Germany's banking sector proved its strength during the financial crisis, but needs to examine its business model to increase stability in the future, Bundesbank board member Andreas Dombret told AFP in an interview.
Dombret, in charge of banking and financial supervision at the German central bank, called on banks to diversify their revenue sources, which are currently too dependent on interest rates, and cut costs.
"Fundamentally speaking, German banks can't all be lumped together in the same basket. Germany's three-pillar banking sector model (private, public and cooperative) has proved its worth during the financial crisis and contributed to a stabilisation of the banking landscape," Dombret said.
And German banks had increased their ability to withstand risks, he added.
"Even before last year's stress tests, they significantly beefed up their own capital. The stress tests showed that all major German banks had sufficient own capital to withstand a substantial economic shock."
Nevertheless, Dombret said he saw room for improvement in the profitability of many German banks.
"The frequently high dependence on interest income is a drag on banks' profitability, particularly during a long period of low interest rates. For this reason alone, banks must take a look at their business models," Dombret said.
He suggested banks should look for alternative sources of income or increase their commission income.
- No taboos -
"And on the expenditure side, a starting point for cutting costs could be their still very large branch networks. Mergers shouldn't be a taboo, either, if two strong partners can find themselves," Dombret said.
The Bundesbank board member said an important factor in the creation of a European Banking Union was to have a sole supervisory authority which applies the same high standards to all banks, no matter in which country they are based.
"Not only the German, but all European banks will have to meet these new requirements," Dombret said.
Under the new Single Supervisory Mechanism (SSM), set up within the European Central Bank, the ECB will be directly responsible for supervising 120 of the region's biggest banks, while 3,400 smaller institutes will continue to be supervised directly by the national authorities of the countries concerned.
Traditionally in Germany, politicians sit on the supervisory boards of the public-sector regional banks or "Landesbanken", or occupy top management positions in savings banks.
Asked about the strong political influence on the German banking sector, Dombret said that it was not "fundamentally in the spirit of a market economy."
"Experience has shown that the state is not the better banker," he added.
One reason why Europe's financial crisis lasted so long was that governments were forced to bail out their country's major banks to avert a possible domino effect across the sector. But in rescuing the banks, the states risked increasing their already heavy debt burdens even further.
"During the crisis, the lines between states and banks were blurred. It's all the more important to create structures, where even large banks can fail without jeopardising the entire financial system," he said.
"We've made a lot of progress, both on a global and European level, but we're still a long way from reaching the finishing line."