The German Sparkassen (public savings banks) are widely praised for their stability and their service to German savers and small businesses. They survived the 2008 crisis largely unscathed; the few failures were handled within the network, and depositors were compensated from a fully-funded deposit insurance scheme, with no public funds involved.
Other countries, especially those with more concentrated banking systems, look enviously at the Sparkassen. In October 2015, the Demos thinktank produced a report arguing that the UK should create a similar network of not-for-profit banks. But are the Sparkassen really such paragons?
German households save a very high proportion of their earnings. Unlike the UK and Ireland, where households save principally in the form of pensions and property, German savers like to keep their money in banks. The success of the public savings banks stems from their role as principal savings vehicle for the famously thrifty German savers.
In fact, they are a little too successful. Savings banks have excess deposits. Ordinarily, an excess of deposits over lending opportunities would drive down interest rates to zero or below. Interest rates have fallen at Sparkassen, but not as much as might be expected, given Germany’s dismal record of both private and public sector investment. So how do Sparkassen manage to maintain positive returns to savers?
Simple. They place their excess deposits with larger institutions – the regional public banks (Landesbanken), and the Frankfurt-based asset manager Dekabank Group. Landesbanken provide wholesale banking services both within Germany and cross-border, while Dekabank manages an asset portfolio of about 155bn Euros, some of it in Luxembourg and Switzerland. In other words, Sparkassen export their excess deposits. The Sparkassen model depends on there being a tier of compliant larger banks that will find profitable investment opportunities both inside and outside Germany to generate the returns that Sparkassen want to provide to savers. The Landesbanken and Dekabank together act like a giant sump.
The sump used to work well. Landesbanken pooled liquidity for the Sparkassen and lent to larger enterprises, while Dekabank invested excess deposits. But then the Landesbanken over-extended themselves, loading up on – among other things – American subprime MBS, risky investments in the Balkans and Irish property loans. In the 2008 financial crisis, several of the Landesbanken had to be bailed out. Since then, the Sparkassen’s equity stakes in the Landesbanken have gradually shrunk, replaced with municipal government ownership. Without this, the Sparkassen would have taken heavy losses.
In 2011, the German Savings Bank Association (the Sparkassen’s umbrella organisation) bought out the Landesbanken’s stake in Dekabank. The Landesbanken are still too damaged to deliver the returns that Sparkassen want, and their new prudent lending model is not going to deliver much in the future either. So Dekabank, not Landesbanken, should now be regarded as the asset management part of the Sparkassen empire. The sump has changed its nature. But it doesn’t generate the returns that it used to – asset managers have to “reach for yield” to make respectable returns these days, and after their experience with the Landesbanken, the savings banks are understandably not too happy for their asset manager to do anything too risky. So the result is a profits squeeze for Sparkassen. They aren’t getting the returns, either on their own lending or on their assets under management at Dekabank, that they need in order to give positive returns to savers.
But it could get a whole lot worse. Because profitable investment opportunities in Germany are thin, the Sparkassen need Germany to export capital. Net capital outflows from Germany are the mirror image of its current account: the savings bank model therefore depends on Germany running a sustained current account surplus. But Germany’s export-led economic model is vulnerable to downturns elsewhere, notably in China. If the current account surplus falls, what will happen to the Sparkassen?