Banks' Equity Holdings in Non-Financial Firms and Corporate Governance: The Case of German Universal Banks

Banks' long-term shareholdings in non-financial firms are a common feature of the Japanese and most Continental European banking systems. With regard to the role of banks in corporate governance the present debate, however, centers on the prominent role Japanese and German banks are said to play. Some American commentators even claim it is no exaggeration to say that the universal bank sits at the epicenter of German corporate governance. In this context German banks' shareholdings are perceived as a key instrument for wielding influence in non-financial corporations. As to the effects of the banks' position, though, observers disagree. While some credit the German banks' involvement in corporate monitoring as being beneficial to the firm, its shareholders and even to societal welfare, others take the opposite stance by claiming that the banks exercise their monitoring acitivites solely in their own interests thereby harming the firm, its shareholders and society as a whole. The present paper studies the role of banks' shareholdings by taking up the German example. First it tries to determine the importance of banks' shareholdings by analyzing banks' equity stakes of at least 5% of voting stock in the 377 German non-financial corporations listed in the first tier of the German stock market. Second the paper examines the reasons why banks hold long-term equity positions. After reviewing the existing literature the paper presents a novel explanation that centers on the banks' interests in the deposit-taking business as a major source of cheap refinancing. The paper then goes on to discuss the implications that follow from these considerations for the role of banks as corporate monitors. In this respect the key insight to note is the fact that a bank's interests as a partial owner substantially differ from those shareholders who hold sufficiently diversified portfolios. Finally the paper reviews the existing empirical evidence on the banks' impact in German corporate governance, in particular the evidencec on the performance of partially bank-owned companies relative to other firms. The findings, however, are inconclusive. In particular, there is no definite proof that the German banks' involvement in ownership-based corporate governance activities generates substantial additional agency costs for investors. The paper ends by offering some speculations on the future development with regard to German banks' equity holdings.