Abstract
Having established the special nature of the East German transition, we turn to an examination of what happened following GEMSU. The chapter is structured in three sections. In the first, we describe the economic collapse that occurred after GEMSU, and outline its causes. In addition, we outline the approach that was adopted to restructure and privatise East German industry and the problems surrounding ownership rights which hindered this process. In the second, we outline the institutional framework that developed after GEMSU, primarily by examining the West German system upon which it was based. The framework in the East, what we term the ‘German Risk Management Framework’ (GRMF), involves a range of financial flows and risk-sharing arrangements between the public and private sectors. In the third, we examine the banking system in the East specifically by first looking at the structure of the West German banking system (what it came to reflect) and then examining how the East German banking system was rapidly transformed to West German standards.
As communist countries went — Westerners never learned more about communism than they did from its disintegration — the GDR was long regarded as the soundest until the opening of the Wall revealed its glaring weaknesses for all to see. (Peter H. Merkl, 1993)
The universal banking system in Germany has proved itself over the years. Its benefits have been demonstrated particularly in difficult phases of Germany’s economic development under the special German conditions: in the early stages of industrialization, during the Great Depression, when banks converted many bad loans into shareholdings, after World War II, when they went beyond their customary role of lender to carry a share of the business risks, and in the recent past, through the swift construction of an efficient, market-oriented banking system, which did not exist in the former socialist GDR. (Manfred Weber, 1995)
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Notes and References
Akerloff et al. (1991, p.1).
Sinn and Sinn (1992, pp.29–30).
Bofinger and Cernohorsky (1992) present comparative data. Also see Giersch, Paqué and Schmieding (1992, pp.266–7) and Siebert, Schmieding and Nunnenkamp (1992).
Dornbusch and Wolf (1994, p.161). The OECD (1990–;1, p.14) placed the fall in real GDP at 31.4 per cent in 1991. The higher early drop was due to significant inflation in the East after GEMSU, particularly for consumer goods. Inflation levels in the East were: 14.2 per cent in 1991; 11.2 per cent in 1992; 8.8 per cent in 1993; and 3.4 per cent in 1994 (German Brief, 13 January 1995, p.7).
Dornbusch and Wolf (1994, p.161).
OECD (1990–;1, p.42). See Siebert, Schmieding and Nunnenkamp (1992, p.93) for a detailed, sectoral breakdown.
Sinn and Sinn (1992, p.29). Also see Akerloff, et al. (1991, pp.6–7).
Akerloff, et al. (1991, p.8).
Sinn and Sinn (1992, p.29). Their calculation does not include, however, the roughly 700 000 people who had taken early retirement up to the end of 1991, or the roughly 540 000 commuters who worked in West Germany. The OECD (1990–;1, p.50) presents similar calculations.
Dornbusch and Wolf (1994, p.161).
Deutsche Bundesbank (1990b, p.15).
The following allowances were made. The rate of M 1 = DM 1 was offered: (a) to balances not exceeding M 2000 for persons born after 1 July 1976; (b) to balances not exceeding M 4000 for persons born between 2 July 1931 and 1 July 1976; and (c) to balances not exceeding M 6 000 for persons born before 2 July 1931. For details, see Deutsche Bundesbank (1990c).
Deutsche Bundesbank (1990b, p.16).
An in-depth look at events leading up to GEMSU from the Bundesbank perspective which focuses on the divisions between then Bundesbank President Karl Otto Pohl and German Chancellor Helmut Kohl can be found in Marsh (1992, pp. 196–27), and a more concise account in Görtemaker (1994, pp.235–8).
Not all were agreed on this point, even though the black market exchange rate had been more than 4 M = 1 DM prior to GEMSU. Sinn and Sinn (1992) argued that based on purchasing power of the Mark in the East, the conversion rates did not adequately compensate East Germans. This view was controversial, however, and many estimates of purchasing power were offered. A useful summary table of these is in Sinn and Sinn (1992, p.54).
Görtemaker (1994, p. 145). As an aside, an opinion poll conducted a day before the announcement predicted that the SPD would win a clear majority of the vote, with expected support at more than twice the level projected for the CDU.
Dornbusch and Wolf. (1994, p.158).
Sinn and Sinn. (1992, p.70).
Autarky was evident on an aggregate level in the closed nature of the GDR economy. Exports in the GDR represented 20 per cent of GDP while in West Germany exports were 35 per cent. (OECD, 1990–;1, pp.26–7) It was also evident on a Kombinat level, with the Kombinate each remaining relatively self-sufficient, what von Thadden (1994a, p.4) described as ‘an economy within an economy.’
The OECD (1990–;1, pp.86–91) outlines the reasons for restructuring.
According to the OECD (1990–;1, p. 16), the Kombinate increased their share of net product in East Germany from 55.3 per cent in 1950 to 95.7 per cent in 1988. During this period, in 1972, the Honecker government had nationalised virtually all of the existing SMEs. Distribution in the labour market showed a similar monopolisation by the Kombinate.
