The hundreds of savings banks and more than 1000 co-operative banks have neither incentive nor inclination for reform. They survived the crisis in good shape and needed no help from local or federal government. Indeed, it was they who were called upon to help their local landesbanken, the regionally owned wholesale banks that have proved so accident-prone over the years.
Landesbanken have a history of problems, from Bankgesellschaft Berlin, which nearly collapsed in 2001 when a revaluation of its property-related liabilities erased its entire capital base, to the current financial crisis, when nearly half of the sector has required significant public or parental support. All this means that Berlin has had enough and is keen for change.
However, except in the most extreme case of WestLB, which as a result of state aid rules must either be sold or merged with another bank before the end of next year by order of the EU, it looks unlikely to happen. Berlin is powerless to force the regions to close banks they want to keep.
The soft touch
So maybe it is time for the EU to get tough on German landesbanken. It has not been in the past.
In 2001, the EU backed down in the face of German pressure about withdrawal of the state guarantee - which gave landesbanken anti-competitively cheap funding - and extended the deadline until 2005.
Then it failed to cap funding limits, allowing landesbanks to load up on cheap debt, which they put to work in international commercial real estate and US subprime-backed securities with disastrous results.
Many argue that German banks get the soft touch from others, too. In 2010, the Basel Committee stretched the deadline for German banks to comply with new Tier 1 rules from 2012 to 2018, so that they have enough time to replace their large percentage of hybrid capital.
It is time for the EU to stop pandering to German banks and resolve a problem it helped to create.
