional Federal Reserve Banks and implementing monetary policy. The Board is obliged to provide the Speaker of the House of Representatives with the annual report about their work. The Federal Open Market Committee consists of 12 members with the right of voice. Its main function is supervising open market operations. Also the committee is charged with operations on the foreign exchange market. At the regular meetings the members discuss such issues as dynamics of prices and income, employment and production, investment in business and equipment and foreign currency market. The FOMC includes 12 members – presidents of the regional reserve banks. According to Maslennikov (2001) as the following FOMC recommendations’ are not binding for the Board of Governors, the Committee doesn’t posses too much power and hardly ever attracts any attention. (p. 96) The whole territory of the United States is divided into 12 Federal Reserve districts; their boarders do not coincide with the ones of the states. Each district is operated by its own reserve bank and it’s branch. These 12 Banks are responsible for implementing the monetary policy set by the FOMC. Each Federal Reserve Bank is also charged with the regulation of the commercial banks within its own particular district. The principal duties of the Fed’s authorities are primarily connected with the provision of favorable monetary conditions for all kinds of commercial activities like agriculture, manufacturing and trade. Providing loans to banks (usually big and important ones), open market operations and setting the interest rate is also among their functions. Shenin (2010) states that today in the United States there also exist following types of financial institutions: Commercial banks. The most numerous group composes an essential part of the US financial markets. These banks are concerned with short-term trade finance, trust services and payment transactions, including transactions with checks and credit cards (p.82). Activities of investment banks cover three areas: a) all types of securities trade b) emission function for those who want to raise capital c) consultations on mergers, acquisitions, etc. Strictly speaking, investment banks are not real banks, as they do not provide banking functions like taking deposits and lending (Veshkin & Avagyan, 2004, p.92). Thrift institutions are financial institutions that obtain the majority of its funds from the savings of the public. Credit unions are member-owned financial cooperative, democratically controlled by its members, and operated for the purpose of promoting thrift, providing credit at competitive rates, and providing other financial services to its members. 1.2 Financial crisis in the USA (2006 – present days).
Causes. The collapse of the real estate market in 2006 was the close point of origin of the crisis. But large default rates on subprime mortgages cannot account for the severity of the crisis. Rather, low-quality mortgages acted as an accelerant to the fire that spread through the entire financial system. The possibility exists that the banks did not disclose to mortgage insurers the risks in the instruments they were agreeing to insure against default. Another point — the billions of dollars in credit extended by Wall Street to aggressive mortgage lenders that allowed them to continue making questionable loans for a long time. Also banks are blamed for bundling thousands of home loans into securities that were then sold to investors such as pension funds, mutual funds and insurance companies. So it is possible to say that American banks are partly to blame for financial crisis that affected the whole economic system in the world. Measures. In general, the Fed took an extraordinarily interventionist approach to the global financial crisis. In September of 2007, the Fed responded to the subprime mortgage crisis by using its traditional tools to try to increase the supply of credit in the market. Specifically, the Fed lowered short-term interest rates dramatically, cutting the federal funds rate gradually until it reached a rate of between 0 and 0.25 percent. The Fed also used its open market operations (OMOs) to inject billions of dollars of liquidity into the banking system (Dozark-Frideres, 2010). But all these measures taken by the Fed were not effective enough to pull the country out of crises, as the situation on the financial market of the USA is still very unstable. Forecasts. Many scientists predict the crash of the whole economy of the country and they name several reasons that are inseparably with the banking crisis: * American dollar may lose its status of world’s reserve currency. * Enormous external debt.
* Hyperinflation (Hera, 2012).
However despite American banking system being still unstable, according to experts’ forecast 2013 is going to be more pleasant to the country as U.S. dollar is expected to strengthen its position on the world currency market. 2. Germany
2.1 The structure of the banking system in Germany.
As in all developed countries the banking system in Germany is two-level. The first level is held by the Central Bank of Germany – the Deutsche Bundesbank, while the second level is represented by commercial banks. Officially the Bundesbank does not hold responsibility for the stability of the financial system in the country, as well as it is not the creditor. According to the Statute of the European Central Bank, the Bundesbank participates in four main scopes of activity mainly in cooperation with the European Central Bank (Maslennikov ,2001, p.167): - issues money;
- is a clearing house for the commercial banks and their regulator; - acts as a states’ banker;
- controls currency reserves.
The Bundesbank is organised on a decentralized basis and consists of the central office (located in Frankfurt am Main) with 14 departments, nine regional offices, known as The Bank deutscher Länder (Bank of the German States) and 47 branches in the largest cities. The supreme governing body of the Bundesbank is the Executive Board. It consists of 6 people: the president, the vice president and one additional board member, all of whom are brought forward by the German government and three additional members brought forward by the Bundesrat. All members of the Executive Board are appointed by the President of Germany (Veshkin & Avagyan, 2004, p.64). The Central office is responsible for the management of the Bank and for solving the principle tasks. The regional offices are responsible for regional tasks. The branches are responsible for operational tasks. They are subordinate to the Regional offices in control of their region. They provide euro banknotes and coins to private authorities and banks. They also process their cashless payments and supply local credit institutions with direct access to the central bank credit. According to Maslennikov (2001) one of the distinguishing characteristics of Germany’s commercial banks is their universality. Almost every bank offers a full range of banking services (p.198). Another feature of commercial banks in Germany is the dominance of short-term lending. Banks are organized as joint stock companies whose capital is strongly "pulverized" within the country and abroad. Banks offer financial services to both corporations and customers in the private business sector. Their services include trade, mergers and acquisitions, management of risky products such as derivatives, corporate finance, wealth management, retail banking, investment management, etc (Jukov, 2011, p. 579). Another type of commercial banks is thrift institutions whose main task is providing proper services of saving and lending money to people who live on a given territory. 2.2 Financial Crisis in Europe (2009 – present days).
