Of all of the EU member states, Germany has the largest banking market. However, not all German banking institutions necessarily face fierce competition. Because the industry is highly fragmented, strict separation of the three existing banking pillars may impede competition, with negative effects on financial stability. We assess the competitive stances of 1,888 universal banks from 2001 to 2009 by using the Panzar–Rosse revenue test. We find evidence that measuring competition at an average country level does not necessarily generate valid evaluations of fragmented markets. In addition, we find no clear indication that either the particular objectives of cooperative and savings banks or the legal protection of these institutions impedes competition or discriminates against private banks. Therefore, as long as the relationship between competition and financial stability is dubious, the overall effect and the social costs or benefits of political measures that influence the structure of the German banking market are at least questionable.

We study the international spillover effects of sovereign rating events on the stock returns of large banks in nonevent countries. Using S&P rating assessments from 1983 to 2018, we find that negative sovereign rating events spill over to foreign banks’ stock returns through the foreign asset holdings channel, especially if the rating shock to domestic banks is severe. Foreign sovereign debt holdings are not the only source to open such a channel. Negative sovereign rating events also spill over through foreign interbank exposures, but not through foreign claims to nonbank firms. We further find a previously undocumented positive side effect of government support to banks. The guarantee channel limits international spillover effects if banks with strong expected government support are located in countries with high sovereign ratings.