Germany: Financial Crises and Formalization of Banking Supervision

Abstract

AbstractIn Germany, the banking supervision formalized as a consequence of the severe banking crises of the early 1930s, just as in many other countries on the European continent. The formalization process was initiated with the decisions to temporarily take over some of the large commercial banks that faced default in the banking crisis in 1931. Due to the extended loans and direct ownership stakes, the government established a board to look after its interests. The “temporary” measures were made permanent by the Nazi-government as one of several institutional and organizational means to have banks accommodate the economic policies of the regime. All three elements of banking supervision formalization (regulation, a supervisor, and supervision) were in place by the mid-1930s. However, given the very high level of control over the banks at the time, it is misleading to date the emergence of formal banking supervision to this time. During the occupation years, the banking supervision (in West-Germany) was organized at the state-level, similar to the US system. We date the full formalization after the Second World War when the German central government's control over the banking sector ended.