In 1989, services in the East accounted for 5.5 per cent of the total value added in the economy, whereas in West Germany they accounted for 29 per cent. Mining and manufacturing accounted for 53.4 per cent in the East against 35.9 per cent in West Germany (OECD 1990–;1, p.24) This, of course, explains why the service sector was able to grow after GEMSU.
Siebert et al. (1992, p.71).
Extensive survey research (Akerloff et al, 1991) suggested that this reasoning was misguided. That is, East Germans were more concerned with the prospect of unemployment than with lower wages — in other words, raising wages was not what East German workers would have preferred (given the unemployment levels it was to bring).
In economic terms, Akerloff et al. (1991, p.16) stated the problem simply: ‘at prevailing Eastern wages and world market prices most Eastern firms that produce tradable goods are unable to cover even their short-run costs of production.’ Hallet, Ma and Mélitz (1994) used simulations — based on the IMF’s MULTIMOD — to demonstrate that the unrealistically high wages would take decades to correct.
OECD (1990–;1, p.51, 1992–;3, p.61).
This phenomenon suggests that wage inflation might have occurred no matter the exchange rate that was applied.
Akerloff et al. (1991, pp.56–64) list reasons for the wage increases, including: (1) that economic union created a single labour market where only one wage could prevail (and where West German wages did not fall); (2) that East German workers had a strong sense that for equity concerns they should be paid the same as West Germans; (3) that East German unions put strong pressure on Eastern wages; (4) that West German unions placed similar pressure on wages to protect West German jobs — i.e. slow migration, and enhance union solidarity East and West; and (5) that management offered no effective resistance to demands for higher wages. Schrettl (1992, p. 153) extends the latter view, arguing that the high wages served as a bargaining point: ‘In resisting wage demands, employers would have deprived themselves of the twin advantages of (i) being able to buy the Treuhandanstalt’s assets relatively cheaply, and (ii) maintaining public pressure on the government to continue existing or even provide further subsidies for investors and employers in eastern Germany.’
Ardagh (1991, pp.462–5) offers a vivid account of the poor state of the environment in East Germany, and the issues involved in its improvement. Also see Merkl (1993, pp.249–52).
OECD (1990–;1, p.89).
Akerloff et al. (1990, pp.26–30) offer a thorough analysis of the low productivity levels in East Germany after GEMSU.
The study measured productivity (as a percentage of West German productivity) on a sectoral basis as follows: Fuel and energy (45 per cent); Chemicals (55 per cent); Construction materials (40 per cent); Steel industry, non-ferrous metals (45 per cent); Mechanical engineering and construction of motor vehicles (55 per cent); Electronics, data processing, precision engineering and optical goods (50 per cent); Textiles (55 per cent); Food Industry (40 percent) (Deutsche Bank, 1989, pp.8–11).
OECD (1990–;1, p.25).
Ibid., p.43.
Beintema and van Ark (1993). They found, however, that performance was relatively good in certain sectors, including food products, beverages and leather products, with productivity levels above 50 per cent of those in West Germany, while machinery and transport equipment sectors performed poorly, with levels of just over 20 per cent of those in West Germany.
Dornbusch and Wolf (1992, p.239).
Akerloff et al. (1991) argued that the loss of product markets represented the second crucial negative effect — in addition to the ‘price-cost squeeze’-on the East German economy.
OECD (1990–;1, p.29). Also see Siebert, Schmieding and Nunnenkamp (1992, p.71).
See Sinn and Sinn (1992, pp.37–9) for a discussion of this issue. This dilemma was common to all ex-CMEA members.
Sinn and Sinn (1992, p.38).
Deutsches Institut für Wirtschaftsforschung, ‘Wochenbericht,’ 12 (21 March 1991, p.127).
OECD (1992–;3, pp.13–24).
Akerloff et al. (1991, p.13).
Ibid., p.28.
The THA was created in March 1990 but was given little scope for privatisation at that time. It was given this scope at GEMSU with the passage of the ‘Trusteeship Act’ (Treuhandgesetz) on 17 June 1990, after which time it began rapidly to dispose of its portfolio. The THA became the focus of both extreme praise and criticism, and the literature on it voluminous. Fischer, Hax and Schneider (1993) offer the most comprehensive treatment. For English sources, Balz (1992) offers a critical appraisal of the THA, while Carlin and Mayer (1992) offer a more favourable account. Deutsche Bundesbank (1994e) looks specifically at the financial aspects of the THA.
Bös and Kayser (1995, p.84). The unification treaty, which took effect on 3 October 1990, repeated these functions virtually word-for-word (Article 25).
Carlin and Mayer (1992, pp.327–8), and (1994, pp. 191–2) examine the creation of these boards, which we discuss further in Chapter 6.
Enterprises were broken down into six categories: (1) profitable; (2) expected to be profitable in 1992; (3) could be successfully privatised; (4) appear capable of being profitable but have inadequate plans; (5) unlikely to become profitable; (6) unable to be made profitable (Carlin and Mayer, 1992, p.329).
