(To view the digital version of this report, please click here.)London has traditionally enjoyed a level of political support that Frankfurt, situated remotely from the politicians in Berlin, can only envy, said Gertrud Traud, chief economist at Helaba, a Frankfurt-based bank. Now London finds itself in an increasingly similar situation to Germany.“Politicians are now in the driving seat,” said Thomas Schluter, spokesperson of the Association of German Banks. The haircut that banks voluntarily took on their Greek exposures perfectly demonstrates the new climate in global banking, with banks forced to acquiesce to politicians.Geographical proximity is not the only explanation. The UK economy is dependent on financial services as its pre-eminent sector, responsible for more than 11% of UK tax income, according to PwC. But if the UK is globally synonymous with investment banking, Germany’s association with manufacturing is even stronger, and it is that industry the German government is most concerned with protecting. Its financial services industry, by contrast, provides only about 4% of the German tax take.German banks are mainly there to serve the real economy, which is in turn driven by its manufacturing sector and particularly the Mittelstand. Fulfilling this function makes the sector extremely decentralised. Even within Germany, Frankfurt does not have the stranglehold that London has in the UK. “Much of Germany’s financial infrastructure is actually outside Frankfurt,” said Prof Jan Pieter Krahnen, head of Center for Financial Studies at Goethe-University Frankfurt. “The savings banks are the biggest segment by far, and they are present everywhere in the country. Although they look like a collection of small banks, they are highly co-ordinated with lots of common services. They are, in effect, one entity and together they are bigger than Deutsche Bank.”Similarly, the 1,500 co-operative banks are found across Germany, and constitute the second-largest banking body, only slightly smaller than the private banking sector. Deutsche Bank comes in third.Changing focusThe focus on domestic business banking also means Frankfurt is dominated by traditional loans business, with capital markets constituting a much smaller segment of banks’ activities. But this is starting to change, said Oliver Wagner, managing director of the Association of Foreign Banks in Germany.“We are seeing changes in behaviour, away from lending and increasingly into capital markets,” he said, with more and more Mittelstand companies issuing own bonds instead of using loans. Banks now advise their business clients at structuring corporate bonds and help them to place them in the market nationally and internationally. This might be a small advantage for foreign banks, which have expertise in this area, Wagner said, but is unlikely to change market competition between Frankfurt and other German financial centres noticeably. Mittelstand and other German businesses would continue to prefer to bank locally due to the federal structure of the German economy, he said. Even when companies list on the Deutsche Borse, many opt to simultaneously list on local exchanges, where they have better access to local retail investors.The economic fallout of the crisis has arguably increased the relative strength of Frankfurt within Germany: regional banks have suffered more than those in the financial capital, because they tend to be less diversified. But there are vibrant financial centres outside Frankfurt, in Munich, Dusseldorf and Hamburg, each with its own strong national ties. Munich has a concentration of Italian and Swiss banks, serving businesses that trade between the two via the shared border. Hamburg has strong Scandinavian ties, as well as some Iranian banks and Dusseldorf is home to a number of Japanese banks, which serve Japanese manufacturers that originally settled there.“To some extent Frankfurt is competing with the likes of London and New York, in terms of trad
