The Role of Banks. It is certainly no exaggeration to say that the stock market in Germany was
controlled by the large (universal) banks. They dominated the different committees and bodies of
the exchange, including the committee that has to approve all listing decisions.51 In addition, the
Borsenzulassungsverordnung (German Stock Exchange Listing Act) required that the request for
listing at the Amtlicher Handel had to be made by a bank in its function as underwriter.
Moreover, banks de facto controlled the distribution channel through which stocks were sold and
advised firms on their financing decision. Clearly banks had a dominant position in the IPO
market. It is therefore interesting to note that the Wissenschaftlicher Beirat des Bundes-
ministeriums für Wirtschaft (Advisory Council to the Federal Ministry of Economics) and the
Monopolkommission (monopolies commission) argue that the reluctance of banks to list
companies was a major reason for the small number of IPOs that we observed in Germany.
The firms that went public in Germany were much older and larger than demanded by the
listing requirements. Observers conclude that banks tended to set very restrictive standards for
meeting the requirements for a listing, which exceeded the formal listing requirements and in
general could not be met by young companies.52 The question, of course, is why was this the
case. Some observers argue that the restrictive listing requirements were an outgrowth of
(excessive) investor protection. This may sound surprising from today’s perspective as today we
make the lack of investor protection responsible for the low use of stock markets. At that time,
however, investor protection seems to have implied investor protection against business risk
rather than against the risk of fraud and misinformation.
Another possible reason why banks were reluctant to promote IPOs is that this line of
business conflicted with the savings and loan business, which was certainly by far the most
important line of business for German universal banks. To the extent that issuing equity and
taking on loans are substitutes, the opportunity costs of an engagement in the issue business are
higher for a universal bank than for an investment bank.53 This is true in particular when the
medium to long-run effects of equity are considered: firms that are financed for the most part by
equity gain financial independence from banks through profit retention. Banks made this
51 For a more extensive discussion see Monopolkommission (1998), pp. 99-101.
52 Schürmann (1980), Büschgen (1996), Wissenschaftlicher Beirat (1997) and Monopolkommission (1998).
53 The concern that this is an important reason for the banks’ limited engagement in the issue business is, for
example, expressed by Deutsche Bundesbank (1984, p. 16), Schürmann and Korfgen (1987), Weichert (1987),
Baums (1997, p. 1944), and Monopolkommission (1998, p. 60 and p. 101).
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