Causes. In 2009 the world’s focus shifted from the global crises to Europe when Greece declared that their economy is about to collapse due to an enormous external debt. Greece was followed by Ireland and Portugal. Debt in these countries has become a burden not because each enjoyed a decade of low interest rates and was then hit by the financial crisis. Easy credit fuelled debt in households and the banking sector (Dozark-Frideres, 2013). We can state that banking systems of Greece and other troubled countries were among the reasons of the crisis, but it is obvious that banking system of Germany had nothing to do with it. Measures. Germany has always handled economics a little different from most other countries. Even though Germans enjoy consumption as much as people from other nations, they tend to only spend the money that they have, and they don’t like to borrow money or use credit cards. (Bareto, 2012). The moment crisis bailed out it became clear that Germany was about to become money supplier for these countries. Since the beginning of the crisis German’s banks provided Greece and Portugal with several money tranches. The European Central Bank (ECB) lead by Germany banking system has lowered interest rates and provided cheap loans of more than one trillion Euros to maintain money flows between European banks. On 6 September 2012, the ECB also calmed financial markets by announcing free unlimited support for all Eurozone countries involved in a sovereign state bailout program. So it can be seen that the European crisis did not really affect German banks. Moreover it is Douche banks that are expected to lead troubled countries of the European Union out of crisis. Forecast. There are now many discussions concerning Germany leaving the Eurozone. In case that happens the forecasts are following: if Germany were to leave the European Union, Germany would not have to worry about large debt. As Germany is also one of the strongest economies in the world with a well-regulated banking system, it would be relatively easy for it to leave the euro. Even though the German exports might suffer at the beginning of the switch, it would quickly regain its strength since it is mainly based on quality and not on price (Bareto, 2012). Still the majority of financial experts doubt the bail out of Germany, as that may leave to the break up of the whole european zone. Anyway the forecasts for Germany's financial future are positive in any case. 3. Striking points.
So after analyzing given information it is possible to emphasize several crucial differences between banking systems of two countries. First of all the system of the U.S. central bank, or the Federal Reserve system is significantly distinguished from the Bundesbank, Germany's central bank. The Fed has five levels - the Board of Governors, 12 district reserve banks, U.S. member banks Federal, Open Market Committee and Federal Advisory Council. Unlike the Federal Reserve, the Bundesbank is officially responsible for the stability of the financial system of the country; it is also not a lender of last resort, as it is part of the European System of Central Banks (Veshkin & Avagyan, 2004, p.92). Another difference is the attitude of these countries: even though both countries tend to consume a lot, Germany only spends the money it has, while America does not hesitate to borrow. This is a very important point, as the US crises took place when local banks started making money out of air by providing the billions of dollars in credit to aggressive mortgage lenders that allowed them to continue making questionable loans for a long time. Of course such situation makes banking system of America less efficient. The analysis of causes of crisis in both countries demonstrates the disability of proper regulation of the banking system of the US that allowed the Wall Street to make so much harm to the whole economy of a county. Moreover, measures, taken by a the US were not quite effective, as the crisis is still so strong that allows to make forecasts about the crash of American financial system (Hera, 2012). On the other hand Germany had nothing to do with the beginning of the European countries. In fact despite unpleasant economic situation in the EU, Germany still remains a country with the strongest economy. It is possible to say that the future of the whole Union depends on Germany’s decisions. Such stability perfectly demonstrates the efficiency of the banking system of a country (Bareto, 2012). 4. Conclusion.
In this paper two absolutely different banking systems were analyzed. Though American system was always considered to be strong, latest events showed that there are many week points that need to be considered. First of all it is an attitude towards consumption. Maybe the US banking system should involve more governmental regulation to avoid situations that may cause financial crisis. The major advantage of banking system in Germany is stability. Even during the severe European crisis the country managed to escape some serious consequences. Probably, it is high time the United States of America took a closer look on banking system of Germany and changed something in its own.
Bareto, J., Zakaryan, S., Kamuf, S., & Klebe, M. (2012). Germany’s Role in the European Debt Financial Crisis. In Honors program University of Florida. Retrieved January 19, 2013, from http://www.honors.ufl.edu/apps/Thesis.aspx/Details/1852 Dozark-Frideres, Taryn. "How Did the Central Banks in the U.S. and Europe React to the Global Financial Crisis?." The university of Iowa Center for International Finance and Development. N.p., 10 Mar. Web. 19 Feb. 2013. http://blogs.law.uiowa.edu/ebook/uicifd-ebook/part-5-v-how-did-central-banks-us-and-europe-react-global-financial-crisis Hera, R. (2012, November 20). Finansovie prestupleniya - eto sistemni risk dlya SSHA. In Goldenfront.