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FINANCE
Bloomberg Businessweek
October 8, 2018
33
PHOTOGRAPH: ARMIN WEIGEL/BLOOMBERG
○ Germany’s Sparkassen could pose a hidden threat to European financial stability
AreGermany’s Savings Banks
ALittle TooCozy?
Regensburg has all the attributes typical of his-
toric German cities: a 12th century bridge across
the Danube, a 500-year-old bratwurst stand, a
palace with a real-life princess—and a mayor who
serves on the board of the local savings bank.
And as happens periodically in places across
Germany, the relationship between the bank and
City Hall stands at the center of a controversy.
Mayor Joachim Wolbergs has been suspended
pending the outcome of a trial for alleged corrup-
tion related in part to his side job as chairman
of the bank’s supervisory board. The accusations
involve campaign donations from a real estate
developer, rights to coveted land, and a low-
interest, €4.5 million ($5.2 million) loan approved
while the mayor headed the board.
The trial, which started on Sept. 24, high-
lights what many economists say are overly
cozy ties between politicians and Germany’s 385
public-sector savings banks, known as Sparkassen.
Those close links are at the heart of concerns
about hidden risks to the country’s inancial sys-
tem, which has shown signs of strain as giants
Deutsche Bank AG and Commerzbank AG struggle
with low profitability and strategic missteps.
“The largest banking system in Germany is pre-
dominantly controlled and monitored by people
whose inancial expertise is questionable,” says
Ralf Jasny, a business professor at the Frankfurt
University of Applied Sciences.
Each Sparkasse is nominally independent, and
they mostly lack the “too-big-to-fail” heft of the
leading Frankfurt banks, falling below the radar
of the European Central Bank and its oversight of
top inancial institutions. While a wave of merg-
ers has reduced the number of Sparkassen by
almost half since the 1990s, the system remains
fragmented. The biggest is the Hamburg aili-
ate, with 130 oices, and several have just a sin-
gle branch. But together they control €1.2 trillion
in assets, which would make them the country’s
second-biggest lender, after Deutsche Bank. The
logo they share—a stylized red “S”—is present
in just about every neighborhood in Germany,
they backstop one another in case of inancial
trouble, and they’re barred from encroaching on
one another’s territory. “A rapid rise in interest
rates could cause problems for all of them simul-
taneously,” says Isabel Schnabel, inance profes-
sor at the University of Bonn and a member of
Chancellor Angela Merkel’s council of economic
advisers. “We could get to a point where there are
too many to fail.”
Flush with deposits from Germany’s famously
thrifty citizenry, the Sparkassen are a dominant
force in retail banking, especially in rural areas.
About 60 percent of the population has a relation-
ship with a Sparkasse, according to ratings com-
pany DBRS Ltd., and on the surface, the banks
look like paragons of prudence. They face little
pressure to maximize proits, and what money
they do make gets reinvested or goes into public
cofers. Their local focus means they prefer con-
servative, low-margin loans to riskier inancial
instruments, and no Sparkasse has defaulted
since the 1970s, when a shared safety net was set
up. But critics point to the example of Germany’s
Landesbanken, a network of wholesale banks
that invest money from the Sparkassen on inter-
national markets. After disastrous bets on U.S.
subprime loans and other blunders a decade ago,
those institutions had to be bailed out, costing
taxpayers more than €30 billion.
In March, Fitch Ratings Inc. cautioned that
most of the Sparkassen’s long-term assets are
mortgages and other instruments that lock in
today’s low rates, but their deposits tend to be
short-term savings accounts that would have to be
repriced more quickly if rates were to rise. That
would hit Sparkassen harder than bigger banks,
which have more diverse portfolios. And their
dependence on local business gives them nowhere
to turn if Germany’s economy falters. “A slump
could lead to a chain reaction of savings bank
insolvencies, which would be diicult or impos-
sible for the Sparkasse system to absorb,” says
Reint Gropp, president of the Halle Institute for
Economic Research.
○ Wolbergs