The purpose of this study is to analyze and synthesize the overall process and the procedures of banking integration in the course of the economic integration between West and East Germany on the occasion of the German Reunification. And this study is also to see in detail what kind of important roles the big three commercial banks of West Germany, i.e. Deutsche Bank, Dresdner Bank and Commerzbank, and KfW(Kreditanstalt fur Wiederaufbau) had done for the fulfillment of the market economy in the East German area and for the rehabilitation of the East German economy. This synthetic analysis of the overall view of the integration processes is ultimately for drawing out possible suggestions and strategies which might be useful and applicable for the integration of the monetary and anking business on the occasion of an upcoming reunification in the Korean peninsula.
The reason why this kind of practical, in-depth case-study on the economic unification between East and West Germany is of importance is that we, as Korean, are in a similar situation, and we can learn directly about the very thing we need to prepare for. Thus the ultimate inclination of this study is to have the right answer of what Korean banking institutions are to prepare for the successful fulfillment of unification of money and banking business between South and North Korea on the upcoming occasion of Korean reunification.
After decades of seperation and Cold War, a reunification does not seem to be an utopian dream any longer but real possibility in the future. What is banking unification between South and North Korea? At the present, a North Korean banking system does not exist that could be unified with the one in the South. Consequently, it would be less of a unification and more of the establishment of market-oriented financial institutions in northern part of Korea to be reorganized with the help and assistance of South Korea. This resembles the German unification in 1990 when East Germany needed a market-oriented banking system. It is generally said that there are two kinds of economic integration between two different economic systems, i.e., radical and gradual ways of economic integration, with each way having its own merits and demerits. When we study the economic integration of the two Korean economic systems, it is also somewhat natural that we should review the way of economic integration in this context.
In this study, however, I focused mainly on the radical case of German reunification and tried to review and learn from this case-study of economic integration. It is generally understood that banking unification is a creation of a single financial market in which uniform regulations are applied and the same financial services are provided under the systematic financial environment. The existence of a single market can be accepted that such a free, uniformed financial market is created as money and capital can be moved without any barriers under a single financial environment within the single area. Within this single area, therefore, same regulations and restrictions are applied to all of the financial institutions operating in the financial market and thus the financial institutions are allowed to establish, transfer and/or close their branch offices under the same regulations and restrictions.
If and when this kind of single financial market is created, then it would be is finally regarded as successful financial integration. This means that the integrated area has allowed for the financial authority to reach its power throughout the whole territory of the integrated-market. Because of the affiliation with two different political and economic blocs for decades, contact between West and East Germany was rather limited and therefore economic development and banking system development were quite different.
What is the necessity of financial integration for the two parts of Korea? It is necessary for Koreans to be able to have economic interest if financial integration is created and a single financial market exists. Furthermore, if and when a single financial market exists, free movement of labor power, merchandise and capital can be guaranteed. Guaranteeing this free movement can help eradicate possible barriers and obstacles of social, political and economical factors which might have negatively influenced the free movement of money, production and consumption factors within the Korean peninsula.
It is very useful for Koreans to look at and review the whole process of the financial integration during the German reunification, which is sure to be the forerunner of this kind of historical matter and provide Koreans an archetypical spirit for their financial integration with the northern part of Korea. Financial reform in East Germany had similar characteristics with other countries of eastern Europe in the sense that East Germany was a transition country which was rapidly transformed from a socialist economy into a marked-oriented one. In this regard, however, the transition of East Germany is much different from those of other East European countries because East Germany was integrated into the market economy of West Germany in a rapid and abrupt way. Their main purpose and target of the financial integration was to accept the whole financial system of West Germany without qualification. This rapid transformation has helped East Germany to minimize the possible uncertainties and difficulties which other transition economies experienced. The financial integration of Germany was therefore very simple in that East Germany was only to accept the financial system of West Germany and to use the legal tender of West Germany.
Now we see why financial integration between the two parts of Germany was inevitably needed on the occasion of the collapse of the Berlin Wall in 1989 and the transition process of East German economy into the market-economy of West Germany. After World War II West Germany restructured its universal banking system, which was traditionally a predominant institution in Germany. This reconstructed system existed at the time of German unification and even prevails today. The banking system in East Germany was operated in a centrally planned economy in which the financial sector was not active but too passive to support the development of the real sector, and thus the effective allocation of economic resources were hardly anticipated. Because the financial sector was passive due to centrally controlled government planning, banking was not free from direct state control but subject to state regulation. Bank failure would ultimately result in the long-run.
At the time of unification, West Germany was characterized by the classical banking system in free market economies : a two-tier system with the central bank on the one hand and commercial banks, as well as other intermediaries, on the other. Until 1945 there was no difference between banking in West and East Germany. After Germany had been seperated, however, East Germany did not possess any two-tier banking system like West Germany (but did not have a pure mono-banking system in line with Marxism-Leninism). East Germany's banking system was characterized by different institutions, with a significant institution being the State Bank of the German Democratic Republic that not only controlled all other financial institutions but financed and directly controlled corporations as well. Also real competition in banking did not exist, neither for credits nor for savings inspite of the existence of several financial institutions.