Ibid., p.329. ‘Potentially viable’ meant that the enterprise would fall into the first four categories outlined above.
von Thadden (1994a, p.6) citing the ‘Treuhand Act’ (Gesetzblatt der DDR I, p.300).
Merkl (1994, pp.214–15) outlines the criticisms which were levied against the THA.
See Watson (1992, p.187).
von Thadden (1994a, p.10). Also see Esser (1994b, p.119).
OECD (1995, p.161).
Although the THA itself ceased its operations at the end of 1994, several agencies were created, including the Federal Institute for Unification-Caused Special Tasks, in order to monitor the agreements that had been secured on employment and investment levels (Economist Intelligence Unit, on Reuters-News-Service, 24 October 1994) For details, see OECD (1995, p.73).
Treuhandanstalt (1994a, 31 May, p.2).
The Economist (24 December-6 January 1994, pp.93–4).
‘Die Treuhand hat Geschichte geschrieben,’ Trierer Volksfreund (3 December 1994).
The precise figure was DM 204 619 bn (Deutsche Bundesbank Monthly Report, February 1995, p.58).
Sinn and Sinn (1992, pp.81ff.) present a comprehensive account of the history behind restitution, the legal and institutional issues involved and the implications for the privatisation process, including a good overview of the different categories of persons along with their entitlements under the law.
For an overview of the development of East German property law, see Jeffress (1991, pp.529–32).
Sinn and Sinn (1992, p.88) offer a detailed account of the specific cases of restitution that emerged.
This decision was meant to appease the Soviet Union and lead it to acquiesce in unification. The decision was challenged in the German Federal Constitutional Court by more than 10 000 expropriated parties, but it was ruled that legal agreements between the Soviet Union and West Germany took precedence over legal claims to compensation based on constitutional principles (Merkl, 1994, p.201).
Siebert (1991, p.296). The reason that ownership remained uncertain was that there had been more than one expropriation in the East — i.e. multiple claimants for the same property.
The cost of financially compensating former owners was clearly a factor in choosing restitution as opposed to compensation, as was the lobbying and potential votes of West Germans who, after all, were the primary beneficiaries of it (see Chapter 6). In extreme cases, or cases where the investment was important for the public good, compensation could be offered. But these cases were the exception, not the rule.
According to Sinn and Sinn (1992, p.83), natural restitution carried out through the municipal authorities has proved to be a complete failure. By October 1991 only about 3.3 per cent of the claims had been settled; 90 per cent of the decisions regarding the restitution of firms were being contested and were thus not yet legally valid. In an interview with the author, one attorney confirmed on the basis of his experience that in the early days municipal cases often took more than a year to sort out.
Some facets of the former East German property law were maintained, notably the East German law forbidding property transfer, originally devised to prevent speculation. After GEMSU, this law was used to prevent property transfer until claims could be processed. In other words, an old East German law was kept in place only with a new purpose (author’s interview).
‘Investing in East Germany: Restitution Nightmares,’ German Brief (10 June 1994, p.4) citing data from the Institut der deutschen Wirtschaft.
Gesetz zur Beseitigung von Hemmnissen bei der Privatisierung von Unternehmen und zur Förderung von Investitionen, (22 March 1991) (Bundesgesetzblatt, Part I, No.20, 28 March 1991, pp.766–89).
Sinn and Sinn (1992, pp.94–6).
The modification process continues. In September 1994, the Financial Times reported, The upper house of Germany’s parliament has passed a law to compensate former property owners in East Germany. The law, which will speed up investment decisions in the five eastern states, follows three years of wrangling over terms and funding. (Judy Dempsey, ‘Germany Passes Property Law,’ Financial Times, 26 September 1994, p.2)
Author’s interview.
Zeitschrift für offene Vermögensfragen (ZOV) and Zeitschrift für Vermögensund Investitionsrecht (VIZ).
We explore risk management by banks in Chapter 6.
Sheng and Cho (1993).
Ibid., p.8.
Schrettl (1992).
Giersch, Paqué and Schmieding (1992, p.262).
Schrettl (1992, p.149).
Esser (1994a, pp.28–9). The West German’ social market economy’ has been the source of a large literature. The father of the term, Alfred Müller-Armack (1965), presents a brief but vague account of its principles.
Randlesome (1994, p.187). The decision to subsidise capital rather than wages attracted some criticism. (Sinn and Sinn, 1992, pp. 174–9) Akerloff etal. (1991) argued for a wage subsidy, as did Begg and Portes (1993).
Deutsche Bundesbank (1995a, pp.48–9).
Deutsche Bundesbank (1992c, p.21).
Ibid., p.22.
Ibid., p.22.
Vitols (1994, p.5). About 60 per cent of all bank loans to small enterprises in West Germany have maturities of more than one year, and most of these have maturities of four years or more (Vitols, 1994, p.6).
Deutsche Bundesbank (1992c, p.28).
