Banking in Europe: The Emerging Shape Special Focus on Germany

The financial crisis contagion has spread eastwards from the US and the European anking industry has been through a roller-coaster ride. While government bail-out plans have been effective to an extent, the European banking industry is bound to experience a slowdown in the coming months. This article explores the key trends in the European banking industry with a special focus on the banking industry in Germany.

The financial crisis that originated in the US subprime market in August 2007, has left the entire financial world gasping for breath. While initially several industry analysts had suggested that Europe would remain untouched by the credit crisis, this has not been the case. Europe has experienced a spate of bank failures, the first of which was Northern Rock in the UK. Some of the other casualties have been Iceland’s Glitnir bank, Germany’s Hypo Real Estate Holding and UK’s HBOS. Belgium’s largest banking group, Fortis, needed the intervention of the Belgian and Dutch governments and the sale of some of its assets to French giant BNP Paribas, to stay alive after getting into difficulty post purchase of Dutch bank ABN Amro. It is estimated that with this deal, BNP Paribas has become the largest bank in Europe.

While the credit crunch virtually brought the economy of Iceland to its knees, governments in the UK and several other countries in Europe including France, Germany, Spain and Italy, have announced bailout packages that involves part nationalization of the their banking sector. The British government has decided to inject €47.6 billion of public money into three banks HBOS, Lloyds TSB and Royal Bank of Scotland. France has announced a €320 billion rescue plan while the German government’s rescue package includes €80 billion in fresh capital and €400 billion in loan guarantees.

Austria’s Chancellor Alfred Gusenbauer recently said that his government would provide up to €85 billion ($114 billion) in inter-bank loan guarantees and up to €15 billion ($20 billion) in equity to support the country’s banking sector. The government had already announced a guarantee for all personal bank savings, applicable from 1 October 2008.

An economic recession is very much on the cards and these events will no doubt have both a short and a long term impact on the European banking sector. However, it must not be forgotten that since the 1990s, the banking industry in Europe has experienced a period of rising profitability despite not-very-strong economic growth in many instances. It is believed that the fundamental developments of the past few decades will continue to shape the banking industry in the coming years.