One of the primary difficulties associated with German reunification was the integration of the vastly different East German economic system. Changes needed to be made in the areas of business, employment, living standards, and the banking system. Reviewing the whole process of the transformation of banking in East Germany and financial integration between the two parts of Germany, we see that intra-German economic transactions were somewhat active in the trade sector but the financial sector was limited to only support intra-German economic transactions. Until the collapse of Berlin Wall in 1989 no close banking relation was established and an active inter-banking relationship. Thereafter, the State Agreement for German Monetary, Economic and Social Union(GEMSU) which concluded on May, 18, 1990 laid the ground to link between East and West Germany in the banking system. East Germany's banking staff lacked the knowledge of financial techniques essential in a market economy; banks were burdened with pre-unification loans that became non-performing after unification; a further organizational problem was the adoption of the West German payment and clearing system. Therefore, for many observers the best way to implement the unification seemed to be a takeover of the existing East German financial institutions by West German institutions. Under this agreement the steps in German monetary union began. Along with the currency conversion came the following steps of transformation in the banking system : 1) While West German commercial banks began to open their first offices in East Germany, West German savings banks started supporting their East German counterparts in preparing for the market economy by consultation, as well as financial and technical assistance 2) The State Bank of GDR lost its functions and capacities as a credit bank to the newly-founded Deutsche Kreditbank and Berliner Stadtbank 3) West German financial laws were introduced in East Germany, 4) The Bundesbank opened an office in West Berlin that moved some weeks later to East Berlin.
In the commercial banking sector, West Germany's private banks went to East Germany partially to takeover existing GDR-banks and partly to create a new network of branches in East Germany. The lack of infrastructure and human-capital significantly impended financial business at that time. Many West German banks that participated in the takeover of East German banks faced difficulties, due to the need of transforming the existent socialist-oriented bank staff into market-oriented bankers. Therefore the necessary education for the East German banking staff was supplied by the West German banks, i.e. the transfer of Western bank staff to East Germany, training of existing bank staff of the former GDR-banks and the training of newly hired personnel.
Apart from private credit banks and saving banks, public banks with special functions like KfW (Kreditanstalt fur Wiederaufbau) and the Deutsche Ausgleichsbank, contributed to the banking system development in East Germany by providing East German firms with various credit programs. KfW's contribution was very significant. In this study, the role and function of the three main commercial banks of West Germany and KfW is reviewed in detail so that South Korean banks might learn from German banks' historical transitional process.
Altogether the German banking unification can be regarded as a success, especially when compared to unification in other economic sectors. Critics may object on the basis that the development of a banking system could have been accomplished entirely by East German intermediaries and that this would have been a more valuable solution. However, we must consider that owing to East Germany's lack of banking skills, financial development would have been a long and drawn-out process, with the risk of a severe banking crisis without western partners.
The German banking unification has proved that a transformation could be successfully achieved if and when there are good banks equipped with a strong and healthy financial status, combined with a well-trained banking staff so that their banks can accomplish unification. However, for the time being, South Korea obviously has to reinforce and complete its own banking restructuring to improve the prerequisites for a banking unification with North Korea. Regarding the transformation of the North Korean banking system, the question arises whether major south Korean banks are sound and efficient enough to play an active role in the North in the event of unification just as West German banks like Deutsche, Dresdner, Commerzbank, and KfW have done in the East. It would be unfortunate if Korean banks lacked prerequisites and did not prepare to contribute to the Korean banking unification and thus Korea could not benefit from the successful experience of German banking unification.

남북한의 금융통합이란 무엇인가? 일반적으로 금융통합이란 한 경제권내에 체계적이고 동일한 형태의 금융서비스가 제공되며 금융정책의 규제를 통일하게 적용받을 수 있는 단일 금융시장이 존재하는 것을 의미한다. 단일금융시장이 된다는것은 경제권내에서 자본이 자유롭게 이동될 수 있는 여건이 형성되어 있는 것이다. 즉 지역이나 기관에 구애받지 않고 이용할 수 있으며 동일한 제약조건으로 적용되어지고 영업허가를 받은 금융기관이 다른 곳으로 이전하거나 지점을 설립하는 것이 자유롭게 되면 이것을 서로 다른 지역의 금융시장이 통합된 것으로 정의한다. 이것은 다른 지역의 금융당국의 권한이 본 관할내의 지역에서도 인정할 수있도록 허용 해주는 것이다. 제도적으로만 통합이 되고 양 지역간에 금융서비스와 상품이 다르다면 이것은 두 지역이 통합된 것이 아니라 분리된 것으로 볼 수 있다. 따라서 금융통합은 화폐적인 부문과 금융적인 부문의 제도적 통합, 통화통합 그리고 단일금융시장의 조건이 확실시 되었을 경우로 정의되어 진다.