Publicly owned savings banks have become a whipping boy when they should actually be congratulated for their good work. Jan Wagner, in Madrid, argues in favour of the status quo.

Not all German banks are in crisis these days. Having emerged as a global financial player in the 1990s, commercial giant Deutsche Bank, for example, has largely maintained its profits despite the weak German economy of the past two and a half years.

But even in Germany – where the intense economic slowdown has led to soaring risk provisions at the banks and bearish equity markets have greatly depressed their revenues and the value of their portfolios – there is another big player beyond Deutsche that has remained profitable: publicly owned savings banks called Sparkassen.

That the Sparkassen are holding up well in one of the worst downturns ever for German banks is hardly a secret and is rooted in history. Since the rebuilding of the German economy following World War II, the Sparkassen have been the dominant force in the domestic retail market and in lending to the Mittelstand – the small to medium-sized enterprises (SMEs) that, today, make up 99% of corporate Germany and employ 70% of its workforce.

New statistics from the Berlin-based Sparkassen association, DSGV, illustrate the might of the Sparkassen. According to DSGV, the 521 Sparkassen control no less than 40.7% of domestic retail deposits and account for 42% of the loans made to the Mittelstand.

In fact, the Sparkassen have tightened their grip on the domestic market by increasing their lending to the Mittelstand while Deutsche and other commercial lenders such as Dresdner Bank, Commerzbank and HypoVereinsbank (HVB) have cut their exposure to the sector. The four commercial banks also have lost some retail market share following the closure of numerous unprofitable branches around Germany. The Sparkassen, meanwhile, have defended their market share amid the downturn by choosing instead to cut costs and staff at their branches.

Propping up the economy

It is also is a blessing for Germany that the Sparkassen have kept their credit lines open. The nation’s economy would be weaker and unemployment higher, otherwise, due to an even greater number of insolvencies among the Mittelstand, which depend on corporate loans. Guido Hoymann, analyst at the private bank Metzler in Frankfurt, remarks: “If the Sparkassen curtailed lending to the Mittelstand, this would have devastating consequences for the German economy. In this sense, they perform a vital service for the economy.”

No one is more aware of this than Holger Berndt, an executive member of DSGV’s board. He strongly feels that because of their crucial role, the Sparkassen should remain publicly owned, despite the trend among European governments to privatise savings banks. “What we are saying is that our decentralised structure and our regional focus has been a huge success and should therefore not be changed,” said Mr Berndt, who spoke to The Banker at the recent World Congress of Savings Banks in Madrid.

Problems for peers

However, analysts point out that while the Sparkassen, as chief lenders to the Mittelstand, are important to the economy, their ownership structure has greatly impaired competition and consolidation in German banking. This static environment, in turn, has exacerbated the woes of other German banks, particularly Deutsche’s three commercial peers.

For one thing, they say, the Sparkassen have had an unfair competitive advantage over their commercial and co-operative rivals owing to guarantees from their government shareholders. These state guarantees automatically provide the banks with investment grade credit ratings, allowing them to underbid their rivals in the loan business and hence keep margins razor-thin. The guarantees are, however, due to expire in 2005 following an agreement between the Berlin government and the European Union (EU).

Mr Hoymann thinks that even after the guarantees expire in 2005, competitive conditions will not improve, since the Sparkassen, as government-owned entities, are under no pressure to achieve high profitability like their commercial peers. “This means they will still be in a position to lend at lower prices than their competitors after 2005,” he notes.

Consolidation block

Frankfurt bank analysts also note that the Sparkassen’s ownership structure – which prevents a commercial bank like Deutsche from buying them – is a key hindrance to much-needed consolidation in grossly overbanked Germany.

Consolidation, they maintain, is the only way German banks can raise their lending margins to the international standard of around 4% from around 1% currently. Cross-segment mergers involving the Sparkassen and commercial banks would further boost the international competitiveness thanks to economies of scale. Indeed, the emergence of an oligopoly in the UK has enabled the banks there to fare far better than their German peers in these tough economic times.

Promoting competition

During the Madrid interview, Mr Berndt dismisses the notion that the Sparkassen’s status had undermined the health of German banking. On the contrary, he says, Germany’s three-tiered banking system had promoted “fierce competition” in the sector, as evidenced by vast retail networks built by both the commercial and co-operative banks to compete with the Sparkassen nationwide.

“Now that the commercial banks are not doing well in the retail business and have suffered because of weak markets and overaggressive expansion, the Sparkassen are blamed. It’s not an honest debate,” he says.

Equally dishonest, according to the German bank executive, is the claim that the Sparkassen possess an unfair advantage owing to their government backing. “If Deutsche Bank were to fail, the government also would step in to help it, so I don’t really see the difference,” said Mr Berndt.

In his defence of the status quo in Germany, Mr Berndt was aided by Jose Antonio Olavarrieta Arcos, his counterpart at the Spanish savings banks association CECA. Speaking to The Banker at the Madrid congress, Mr Olavarrieta warned that if the ownership structure of German or Spanish banks were changed in the interest of consolidation in those markets, it could entail “financial exclusion” of people and SMEs.

Although the 46 Spanish savings banks have foundations as their shareholders, their ownership structure – like that of the Sparkassen – prevents them from being bought by Spain’s commercial banks.

Taking the UK as an example, Mr Olavarrieta says Don Cruickshank, former chairman of the London Stock Exchange, had recently issued a report, which found that the emergence of a bank oligopoly in that market had caused a considerable credit crunch.

“We fear that this could happen in Spain if there were consolidation between the commercial and savings banks. We therefore don’t want a jungle only with elephants. There have to be monkeys and tigers too,” the CECA executive says.


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