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German savings banks model shows Europe the way forward

The concepts on which a European banking union is based are flawed. Basing this union on the principles upon which the German savings banks model is founded – a model that has remained stable in recent years of crisis – would be a more sensible option.
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German savings banks model shows Europe the way forward

Europe finds itself in the midst of a debate on structural reform. Some of the contributions made during this debate would appear to be a knee-jerk reaction. This also applies to the idea of a so-called 'banking union', which was put forward recently. In my opinion, the test of such a comprehensive concept for Europe must also be whether it is compatible with the fundamental principles of European unification: subsidiarity, proportionality and unity in diversity. Abandoning these principles and leaving aside well-functioning decentralised structures would be too high a price to pay. In particular, it would be too high a price for the wrong objective – to bail out faltering banks abroad with the money of German savers.

In the opinion of the Savings Banks Finance Group [representing savings banks, landesbanken and regional building societies], the top priority must be to strengthen confidence, increase the stability of the European financial sector and to demand accountability from banks, specifically big banks. Last but not least, the questions relating to banking supervision, deposit protection schemes and crisis management options must also be addressed.

This goal is widely accepted. However, what lies behind the ideas upon which these demands are based? In my view, the concepts proposed to date with regard to the banking union are based on completely false assumptions. Moreover, they are in stark contrast to the success story of Germany’s savings banks and their business model, which has continued to be stable, even during the past few years of crisis. Savings banks practise the principles mentioned above – subsidiarity, proportionality and unity in diversity. This is part of their intrinsic character. The German economy, and in particular the country's small and medium-sized enterprises, have always benefited from this business approach.

Banking supervision

Market proximity creates confidence, stability and accountability. For this reason, we would suggest that the common European supervision mechanism, which is under debate within the context of the banking union, should be based on national banking supervision institutions, structured as a multi-level system. Furthermore, a central European banking authority should solely concentrate on the biggest European banks which, because of their size, can jeopardise entire countries. The truth is that they are not 'too big to fail' – as we have seen – but that they are 'too big to be allowed to fail'. Regionally operating banks such as savings banks can continue to be supervised by national banking regulators. Effective supervision depends not least upon proximity to, and knowledge of, the market.

The new banking supervision authority should be directly attached to the European Central Bank (ECB). This would make it easier for both institutions to perform their common supervisory role. More effective future European supervision would therefore depend upon the ECB’s specific expertise, as well as closer co-operation between the ECB, the national central banks of the euro member states and the other EU countries. At the same time, the ECB’s independence in the field of monetary policy must be preserved.

In my opinion, it would be wrong to split the responsibility between the ECB and the European Banking Authority (EBA) whose responsibilities for the eurozone can be integrated into the ECB. The EBA is an example of Europe taking the wrong direction through a centralised approach. And it will not be helped by increasing the speed with which the wrong direction is followed.

Deposit protection scheme

Europe runs the risk of putting the cart before the horse. This applies, for instance, to the deposit protection scheme envisaged in the context of the banking union.  The Savings Banks Finance Group strongly opposes such a scheme in the interest of German savers. The scheme would fall considerably short of the standard proven level of protection for the vast majority of German banks, and it would undermine the credibility of the security of deposits due to the large number of access options. Instead, we are in favour of the swift adoption of the EU’s Deposit Guarantee Directive, which has already been largely agreed. This directive recognises national deposit guarantee schemes. This is not only a decision in line with the principle of subsidiarity, it will also put an end to the tendency to delegate responsibility upwards and thus to pass the blame.

In the Savings Banks Finance Group, we rely strongly on local responsibility. Our joint liability scheme is not an insurance that any bank can help itself to when the house is on fire. Instead, we have established an intra-group monitoring system which provides for early intervention rights enabling graduated countermeasures to be taken in good time at a regional level. This is in addition to the national supervision rules which savings banks – like all German banks – are also subject to. It is perhaps important to add that since we established our intra-group joint liability scheme (which has been in operation since 1973), no customer of a member institution has ever lost his or her deposits, no depositor has ever had to be indemnified, and no member institution has ever defaulted on its financial obligations, much less become insolvent.

Germany’s current 423 savings banks are independent institutions, with responsibility for their own actions. With an average balance sheet total of €2.5bn, no savings bank is large enough to jeopardise an entire country, let alone an association of countries. Savings banks operate without government guarantees and are fully exposed to competition. No one can seriously expect us to support competing big banks with our profits, and certainly not with our deposits.

Crisis management

Recently, the European Commission (EC) presented a proposal for a directive outlining the framework for bank recovery and resolution. In principle, the approach adopted by the EC is correct. Distressed banks should be permitted to leave the market. But this will require credible options. The application of the planned resolution instruments, for instance – combined with the authority to implement the resolution – can be ensured by financing these instruments through national resolution funds. In Germany, the Restructuring Act was adopted in 2010 under which such a fund was established. The fund is fed by an annual bank levy. This model can also be applied in other countries. However, it would be absurd if cross-border access were permitted to tap the national resolution funds of individual member states. This would provide a comfort zone for banks in crisis.

