German Savings Banks oppose bailing out faltering banks with the money of German savers
In an unusually bold statement, the German Savings Bank Association (DSGV) expressed deep concerns about a banking union in Europe. The concept was based on "completely false assumptions" and was aimed only at bailing out banks using the money of German savers. Georg Fahrenschon, president of the DSGV, instead wants national regulators to be closely overseen by the ECB. He also wants the European Banking Authority (EBA) to be shut down altogether.
Ahead of the German Bundestag’s decision on EFSF financial aid to be made available to Spain for recapitalising the country’s banks, Georg Fahrenschon, President of the German Savings Banks Association (DSGV), warned that the so-called ‘banking union’ was based on “completely false assumptions”. Fahrenschon: “We are against rushing into a union, mainly to bail out faltering banks abroad with the money of German savers.” The top priority, Fahrenschon said, had to 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, he added, it was necessary to deal with questions relating to banking regulation, deposit protection schemes and crisis management options.
The German Savings Banks used to closely support the German “Mittelstand”, small an medium enterprises with a modest but steady need for financing. After having been merged with some of the troubled Landesbanken like WestLB, a regional bank that collapsed in the aftermath of the Lehman crisis, the Savings banks are looking for an new profile in the German banking landscape. The integration of the Landesbanken proofed to be painful, putting some heavy losses on the savings banks. Regarding exposure to the countries of the European periphery the savings banks claim not to have too much exposure to Greece and other countries from southern Europe. However, the Sparkassen participated in the LTROs from the ECB.
The new president, Georg Fahrenschon, was a high ranking conservative politician, serving in his most recent job as finance minister of Bavaria. He is member of the CSU, the more conservative sister party of Angela Merkels CDU. The CSU is facing an election with a strong euro sceptic party already represented in the state parliament of Bavaria. The CSU is trying to win a profile as a voice of the hard working Germans, whose wealth needs to be defended against the southern Europeans and too much bureaucracy from Brussels.
So it is no surprise that Fahrenschon wants to distance the savings bank from the European investment banks without being overly anti-European. As far as banking regulation in Europe was concerned, Fahrenschon said that a common European supervision mechanism should be based on national banking supervision institutions, structured as a multi-level system. This would be the only way for the EU to live up to its very own principle of subsidiarity. A central European banking authority, he added, should concentrate solely on the biggest European banks that are too big to fail, while regionally operating banks such as savings banks would continue to be supervised by national banking regulators. From the DSGV’s perspective, the new banking supervision authority should be directly attached to the European Central Bank (ECB). This would make it easier for both institutions to play their common supervisory role. The ECB’s specific expertise, as well as closer co-operation between the ECB, the national central banks of the euro zone and the other EU countries within the European System of Central Banks (ESCB) constituted a sound platform for an effective European supervision mechanism, he said.
Fahrenschon: “The key point is that the ECB’s independence in the field of monetary policy would have to be preserved if the banking authority is attached to the ECB. For this reason, Frankfurt is the perfect location.” The European Banking Authority (EBA) as a standard setter should be closed down and its responsibilities should be integrated into the ECB.
In the interest of German savers, Fahrenschon said that he was flatly opposed to the establishment of a European deposit protection scheme. “Savings banks see their role as the protector of German savers. For this reason, we cannot accept that the savers’ money is used to help major international and investment banks that have run into trouble”, said Fahrenschon.
All those who, like the savings banks, were in favor of a closer political union in Europe would have to focus on the confidence people have in banks, in particular the trust that their savings would be safe. “When the house of foreign banks is already on fire, no one can seriously expect us to provide fire insurance for these competitors. To benefit from solidarity now, such banks would have had to pursue a similar risk policy, and they would have to have a track record of years of reliability”, said Fahrenschon.
In principle, Fahrenschon welcomed the EU’s proposal for a directive on crisis management, a framework for the recovery and resolution of banks and investment firms. To make future crises less likely, credible options will have to be created to ensure that crisis-ridden banks can leave the market. In Germany, a fund was established in 2010. An annual bank levy is paid into this fund in accordance with Germany’s Restructuring Act. This fund is an appropriate instrument that can be described as exemplary. Fahrenschon: “The other EU Member States are now called upon to establish similar systems.”
According to Fahrenschon, the requirements to be imposed on Spain – which should be inseparably linked with the EFSF aid – should be used to downsize and split up the banks concerned to local cajas. In this context, it must also be possible for Spanish banks to focus their activities on the region in which they are based, and it must be possible to correct the fallacy of the “stock corporation”.
The banking crisis in Spain has been largely due to misguided structural decisions taken in the past. Guided by dogmatic deregulation concepts, the cajas in Spain were forced to abandon the regional scope of their operations and to merge with other previously regional banks to create stock corporations. As a consequence, the banks were obliged to pursue a policy of uncontrolled expansion which, from a risk perspective, was misguided. To survive, each bank had to outdo the other cajas when it came to lending to the real estate sector. In conclusion, Fahrenschon stated that the attempt made to remedy these misguided developments by merging banks to create huge, listed stock corporations has further exacerbated the problem.
Deutscher Sparkassen- und Giroverband (DSGV – German Savings Banks Association) is the umbrella organisation of the Sparkassen-Finanzgruppe (Savings Banks Finance Group). The organisation includes 423 savings banks, eight Landesbank Groups, DekaBank, ten central building societies, eleven direct insurer groups of the savings banks, and many other financial service providers.