The ‘German Unity Fund’ was created on 16 May 1990, under which the federal government and the West German Länder would raise DM 115 bn to finance unification. (F. Protzman, ‘Germans in Accord on Financing Unity,’ The New York Times, May 17 1990, as cited in Jarausch and Granson, 1994, p.153.)
Deutsche Bundesbank Monthly Report (1993, p.59).
OECD (1992–;3, p.70). In a study of the Institut der deutschen Wirtschaft, fourth-fifths of responding enterprises cited high capital costs as a major deterrent to investment (Smyser, 1993, p. 179).
Harm (1992a, p. 7). We use the term ‘Mittelstand’ rather than’ sME when referring to Germany.
Simon (1992).
William J. Holstein, ‘Think Small: The Export Lessons to be Learned from Germany’s Midsize Companies,’ Business Week (November 4 1991, pp.58–65).
The senator was Elmar Pieroth (Merkl, 1993, pp.272–3).
Treuhandanstalt (1992, 1993).
Hummel, Ludwig et al. (1994, p.92).
Harm (1992a, p.32) observes that a lot was achieved by the government providing liquidity, while the banks of the private sector bear the risk and are compensated for it. This way, a market inefficiency is overcome while avoiding the mistakes of centralised administration.
Kreditanstalt für Wiederaufbau (1993, p.1).
The KfW approves about 99 per cent of the applications it receives in the East. The large demand for loans after GEMSU placed the KfW under pressure to review (quickly) all the applications it had received. The decision to approve a loan application was based on a quick check of whether the borrower met the required criteria (see Appendix 2, p. 000) and whether the purpose of the loan was within KfW guidelines, (author’s interview).
The margin is generally 1 per cent when the Hausbank takes the full liability for the loan, but decreases as risk-sharing between the KfW and the Hausbank is introduced (see below).
Kreditanstalt für Wiederaufbau Annual Report (1990, p.40).
Kreditanstalt für Wiederaufbau Annual Report (1992, p.29). The maximum is 50 per cent in West Germany.
One estimate (Harm, 1992a, p. 11) placed the general KfW share at roughly 41 per cent of the borrower’s financing package, though it did not specify the year.
As a result, the loan approval rate for the DtA has been slightly lower in the East than for the KfW (about 96 per cent of all applications) and the lending process somewhat longer (about two months), (author’s interview). These results may also be caused by the more difficult screening involved in startups as opposed to existing enterprises.
Deutsche Bundesbank (1992c, pp.22–3).
Deutsche Bundesbank (1990b, p.19).
What the Deutsche Bundesbank (1995a, p.46) called ‘aid towards self-help’, these funds were transitional in order to enable the East to develop its infrastructure while maintaining satisfactory living standards for the people.
Public transfers between West and East German governments, on regional and local levels do not generally get intermediated by the banking system (in the first instance). On the other hand, West German banks provide significant levels to the German government. (Deutsche Bundesbank, 1997). The transfer process would warrant a complete discussion in its own right. These transfers have been significant in the East, and regional and local governments have played a significant role in their allocation. The East German Länder each developed industrial policies with elaborate schemes for privatisation and various financing and support packages. To compete for investment, the Länder publicised these programmes, took on financial advisors, and introduced high-profile advertising. The Investment Atlas for Saxony, for example, outlines the regional advantages, industrial and sectoral structure, opportunities for support and corresponding contacts for the Land Saxony. The Atlas was prepared by the Saxony Economic Development Corporation with the support of Deutsche Bank.
The OECD (1991–;2, p.37) estimates that in 1992, of the total DM 218 bn in transfers to East Germany, only 25 per cent was used for investment purposes, whereas 55 per cent was used for consumption, subsidies and interest payments. (The other 20 per cent was marked ‘other’.) Moreover, the OECD measure of public transfers includes ERP funds (i.e. Specialised Bank loans) which, equalling 11 per cent of the total, are virtually all used for investment purposes. This makes the low level of investment overstated somewhat in any event. The use of public transfers primarily for consumption reasons is another reason why they have not featured more prominently in the analysis.
According to the OECD (1990–;1, p. 102), following an agreement in March 1991, between the Treuhandanstalt, the Federal government and the new Länder on the principles for cooperation, the Treuhandanstalt appears to have become more firmly committed to financing investment and other restructuring expenditures on the part of firms for which purchasers are not readily apparent.
Deutsche Bundesbank (1990b, p.16).
The Bundesbank uses the measure of ‘business volume’ rather than balance sheet size to compare banks. Business volume is the ‘balance sheet total plus endorsement liabilities on rediscounted bills, own drawings in circulation discounted and credited to borrowers, and bills from the banks’ portfolios dispatched for collection prior to maturity’ (Edwards and Fischer, 1994, p. 100).
Weber (1995, p.38).
Edwards and Fischer (1994, pp. 107–8).
See Weber (1995, pp.54–6).
Ibid., p.38.
Ibid.
Harm (1992a); Vitols (1994).
Edwards and Fischer (1994, pp.75–83) provide a detailed description of the different legal forms.
