Handelsblatt Interview

Small Banks, Big Problems

  • Why it matters

    Why it matters

    Germany’s savings banks may be small, but together they form the backbone of the country’s banking system. They need to reform their business to survive today’s period of low interest rates.

  • Facts

    Facts

    • German savings banks earned about 7 percent less last year than they did in 2015, largely becasue of lower profits from traditional lending.
    • They rely on traditional lending for about 80 percent of their earnings, a much higher amount than larger banks.
    • Record low interest rates are reducing profit margins from lending, and increasing their costs.
  • Audio

    Audio

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Festveranstaltung 25 Jahre Ostdeutscher Sparkassenverband
Even Germany's small savings banks, led by Georg Fahrenschon, worry about Donald Trump's populism. Source: Ralf Hirschberger/dpa

Many private banks across the Western world have seen their share price skyrocket since Donald Trump’s election as U.S. president. Georg Fahrenschon, who leads a group of non-listed state-backed banks in Germany, isn’t sure that’s necessarily a good thing.

The president of the association of German savings banks, a network of nearly 400 small, independent financial firms across the country, warned in an interview that the rise of populism and protectionism poses a serious threat to Europe and global society.

“We’re dealing with a worldwide crisis of confidence that is calling into question many of our accomplishments,” Mr. Fahrenschon told Handelsblatt, listing not just Mr. Trump but Britain’s exit from the European Union as the key threats to emerge in the past year.

Mr. Fahrenschon said it is up to all global leaders in politics, academia and the business world to come up with new ideas to confront populism, figure out “how to close the growing gulf between the rich and the poor” and respond to people’s fears about globalization and digitalization.

“We have to stand for open borders, unobstructed trade relations and international cooperation,” he said, but added that the focus should be on ensuring “that all parts of the population benefit from these effects.”

That doesn’t mean Mr. Fahrenschon doesn’t recognize some of the complaints coming from the populist right wing in Europe. In particular, he demanded that the European Union give more powers back to its member countries.

Mr. Fahrenschon has some self-interest in politicians answering the complaints of populists.

“People are sick of an E.U. that thinks it knows everything better and wants to regulate everything jointly,” he said. “Concretely that means we need to push back against centralizing things in Brussels and focus more on our regional strengths.”

This is where his comments come back to the savings banks themselves. Mr. Fahrenschon and other savings bank executives have long complained that they are being unfairly treated by Brussels bureaucrats. In other words, Mr. Fahrenschon has some self-interest in politicians answering the complaints of populists.

“We don’t accept that regionally anchored banks that are closely connected to their customers are throttled by rules that are actually meant to rein in the big international banks,” he said.

Deutsche Bank isn’t the only German bank struggling to make ends meet these days. The savings and loan banks, a critical cog in the country’s financial system, have long been complaining they can’t earn a living in the current age of record low interest rates in Europe.

The threat from online banking, coupled with the tougher regulation since the 2008 financial crisis, doesn’t help either. Smaller savings banks have struggled to cut their branch networks to answer the online competition. On regulation they complain that following the same rules as international banks puts them at a disadvantage, as their costs are higher.

All of this is borne out by the numbers: Savings banks earned 7 percent less last year than in 2015, when they earned €10.8 billion ($11.7 billion) in pre-tax profits.

Many are predicting a new wave of mergers between the 400-odd savings banks may be the only solution.

Interest rates alone are seriously eating into profits, as savings banks and other small German banks like credit unions rely on traditional lending for much of their business. They count on interest-rate profits for about 80 percent of their business – a much higher percentage than major investment banks.

But the European Central Bank has held its benchmark rate at 0 percent for the past year, and even charges banks 0.4 percent for any reserves that they deposit overnight with the ECB. All of this is designed to revive the euro-zone economy by kick-starting lending, but it’s hitting small banks hard.

Mr. Fahrenschon, who spoke Thursday at a Handelsblatt-sponsored conference in Berlin, said the trend is only likely to get worse this year. The banks’ earnings ratio is likely to increase to 75 percent, meaning the banks will have to spend 75 cents to earn one euro. That ratio stood at 64 percent in 2015.

The Bundesbank, in a joint study with the Frankfurt-based ESMT school, predicted Wednesday that interest-rate margins will tumble about 16 percent over the next four years, even if the interest rates set by the ECB hold at their current level. The German central bank has also offered cover for the banks’ complaints about regulation coming out of the euro zone.

“A one size fits all approach does not serve the banking landscape well,” Andreas Dombret, head of banking supervision at Germany’s central bank, the Bundesbank, said Thursday.

Mr. Fahrenschon said he’s still confident that savings banks can survive, though it will take “tremendous company effort.” Other bankers at Handelsblatt’s conference were not so sure.

Many are predicting a new wave of mergers between the 400-odd banks may be the only solution.

 

Frank Drost is a correspondent covering banking regulation for Handelsblatt out of Berlin. Michael Maisch is the deputy editor of Handelsblatt’s finance section and is based in Frankfurt. Elizabeth Atzler of Handelsblatt in Frankfurt and Christopher Cermak of Handelsblatt Global also contributed to this story. To contact the authors: drost@handelsblatt.com and maisch@handelsblatt.com

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