The German exchange traded fund (ETF) recovered nicely last year, aided by an improving global economy. The country’s banking sector, though, hasn’t fared as well.

Germany is Europe’s largest economy, but investors are not that enamored by the country’s banking sector, reports Andrew Ross Sorkin for The New York Times. Case in point: Only two people placed bids on a recent auction of WestLB, a publicly owned institution that use to be Germany’s third-largest lender.

The lack in interest of this one bank is seen as part of a bigger financials picture. A majority of Germany’s largest banks are still heavily invested by the government after bad lending decisions during the last market bubble. Now that the banks can no longer access cheap capital, the sector doesn’t seem all that profitable anymore.

Jörg Rocholl, a professor at the European School of Management and Technology, remarks that the “fragility of the German banking sector poses a substantial threat to sustained economic recovery in Germany” and that the “excellent economic situation is not mirrored by the banking system.”

The sector happens to account for 18% of iShares MSCI Germany (NYSEArca: EWG), so use caution and be on the alert for signs of trouble.

Despite slower growth in the fourth quarter, the German economy still showed a 0.4% rise over the previous quarter, according to BusinessWeek. The economy expanded by 3.5% in 2010 on increased exports to a recovering global economy and improving domestic demand. [Germany ETF Caught In Mixed Sentiment.]

Max Chen contributed to this article.

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