Ibid., p.75.
Ibid.
Ibid. The decrease in turnover reflects the changeover in legal status in many of these businesses to GMbH or AG status.
Some GMbHs are quite large, bigger than AGs.
In Chapter 6 we examine more closely the governance role of German banks vis-à-vis the Mittelstand.
Schneider-Lenné (1992) provides a clear and concise overview of the control levers. A more comprehensive analysis is Baums (1992), with a detailed, legal review provided by Roggenbuch (1992).
Prill (1995) provides a detailed discussion on the importance of proxy holdings in the governance of non-financial enterprises.
All AGs must have a supervisory board, as well as all GMbHs with more than 500 employees, though in the latter case the board has less extensive rights. It cannot, for instance, dismiss the management of an enterprise, a right which is accorded to supervisory boards in AGs. The main functions of the supervisory board are outlined in the Stock Corporation Act (Aktiengesetz) and are not explored here in detail.
There are periodic accusations against the banks for exercising monopolistic practices by virtue of their control levers. The Gessler Commission, however, appointed by the Minister of Finance, prepared a study during the period 1974–;9 and found little support for the accusations being made against banks. For a summary of the findings, see Krummel (1980).
Edwards and Fischer (1994, pp. 1–11) offer a concise overview of this literature.
Gerschenkron (1968, p.137). Hu (1975, pp.7–17) presents a brief historical overview of the large role the German banks have played in the country’s economic development.
See Esser (1990). Harm (1992b) also investigates ‘the myth in the Anglo-Saxon literature: that German banks own or control German industry’, and argues that ‘banks have been vindicated by all major studies examining the banking system’. Dyson (1986) argues that German banks have become less disposed to assist firms in distress.
Edwards and Fischer (1994) find no evidence that banks provide plentiful and lower-cost finance to industry as a result of their universal status and institutional levers of control.
Sabel, Griffin and Deeg (1993, p.13) note that management [in large firms] could not bring the level of internal finance high enough to make bank debt superfluous until the early 1970s, when pension reform gave them an opening to act. This is not to say that the Big Banks did not maintain a significant share of business — primarily non-lending services — with these enterprises.
See Deeg (1993, pp.168–70).
Deeg (1992, p.184). See also Sabel, Griffin and Deeg (1993) for a thoughtful presentation of the major strands of the contemporary view.
Quack and Hildebrandt (1995b, p.11); Vitols (1994); and Harm (1992a), especially the table on p.24.
Sabel, Griffin and Deeg (1993, pp.17–24) and also Mullineux (1994, p.25).
From 1978 to 1982, Big Bank Mittelstand loans as a per centage of total corporate lending rose from 28.3 per cent to 37.2 per cent. The rise, however, took place as the Big Banks’ share of the overall corporate loan market fell from 15.4 per cent to 11.9 per cent. That is to say, Big Banks saw a relative increase in Mittelstand lending as lending to large enterprises fell.
Buck (1987, pp.190–3) and Garvy (1966, pp.145–50) provide more detailed discussions on the development of the Staatsbank.
Garvy (1966, p.146).
Buck (1987, p.197).
Ashauer (1990, p.9). He offers a detailed description of savings bank activity in East Germany, including a geographic breakdown of the branch network.
Garvy (1966, p. 145).
Buck (1987, pp. 193–7) examines these banks’ functions and development.
To enhance their business standing in the West, these banks were registered as AGs. (Buck, 1987, p.196)
Gesetz über die Änderung des Gesetzes über die Staatsbank der DDR.
The DKB, created on 19 March 1990, initially had a balance sheet volume of M 286 bn, with a portfolio of more than 7000 enterprises (‘Privatisierung bis Jahresende’, Neue Zeit, 24 February 1994, p. 10).
Shinasi, Lipschitz and McDonald (1990, p.151).
Author’s interview. Buck (1987, p. 198) notes that the actual per centage of women working in banks was 80 per cent, though another account puts the figure at 95 per cent (The Problems of Unity’, Euromoney, September 1990, p.11).
Daniel Ben Ami, ‘Bankers in the Front Line’, Banking World (February 1991, p.17).
Based on the prevailing market exchange rate of M 7 = DM 1 (Shinasi, Lipschitz and McDonald, 1990, p. 144, n. 2), and on the average 1989 exchange rate of DM 3.081 = £1 (Deutsche Bundesbank, Monthly Report, Statistical Section, March 1995, p.76).
For a technical, legal account of the institutional changes in the banking system following GEMSU, see Robertz (1990).
See Deeg (1994, pp.8–15) for a detailed discussion on the integration processes of both bank sectors, with particular emphasis on the internal political dimension.
Meinecke (1993, p.90).
FIBOR is the Frankfurt Interbank Offer Rate. The claims were in essence interest-bearing government bonds. Redemption beginning in July 1995 involved 2.5 per cent of the claims’ nominal value being paid back annually (Schütte, 1993, p. 183, n. 2).
