Model Banking

Savings group chief warns of conflict of interest in ECB dual role

Fahrenschon Bloomberg
Georg Fahrenschon, president of the German Savings Bank Association, gestures as he speaks during the Banks In Transition Conference in Frankfurt.
  • Why it matters

    Why it matters

    Georg Fahrenschon downplays fears of a housing bubble driven by the liquidity glut and says the nation’s savings banks are capable of coping with low interest rates.

  • Facts


    • Georg Fahrenschon warns that when the ECB begins overseeing the largest banks in the euro zone, its dual role as supervisor and policy maker may not mesh easily.
    • Savings banks will not be tempted to take risks in the low interest rates because they are mandated to play safe.
    • Mr. Fahrenschon dismisses fears that low interest rates will lead to the creation of banks that are “too big to fail.”
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The German savings banks came through the financial crisis well. So well, in fact, that savings banks outside the country are considering copying the German system.

Georg Fahrenschon, the former finance minister of Bavaria and current president of the German Savings Bank Association, certainly considers the German model an export worthy commodity. He’ll take his message to Oslo at the end of the month, where he is pleased to have been invited to speak at the 100-year celebration of the Norwegian Savings Banks Association.

In November, the European Central Bank will take over supervision of the large banks in the euro zone. Are you sure they will be sound banks?

I am an optimistic person by nature. From the German point of view, we have seen the consequences of previous mistakes in the last four years. In addition, a stress test is now being conducted that should ensure that only solid institutions will be taken under supervision.

Isn’t this stress test a waste of time, since the ECB is encouraging institutions to take risks through low interest rates?

There are surely certain risks in that direction. This also illustrates the institutional problem of the ECB. From now on, it is not only responsible for monetary policy, but soon will be the highest bank supervisor. It will be two-faced, so to speak.

Which danger does this dual role hold?

For example, the ECB continuously injects more liquidity into the market and it shouldn’t be surprised when in parts of Europe, banks plug their own holes with it.

Do you believe that distorts the current stress test?

There are also contradictions in the stress test. The institutions will be treated differently. Banks that are already on the ECB’s drip will have an advantage. But healthy (banks), will be scrutinised, with the philosophy “You look so healthy, something must not be right there.”

I see no housing market bubble. I do, however, see a build-up in individual regions

So you see a conflict of interest for the ECB?

Yes, there is that, in defiance of all the Chinese walls that one bangs into at the ECB. The ECB will in the future be responsible for monetary stability, financial supervision and also for the handling of banks. It is clear these functions actually belong in different hands. The ECB may not go the way of becoming a European substitute government. It is already today following in the footsteps of the U.S. Federal Reserve Bank, that is not  bound only to monetary stability. We had imagined that otherwise.

Keyword: liquidity glut. Do you see a housing market bubble in Germany?

I see no housing market bubble. I do, however, see a build-up in individual regions. And the oversupply of liquidity leads to high-risk classes of investment coming into vogue again.

How do you determine that?

For example, with niche markets. Antique cars, other antiques, art and jewelry are well advertised. Suddenly, there are notices for investments in the mailbox promising a return of 8 percent. This is an attempt to do business by putting investment pressure on private households. For me, that is no longer a gray, but rather, a dark gray capital market.

How can you make sure that savings banks, with low interest rates, will not be tempted to take greater risks with their own investments?

The savings banks have a clear compass for their monetary policy and do not take irresponsible risks. No one should worry there.

But still, the incomes are getting lower, the prices are getting higher. How much longer can the savings banks endure that?

There have been savings banks for over 200 years. They can endure a prolonged low interest phase. Our institutions recorded a very gratifying business development. I assume the savings banks results in this year will be at about the same level as last year. That is also because we had a stable situation in retail and corporate transactions.

But your clients are suffering.

Yes, the historically low interest rates are not making savings any easier right now and, in fact, are creating an environment when  less will be saved. Based on a previously used method of calculating the savings rate, the rate this year will probably be just over the 10 percent mark. We view that as a minimum for a reasonable retirement plan. In the past year, it was 10.5 percent.

The savings banks have a clear compass for their monetary policy and do not take irresponsible risks. No one should worry there.

Some managers of private big banks believe the ECB stress test will create a merger boom among Europe’s financial institutions. Do you share that view?

I do not see it like that. At least the institutions in our group – I am thinking here of the state banks – have done their homework and are set up solidly. I cannot see a merger boom even outside of our group.

Wouldn’t bank mergers automatically revive the “too big to fail” thinking again, the danger that very big banks will have to be bailed out by the taxpayers because of their importance to the financial system?

That is correct, but there have not been more bank mergers, and this subject has not been discussed .

The savings banks made their reputations during the crisis, but most recently, the image has been somewhat tainted by news that Miesbach-Tegernsee district savings bank in Bavaria sponsored a birthday celebration for the former district authority. Can you rule out such cases today?

We have 417 savings banks, all of which act independently in the market. Their colleagues and the members of the boards of directors mirror the cross-section of the whole population. One can never rule out malfunctioning individuals 100 percent, but one must do everything to prevent such a malfunction. And we are doing that. The regional associations have established new codes of conduct as have the Bavarians. And we all have a renewed attention on it in the group.

This interview was translated by Anna Park Kim. Jeff Borden also contributed to this story. To contact the authors: and 

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