VoxEU Column Financial Markets

Bank ownership and stability: Evidence from Germany

Issues of banking stability are currently intensively debated in Germany and elsewhere. This column looks at German banks and suggests that privately-owned banks are more profitable and better capitalised than savings and cooperative banks, but also take more risk. This higher risk taking results in higher default probability and higher “proximity to insolvency” of privately-owned banks.

Since the onset of the financial crisis, bank stability has been at the top of policy makers’ agenda across advanced and developing countries (IMF, 2007). Bank stability, however, seems related in part to size and ownership structures. Some analysts point to the failure of private banks as evidence of the fragility of short-term and profit-oriented banking. Others point to governance failures and distorted business models in state-owned banks that came to light during the crisis, in Germany and elsewhere. A third bank group that has seemingly been least affected by the current crisis are cooperative banks, i.e. financial institutions owned by their members, given their business models and very limited exposures to structured finance products.

Looking beyond the crisis, there is an even more fundamental question about the connections between bank stability and ownership types (e.g. Ianotta, Nocera and Sironi, 2007; Garcia Marco and Robles Fernandez, 2008). This is an important question for researchers and policy makers alike who care about the stability of the overall banking system.

Germany offers a unique “laboratory” to explore bank stability across different ownership types, as the banking system consists of three broadly equally sized segments, privately-owned banks, government-owned savings banks, and cooperative banks. To shed light on bank ownership and stability issues, we have recently analysed a new dataset on German banks (Beck, Hesse, Kick and von Westernhagen 2009). We use annual data over the period 1995 to 2007 and relate different measures of bank stability to ownership dummies and an array of other bank characteristics. We also explore differences in the relationship between stability and bank size across different ownership types. The sample is quite broad, but excludes the five large private banks, Landesbanken and two cooperative central banks. Another caveat is that the sample ends in 2007, i.e. before the current crisis. The study is therefore not able to account for the dynamics of the current financial turbulences.

What does the literature say?

Theory gives conflicting predictions on which ownership type is most conducive to stability. While government ownership of banks can reduce risk-taking by banks as high returns might not be the primary concern, it can also increase bank fragility given weaker banking skills, weak governance structures, unstable business models, and overall misaligned incentives in government-owned banks, resulting in lower efficiency and lower profitability thus leading to fragility. Cooperative banks might be less fragile than other banks as they have a stable deposit and customer basis, focus on capital preservation and do not maximise profits but customer surplus which could serve as a potential cushion in weaker periods (Fonteyne, 2007); further, disperse membership and dominance by managers in risk-taking decisions might reduce incentives for risk taking and thus fragility. Finally, the stability of privately-owned banks depends on shareholder concentration, among other factors; more concentrated ownership might reduce agency problems between managers and owners, as the latter are better able to monitor and discipline the former, and lead to more risk taking. Besides bank-specific factors, the risk-taking approach and thus stability of banks of all ownership types depends very much on the financial safety net and macroeconomic conditions.

The existing evidence has provided ambiguous evidence on the relative stability of banks with different ownership patterns. Cross-country evidence has consistently pointed to a higher share of government ownership resulting in higher banking fragility and crisis probability (La Porta et al., 2002; Barth, Caprio and Levine, 2004). Ianotta, Nocera and Sironi (2007) find for a sample of large European banks that government-owned banks are least stable, followed by privately-owned banks, while cooperative banks are the most stable banking group. Garcia Marco and Robles Fernandez (2008), however, find that Spanish commercial banks are less stable than Spanish savings banks. Similarly, Hesse and Cihak (2007) find for a sample of OECD countries that cooperative banks are more stable than commercial banks. Unlike the existing literature, we consider bank stability across three different ownership types within the same country, holding constant the institutional, regulatory and macroeconomic framework faced by banks.

What do we find?

Our findings suggest that cooperative banks are the most stable financial institutions in Germany, as measured by the z-score, i.e. the distance to insolvency, followed by savings banks and private banks. Decomposing the z-score, we find that privately-owned banks are more profitable and better capitalised than both savings and cooperative banks, which, however, is more than compensated by the higher volatility in profits. This is consistent with Hesse and Cihak (2007) for their OECD sample. Using the NPL-score as a measure of lending risk yields similar results, although there is no significant and consistent difference between cooperative and savings banks in lending risk. The findings confirm the stability-enhancing impact of cooperative banks due to their focus on capital endowment protection and consumer surplus maximisation as well as their disperse shareholdings.