The RIKO (Rückstellungen für Richtungskoefflzienten) fund was established at the Staatsbank to reconcile the official exchange rate with the one used for trade with non-CMEA countries. Trade with these countries was conducted using the ‘valuta mark’ (VM) rather than the Mane. While the official conversion rate was VM 1 = DM 1, an unofficial, depreciated rate was used in practice. In 1989, for example, this rate was VM 1 = M 4.4. Thus if an importer brought in goods worth DM 100, he would pay M 100 to the Foreign Trade Company handling the transaction and an additional M 340 to the fund. Similarly, the export of goods worth DM 100 would involve M 100 being paid to the exporter via the Foreign Trade Company with an additional M 340 coming from the fund. The liability at GEMSU for the Staatsbank derived from the export surpluses the GDR had experienced (i.e. an export subsidy). For details, see Mayer and Thumann (1990, p.53).
This was written into the State (GEMSU) Treaty (Annex I, Article 8, paragraph 4 (2)) (Deutsche Bundesbank, 1990b, p.24).
We discuss this point in more detail in Chapter 6. We should note, however, that the East German banks were requested to prepare balance sheets which had to be audited and then submitted to the Federal Banking Supervisory Office by not later than 15 March 1991, but were unable to meet this deadline, largely due to valuation problems of the old loans (Deutsche Bundesbank, Annual Report, 1991, p.113).
Shinasi, Lipschitz and McDonald (1990, p.152).
Deutsche Bundesbank, Annual Report (1991, p. 114). Due to these problems, claims were often allocated in the early stages as book entries with no funds being transferred until a later date.
Deutsche Bundesbank (1992a, p.23).
Deutsche Bundesbank (1994c, p.38).
Deutsche Bundesbank (1993b, pp.49–50) presents a breakdown of the funds allocated.
The precise figure was DM 75.263 bn (Deutsche Bundesbank Monthly Report, May 1995, p.57).
For a discussion of these instruments of monetary policy, see Deutsche Bundesbank (1989b, pp.44–80).
According to the Bundesbank, the minimum conditions for trade bills are that they must be ‘backed by three parties known to be solvent, they must fall due within three months of purchase and they should be good trade bills’, (Deutsche Bundesbank, 1989b, p.46).
The Bundesbank accepts various forms of collateral, including: (1) Bills (including trade bills); (2) Treasury Bills with a maturity under one year; (3) Bonds and debt register claims of the Federal Government, a Land government or a Federal Special Fund; (4) Other Bonds and Debt Register Claims; (5) Equalisation claims Deutsche Bundesbank, (1989b, p.50).
Based on a Bundesbank decision of 17 May 1990. The promissory notes were also backed by provisional claims made on the equalisation fund (Deutsche Bundesbank, Annual Report, 1990, p.123).
Shinasi, Lipschitz and McDonald (1990, p.151).
The combined average business volume in 1991 was approximately DM 140 bn for East German Savings Banks and Credit Cooperatives as against the total West German level of DM 5,243 bn (Deutsche Bundesbank Monthly Report, Statistical Section, March 1995, p. 16). The East German figure was computed as follows: these banks held 24.1 per cent of their total business volume as loans to non-banks (Deutsche Bundesbank, 1994f, p.46), these loans totalling DM 33.724 bn (Landeszentralbanken data).
Deutsche Bundesbank (1990b, p.18).
Reuters-News-Service (5 December 1991).
Announcement made on 2 October 1991 (Reuters-News-Service). For a complete breakdown of the decrease in rediscount quotas over time, see Deutsche Bundesbank (1992a, p.11).
Deutsche Bundesbank, Annual Report (1990, p. 123).
David Goodhart, ‘Management: Teaching Potential Capitalists — The Deutschebank at the Leipzig Fair’, Financial Times (19 March 1990, p.14).
Plessing (1993, pp.137–8). The old debt of the BSB amounted to DM 7 bn and was refinanced by the Staatsbank in the early stages. In addition, the BSB was given the option to access the Equalisation Fund for compensation for NPLs, making them — in effect — guaranteed (Treuhandanstalt, Pressemitteilung, 7 September 1991).
In sheer physical terms, the conversion represented a massive undertaking. The Bundesbank noted that it had supplied its main branches in the East with’ several hundred tonnes of currency worth a total of some DM 28 million’ (Deutsche Bundesbank, 1990a, p.25).
Plessing (1993, p.136).
Darrell Delamaide, ‘The Provincial Powerhouse’, Euromoney (October 1991, pp.67–8).
German Brief (13 January 1995, p.10).
Plessing (1993, p.138). The Credit Cooperatives remained East German-owned.
Deutsche Bundesbank (1990b, p.16).
Deutsche Bundesbank (1994f). We present a full discussion of these banks’ activities in Chapter 5.
Katharine Cambell, ‘International Capital Markets: Staatsbank Refinancing Total Stands at DM 24 bn’, Financial Times (7 September 1990, n. 36). For a report on the refinancing activities of the Staatsbank Berlin, see Garry Evans,’ staatsbank Can Sit Back’, Euromoney Supplement (September 1992, p.51).