The option to wind up banks cannot be off limits. We in the Savings Banks Finance Group have recently experienced ourselves how hard this can be, with the successfull winding up of WestLB, which used to be Germany’s third largest bank. Other landesbanken have reduced their balance sheet total, on average by 15% in the past two years. However, it is important to maintain or restore the right proportions in the market. It strengthens customer focus, reinforces local responsibility and, last but not least, it is a path to the origins of the banking business: supplying banking services to citizens and local businesses.

Overall, however, crisis management should not focus solely on the resolution of banks. Instead, we should focus on crisis prevention. We should reconsider business models and build on the great idea of small units.

Spain's cajas

This idea was discontinued in Spain. Although the current economic crisis was triggered by a real-estate bubble, structural decisions taken in the past and the fact that the core principles of savings banks were abandoned also play a part. Guided by deregulation concepts, which were to an extent dogmatic, the cajas in Spain were forced to abandon the regional scope of their operations – clearly a misguided development. Banks which previously had regional roots were merged gradually to form increasingly large corporations – the pace of this trend has even been accelerated recently.

Today’s cajas have achieved a balance sheet total of more than €100bn on average. Germany’s biggest savings bank has a balance sheet total of approximately €39bn – the smallest has a balance sheet total of approximately €130m. In Spain, cajas were obliged to pursue a policy of uncontrolled expansion – primarily in the large-volume real-estate sector – which, from a risk perspective, was misguided. This resulted in mutual damage in an overheated market. The mergers, which led to huge, listed stock corporations, delayed and aggravated problems until the banks were no longer able to solve them without outside assistance.

In my opinion, the European Stability Mechanism aid for Spain should therefore be linked to clearly defined requirements. Spain now has the opportunity to rectify and downsize the banks concerned, turning them once again into genuine local savings banks. It is clear that artificial growth is not sustainable.

Germany's savings banks

The business model of Germany’s savings banks has been successful for 200 years. In view of the short-term perspective of the current debates, such a time period admittedly seems to be almost unreal. It also goes without saying that such success will not continue in the future without further action. It is all the more important for us that the necessary environment should be preserved. This includes responsibility at the lowest local level, proximity to the market, and what is referred to in Europe as 'unity in diversity'.

The core elements of the business model of Germany’s savings banks are decentralisation and the promotion of public welfare. In spatial terms, the business area of a savings bank is the administrative region in which it is situated. In terms of substance, the purpose of the business model is to promote and strengthen this region. Savings banks do this, for instance, through the non-discriminatory provision of financial services, with appropriate terms and conditions, to all groups of citizens. Their sustainable commitment to the development of local businesses, particularly small and medium-sized enterprises, is combined with a profound knowledge of their customers – which is a consequence of their long-standing focus on the local business community.

This model has proven to be successful but it is not very exotic. European countries such as Austria, Norway or France also have decentralised savings banks sectors, the Swiss cantonal banks are another example, and around the globe local banks play a pivotal role, especially in emerging economies. In Germany, large segments of the banking market have a decentralised structure, in particular the Savings Banks Finance Group (with the savings banks and landesbanken) and the co-operative banks (Volksbank and Raiffeisenbanken). Together, they provide more than 56% of the loans to enterprises in Germany (according to 2011 figures) – which is a great economic achievement, accomplished through day-to-day competition.  

Germany’s big banks have a high international profile due to their capital market activities. Taken together, all of the big banks account for a relatively small portion of the loans granted to German enterprises (13.2%). In 2011, their share was once again smaller than that of the landesbanken (17.5%).

Strength through independence

Decentralised structures require local responsibility, and local responsibility requires freedom of choice. When seen from outside it is sometimes considered unusual that German savings banks have no owners. Local governments do not hold any shares. Savings banks are legally and financially independent credit institutions. They are not managed by politicians, but by banking professionals who are approved by the German supervisory authority. They are profit-oriented but not driven by dividends. All of their profits are transferred to retained earnings and used to strengthen their capital base or to sponsor social and cultural activities which are intended to promote public welfare.

Deposits and profits are therefore not siphoned off from the regions to be fed into the big carousel of international financial markets. Instead, savings banks fuel local economic cycles: local deposits are transformed into local loans, strengthening the real economy. Each savings bank is fully responsible for its own risk management and fully exposed to the pressure to increase its efficiency. Its interest in the development of its business can therefore only be a sustainable one. No German savings bank can simply lean back and rely on a financially strong superstructure. And it is also for this reason that we are opposed to a 'comfort zone' for big banks, which hides rash proposals for the communitarisation of risks behind the word 'union'.

This is a clear 'yes' in favour of Europe. A Europe whose inner strength is greater than it may currently appear to be. Brussels tends to adopt big, centralistic solutions, in particular in the difficult structural debates of the ongoing crises. However, it is important that the weight in Europe should not be shifted too much towards a superstructure, which will put an increasingly heavy burden on the diverse underlying structures. In the final analysis, these structures will have to bear the entire weight. I realise that, as an organisation that is committed to its decentralised structure, the Savings Banks Finance Group often does not fit into the picture at first sight. But Europe has had positive experience with decentralised and small-scale structures. And Germany’s economy and its attendant financing structures are a particularly good case in point.

Georg Fahrenschon is the president of the German Savings Banks, which is the umbrella organisation of the Savings Banks Finance Group.

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