© The Financial Times Ltd 2013 FT and 'Financial Times' are trademarks of The Financial Times Ltd.
December 2, 2012 5:24 pm
The band of the Karlsruhe Ettlingen savings bank strikes up Abba’s “Money Money Money” as Michael Huber steps from a barn into a light autumn rain and takes hold of a spade.
Saturday morning is normally free time for a bank chief executive. But Germany’s 420 local savings banks pride themselves on being close to their communities and so Mr Huber is helping to mark his institution’s 200th anniversary by planting trees in this park on the banks of the Rhine.
With goulash and Glühwein dispensed to chilly guests, Mr Huber is happy to acknowledge that his is a very different bank to the likes of Deutsche Bank – which has a balance sheet 300 times bigger. It is one reason why he wants EU officials to reconsider plans to bring all 6,000 eurozone banks under European Central Bank supervision as part of an EU “banking union”.
Rules that might suit international banks would be inappropriate for an institution like his, Mr Huber says. “You don’t impose the safety rules you’d need for a 2,000-passenger cruise ship on a yacht taking five people up the coast,” he says. “There would be enormous administrative costs that I would have to pass on ... it would hit Mittelstand companies and the local economy.”
Mr Huber’s arguments are far from isolated. Some of the loudest objections to EU banking union plans have come from Germany, and particularly from its savings banks, or Sparkassen, which believe they are central to the country’s tradition of strong regional industries.
They say home regulators better understand their characteristics and way of doing business. On the other side are banking rivals at home and abroad – and many European officials – who are suspicious of, and even worried by, some privileges enjoyed by these public sector banks and say common supervisory rules policed by a central regulator are required.
No country in the eurozone has such a welter of small banks as Germany. Even its largest savings bank has a balance sheet that, at €40bn, is about 50 times smaller than Deutsche Bank’s. More than 100 have less than €1bn in assets. All ply their trade only in their home areas, as do 1,200 local German co-operative banks that have similar concerns about banking union.
The FT has launched a series probing the politics of a proposed European banking union and the entrenched interests from London to Berlin
Altogether, Germany has almost one-third of the eurozone’s banks – and its savings banks, established under public-sector law, are powerful lobbyists with strong political ties. Given Germany’s political and economic clout within the eurozone, it means the country’s savings banks could play a decisive role in determining the structure of Europe’s banking union.
Seen from elsewhere in Europe, Germany’s desire to shelter its small banks may seem symptomatic of Berlin’s intention to prioritise its interests in the eurozone crisis. But inside Germany, opponents of ECB-led supervision believe it would be an unnecessary and distracting burden on banks that weathered the crisis and pose no systemic danger.
“We are in favour of improved European supervision [but] we want supervisors who can concentrate on the places where the problems are,” says Georg Fahrenschon, the head of the DSGV, the association representing all savings banks. “Customer-focused, small, regional banks bring stability. They should not be at the centre of new measures.”
Ask those outside the Sparkassen group about why they complain of its privileges and one thing that crops up is its member banks’ right to consider loans to each other – or the closely linked Landesbanken where many regional savings bank associations are co-owners – as, in effect, risk-free. It means no capital needs to be held against such exposures, writes James Wilson in Frankfurt.
That anomaly “leads to a de facto underestimation of capital requirements” and could encourage more leverage and interconnectedness to the detriment of stability, the International Monetary Fund argued last year.
At the same time, the 423 savings banks do not need to file combined accounts as a single financial group. Their accounts are first overseen by auditors from within the savings bank group, not external auditors.
The savings banks have also argued they should be able to remain outside of European deposit insurance plans, saying their traditional unlimited guarantees for each others’ survival is more than adequate. Critics say Landesbanken bailouts during the crisis show that the robustness of the joint liability scheme is exaggerated. In some cases savings banks did not contribute a share of aid that reflected their ownership stakes.
Savings banks also enjoy a lower cost of capital than rivals: they are under no obligation to make payouts to their local municipalities.
Their donations to local sports clubs or cultural events partly make up for the lack of dividends – but Ralph Brinkhaus, a CDU MP, says savings banks’ low level of dividends “is not going to be sustainable when so many local authorities are in financial problems”.
For critics of the Sparkassen, opposition to banking union is more special pleading. Savings banks, they say, portray themselves as small and systemically irrelevant where it suits – but enjoy benefits from being considered in other circumstances as part of a large, closely linked network. “Sometimes they are one of the biggest financial groups in the world and sometimes they are just 400 simple little banks,” sighs a competitor.
Savings banks’ combined assets exceed €1tn and they are also bound up, through ownership stakes and mutual guarantees, with the larger regional Landesbanken. According to Moody’s, the credit rating agency, the savings bank family has more assets than Deutsche, the eurozone’s largest bank, while savings banks grab a 38 per cent share of German bank lending and almost 37 per cent of deposits.
For critics, the fact that the savings banks are broadly similar and tightly networked increases their systemic risk and makes it more important they are placed under ECB supervision.
At the same time, even critics acknowledge that the financial crisis has reinforced the savings banks’ message that they are essential to Germany’s economic success. With plenty of stable funding from local savers, savings banks kept up lending to German companies through the crisis.
Many in Ms Merkel’s government support the savings banks’ position. Already Mario Draghi, ECB president, has bowed to one concern by suggesting that banking union need not involve a common European pot for deposit insurance. And observers think a likely compromise on banking union could be that the ECB takes nominal control but leaves day-to-day work to local regulators.
The DSGV’s Mr Fahrenschon insists banks that are “too big to fail” – not his savings banks – should remain the regulatory priority. He points to the EU-commissioned Liikanen report, which recommended ringfencing banks’ trading assets, as endorsement of the need to treat different types of banks differently.
“Europe has to make the effort to establish a system that deepens co-ordination and co-operation and improves the efficacy of supervision – but at the same time does not damage or sacrifice the strengths that we have,” he says. “That needs a supervisory approach that can take into account the different circumstances we have.”
Copyright The Financial Times Limited 2013. You may share using our article tools.
Please don't cut articles from FT.com and redistribute by email or post to the web.