By October 1991, roughly DM 85 bn had been raised. (‘Germany: Staatsbank Berlin Needs to Raise a Further DM 30 bn on the Capital Markets’, Frankfurter Allgemeine Zeitung and Boer sen Zeitung (English abstracts)).
Staatsbank Berlin, Geschäftsbericht 1993.
KfW Advertisement, ‘German Banking and Finance Survey’, Financial Times (17 May 1995, p. IT. ‘In the unification treaty, it was envisaged that all or part of the Staatsbank would be transferred to a public-law institution after completing its tasks’. (‘Germany: Merger of Staatsbank with KfW is complete’, Boerson Zeitung (English abstract), 29 July 1994, which also provides an overview of the Staatsbank performance after GEMSU).
Schütte (1993, pp. 176–7) based on his interviews in the Staatsbank. This figure roughly corresponds to the total outstanding credit at GEMSU (see Table 4.2). Schütte provides a breakdown of the old loans by bank and further divides them into nominal and real values.
Plessing (1993, p.137).
For details, see ‘Germany: Privatisation of Deutsche Kreditbank Begins’, Boersen Zeitung (English abstracts) (31 August 1994). For an overview of the activities of the DKB since GEMSU, see Peter Stebner, ‘Privatisierung bis Jahresende’, Neue Zeit (24 February 1994, p. 10).
Schütte (1993, pp. 175–6).
Schütte (1993, p.177). According to the THA, ‘Under the terms of the so-called Debt Remission Regulations [Entschuldungsverordnung] of September 30 1990, a remission of the company from existing or inherited debts can be effected wholly or partly for the purpose of restructuring the company or enhancing its effectiveness’ (Treuhandanstalt, (n. o.)).
Of the total of DM 101 bn at GEMSU, the THA absorbed between DM 77–78 bn of the old loans, DM 15.6 bn were recovered through liquidations, and DM 7 bn were covered in sale agreements by the purchasers. The THA also paid an additional DM 28 bn in interest on these loans (Hornef, 1994a, pp.21, 32). Schmieding and Buch (1992) were quite critical of this approach, arguing that the case-by-case approach led to a virtual global write-off in the end, but with far more expenses, delays and administrative burdens.
In a strong critique of the gains made by the banks without bearing risks, Der Spiegel claimed that the West German banks — especially Deutsche Bank and Dresdner Bank- earned more than DM 5 bn per year for managing the collection of these loans in the first three years after GEMSU. (‘Das Zinsenwunder im Osten’, Der Spiegel, October 1994, p.55). While the precise ‘fee’ paid to the West German banks is not clear, it is important to distinguish between this management fee and the actual interest payments on the loans. While the majority of the interest payments for the old loans went to the DKB, the institution taking responsibility for them, some (West German) banks took responsibility for the old loans and were entitled to the interest payments due. DG Bank, for example, took on more than DM 16 bn in old debt from the BLN’s books when it acquired it. The overall interest payments for the bad debts were significant. An OECD (Economic Survey, 1990–;1, p. 101) estimate for 1990 placed the level of interest payments at roughly DM 7 bn for the first quarter of 1991 alone.
‘Treuhand: Noch keine Entscheidung über Privatisierung der Deutschen Kreditbank’, Handelsblatt (23 February 1994, p. 13). Of this decrease, the bulk was due to the debt reduction in THA enterprises, falling from DM 85.7 bn in 1990 to DM 8.6 bn by the end of 1993.
‘Germany: Deutsche Kreditbank would retain autonomy under Bayerische Landesbank’, Frankfurter Allgemeine Zeitung (English abstracts) (6 January 1995). The agreement was that DKB would keep its name but be integrated into the Bayerische Landesbank East German network.
Reuters-News-Service (23 October 1992).
‘Thirty-five years after it came into force, the Deutsche Bundesbank Act of July 26, 1957 (Federal Law Gazette I, p. 745) has for the first time been amended (by the Fourth Act Amending to the Deutsche Bundesbank Act) with respect to major provisions governing the way the Bundesbank is organised’. (Deutsche Bundesbank, 1992b, p.48). In the lead-up to its reorganisation, there were sharp disagreements among the Länder themselves, and also between the Länder and the Federal government, over what the final structure should be. Each of the five new Länder wanted to be represented on the Bundesbank governing council, and a political battle ensued between the Länder and the Federal government. In the end, the Federal government’s view that the bank should be streamlined was adopted, and an organisational consolidation occurred, whereby some of the Länder in the East shared a Bundesbank main branch (Landeszentralbank). Nine main branches remained as a result of the reorganisation, including: (1) the Land of Baden-Württemberg; (2) the Free State of Bavaria; (3) the Länder of Berlin and Brandenburg; (4) the Free Hanseatic City of Bremen and the Länder of Lower Saxony and Saxony Anhalt, (5) the Free and Hanseatic City of Hamburg and the Länder of Mecklenburg-Westem Pomerania and Schleswig-Holstein; (6) the Land of Hesse; (7) the Land of North Rhine-Westphalia; (8) the Länder of Rhineland-Palatinate and Saarland; and (9) the Free State of Saxony and the Land of Thuringia (The East German Länder are shown in italic). For details, see Deutsche Bundesbank (1992b, pp.48–53).
