The Japanese Main Bank System: Its Relevance for Developing and Transforming Economies

By Masahiko Aoki; Hugh Patrick | Go to book overview

12 The German Banking System and its Impact on Corporate Finance and Governance

Theodor Baums

The task of this chapter as originally described in the outline of the current project was to compare the German banking system, as one type of 'relationship banking', with the Japanese main bank system. This was, of course, not simply meant in the sense of a mere description and comparison of different institutions. A meaningful contribution has to look instead at the functions of a given banking system as a provider of capital or other financial services to their client firms, to ask in what respect one or the other system might be superior or less efficient, and to analyse the reasons for this. A thorough analysis would have to answer questions such as, for instance: to what extent investment is financed by long- or short-term bank loans; whether German banks—because of specific institutional arrangements like owning equity, having seats on company boards or having other links with their borrowers—have informational or other advantages that make bank finance cheaper or more easily available; how such banks behave with respect to financial distress and bankruptcy of their client firms; and what their exact role is in corporate governance.

Banking systems and bank-firm relationships concern corporate governance as well as corporate finance. After a brief analysis of the structure of the German banking system and its special traits, we turn to the question of whether, and to what extent, equity holdings of banks, their position as proxy-holders, and their role on the boards of firms—issues normally analysed from the perspective of corporate governance—also help corporate finance. Subsequent sections look at corporate governance from the standpoint of corporate finance, including the role of German banks as delegated monitors in widely held firms. The various links between firms and banks, including the instruments of control available to banks, are explored and an assessment is made of their impact on firms and their managements. The advantages and disadvantages of the

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