When using a measure of distress probability, however, we find that savings banks are more stable than cooperative banks, with private banks again facing the highest distress risk. While cooperative banks are thus farthest away from insolvency, due to the low volatility of their profits, they face higher distress risk than savings banks, suggesting skewness in the underlying distribution of profits and capital buffers. We would like to stress the relative nature of our stability comparison across ownership types. Although private banks in Germany are less stable than cooperative and savings banks in Germany, they are stable in international comparison, as shown by Beck and Laeven (2008).

The literature on the relationship between bank size and stability has found ambiguous results for banks in the US and elsewhere (e.g. Mishkin, 1999; Calomiris and Mason, 2000; or De Nicolo 2000). In our study, we find some tentative evidence for the too-big-to-fail phenomenon. Specifically, when using the z-score, larger private banks are less stable than small private banks, due to lower capital, while this relationship is reversed for savings and cooperative banks, due to lower volatility. When using the distress probability score, on the other hand, we find that both private and savings banks are less likely to become distressed as they grow larger. Further, there is a negative relationship between bank size and lending risk for private banks. Taken together, we interpret this as evidence in favour of too-big-to-fail policies, especially in the case of private banks; the latter hold less capital as they grow larger, counting on government support in case of fragility.


Our results highlight the return-risk trade-off in banking and its variation across different ownership types, with privately-owned banks in Germany taking more risk, but also reaping higher returns. We find some evidence for the too-big-to-fail phenomenon, with privately-owned banks reducing their capital buffer as they grow larger. Overall, the findings provide important insights for regulators and supervisors in charge of banks of different ownership types, especially of applying different stability indicators, as they might yield different results, depending on whether they focus on specific risks, such as lending risks, or on different moments of the distribution.

Note: This columns’ findings, interpretations, and conclusions are entirely those of the authors and do not necessarily represent the views of the Deutsche Bundesbank, the IMF, its Executive Directors, or the countries they represent.


Barth, James, Gerard Caprio and Ross Levine (2004). Bank Supervision and Regulation. What Works Best? Journal of Financial Intermediation 13, 205-48.

Beck, Thorsten, Heiko Hesse, Thomas Kick, and Natalja von Westernhagen (2009). Bank Ownership and Stability: Evidence from Germany. Bundesbank Working Paper Series, forthcoming.

Beck, Thorsten and Luc Laeven (2008). Resolution of Failed Banks by Deposit Insurers: Cross-Country Evidence, in Asli Demirguc-Kunt, Ed Kane and Luc Laeven: Deposit Insurance around the World, Issues of Design and Implementation. Cambridge, MA.

Calomiris, Charles W. and. Joseph R. Mason (2000). Causes of Bank Distress During the Great Depression. National Bureau of Economic Research, Working Paper No. 7919, Cambridge, MA.

Hesse, Heiko and Martin Cihak (2007). Cooperative Banks and Financial Stability. IMF Working Paper 07/02.

De Nicolo, Gianni (2000). Size, Charter Value and Risk in Banking: An International Perspective. International Finance Discussion Papers No. 689, Washington, DC: Board of Governors of the Federal Reserve System.

Fonteyne, Wim (2007). Cooperative Banks in Europe – Policy Issues. IMF Working Paper 07/159.

Garcia Marco, Teresa and M. Dolores Robles Fernandez (2008). Risk-taking Behaviour and Ownership in the Banking Industry: The Spanish Evidence. Journal of Economics and Business 60, 332-54.

Ianotta, Giuliano, Giacomo Nocera and Andrea Sironi (2007). Ownership Structure, Risk and Performance in the European Banking Industry. Journal of Banking and Finance 31, 2127-2149.

IMF (2007). Global Financial Stability Report. Financial Market Turbulence: Causes, Consequences, and Policies. October 2007. Washington D.C.

La Porta, R., F. Lopez-de-Silanes and A. Shleifer (2002). Government Ownership of Commercial Banks. Journal of Finance 57, 265-301.

Mishkin, Frederic S. (1999). Financial Consolidation: Dangers and Opportunities. Journal of Banking and Finance 23, 675-691.


4,199 Reads