A discussion of the functions of the Federal Banking Supervisory Office and its relationship with the Bundesbank can be found in Böhnel (1995).
Shinasi, Lipschitz and McDonald (1990, p. 154). The Banking Supervisory Office in the FRG could, under certain circumstances, grant exemptions to the banking law to East German banks.
Only basic financial data were required from East German banks until the end of 1990. For details on the specific requirements and concessions, see Deutsche Bundesbank, Annual Report (1990, p. 117).
Deutsches Institut für Wirtschaftsforschung, ‘Wochenbericht’, (51/52, 19 December 1991, p.727).
David Waller,’ service with a Smile’, Financial Times (4 May 1994, p.II). Another reason overlooked by the reporter is that East Germans would perhaps not be able to handle the immediate introduction of sixty new products, thus leading the bank to opt for a gradual increase.
Industrie. und Handelskammer zu Leipzig, Jahresbericht, 93/94, p.9.
Deutsche Bundesbank (1990a, p.30).
The old system was the Einheitliches System der Elektronischen Rechentechnik, which means’ standard system of electronic data processing’ (Deutsche Bundesbank, 1990a, p.26).
The details of the transfer process can be found in Deutsche Bundesbank (1990a, pp.30–1).
The increasing adoption by banks and their customers of west German accounting and payment methods, the reduction of transport times and the further expansion of processing capacities in the computer centres of the banking industry and the Bundesbank in 1991 helped to ensure that, in both paperless and paper-based payments, the banking industry largely managed to achieve the processing periods customary elsewhere in west-east and east-west payments as well as within the new Länder. Hardly any complaints [reach the Bundesbank] about unduly long processing periods for credit transfers. Temporary backlogs which occurred in individual payments computer centres in the processing of requests for the investigation of the whereabouts of credit transfers and cheque or direct debit collections not carried out at all, or in time, have meanwhile been eliminated by means of elaborate staff and organisational measures. (Deutsche Bundesbank, Annual Report, 1991, p.117)
Author’s interview.
Marsh (1992, p.217).
Author’s interview.
Author’s interview. The internal system was called a ‘Büro Kommunikation System’ (BKB). Deutsche Bank, like the Bundesbank, also negotiated a few unofficial lines, it sharing the same building in Berlin with the Bundesbank.
West German Savings Banks were not allowed to buy their East German counterparts yet needed to improve the latter’s operations in order to serve their West German customers in the East — i.e. the East was an extension of the competition between Savings Banks and Big Banks in West Germany (‘The Problems of Unity’, Euromoney, September 1990, p. 11).
Bundesverband deutscher Banken (1994, p.5).
Friedmann (1995, p.968).
Bankenverband mittel. und ostdeutscher Länder (1995, p.4).
These figures represent the total branches of all private banks in East Germany, rather than the nine reporting banks from which the previous investment figures were taken (see Chapter three). Since the nine reporting banks possess the vast majority of the branches, however, the two sets of figures should roughly correspond.
Friedmann (1995, p.968).
Deutsche Sparkassen. und Giroverband e.V. (1994, p.3).
Deeg (1994, p.8).
Bundesverband deutscher Banken (1994, p.6).
According to the BDB report (1994, p.6), ‘training intensity is defined as the ratio of the number of staff who received training to the total number of workers’.
Deeg (1994, p.8). More than 7500 East German staff have received training at the German Sparkassen Academy in Bonn. In addition, the Ostdeutsche Sparkassen Academy Berlin-Rahnsdorf was in the process of being built in 1994 (Deutsche Sparkassen. und Giroverband e.V., 1994, p.5).
Deutsche Sparkassen. und Giroverband e.V. (1994, p.4).
Of the 33 000 West German (Private) Bank employees in the East, 4600 had been trainees (Friedmann, 1995, p.968).
Deutsche Sparkassen. und Giroverband e.V. (1994, p.4).
Wagner (1993, p.1010).
Carlin and Richthofen (1995, p.17).
Deeg (1994, p.22).
Bundesverband deutscher Banken (1994, p.6).
A senior Deutsche Bank manager argued that if other industries had taken the banks’ approach of not only supplying high financial investment, but also management transfers on a large scale, they might have developed faster and better. He argued that the banks had no choice but to pursue this strategy — as opposed to manufacturers who could produce in the West and sell in the East — because for banks ‘all business is local’. (Author’s interview).
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© 2000 Gregg S. Robins
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Robins, G.S. (2000). Economic, Institutional and Banking Development after GEMSU. In: Banking in Transition. Studies in Economic Transition. Palgrave Macmillan, London. https://doi.org/10.1057/9780230286634_4
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