Germany has too many banks, more than any country in the world.
That’s especially true of its savings banks, which are often run by local cities and municipalities.
Take the one in Bad Sachsa in northern Germany, with just 40 employees.
After 129 years of proud independence, it is contemplating the unthinkable — a merger.
It’s brutal out there for small banks in the euro zone’s near-zero interest rate deep freeze. Their returns are miserable and their costs are rising, and often, their customers are dying off in Germany’s aging society.
“We are well aware that the savings banks landscape is changing fast,” said the chairman of Bad Sachsa’s supervisory board, Axel Hartmann, who is also the town’s mayor. “We are totally open to possibilities.”
But Bad Sachsa is an exception.
The leaders of Germany’s vast “Sparkassen” sector are not as open as Mr. Hartmann is to moving with the times, it appears. Many in wealthier communities want to preserve their comfortable independence, despite signs some in the industry see of a coming crisis.
“It isn’t just the regional savings banks, we need more efficiencies among the independent regional banks, the building societies and the public insurance companies.”
With more than 2,000 institutions vying for customers and businesses, Germany has more individual banks per household than any developed country in the world. France, by contrast, relies on a group of larger banks.
Some leaders of savings banks see a crisis brewing, with the small organizations vulnerable to the next global financial upheaval.
Some senior executives like Mr. Hartmann are openly calling for consolidation — still a taboo to many of their peers.
But there is a precedent — Germany’s layer of “Genossenschaftsbanken” — independent cooperative institutions much like credit unions in the United States, which have boosted market share by consolidating.
“My feeling is that the cooperative banks overall have reacted faster and with greater flexibility,” Klaus Fleischer, a professor at the Munich University of Applied Sciences, told Handelsblatt. “The cooperative banks quickly started bundling necessary processes and shouldering the burden together.”
Mr. Fleischer’s opinion is not universally held. Defenders of savings banks argue that the branch depends on independence and strong local ties, which a wave of consolidation would undermine.
Mergers could reduce diversity in the sector, they warn ominiously, possibly creating further instability.
The savings banks are typically small like in Bad Sachsa, but as a sector, their influence is huge in Germany and often controversial in Brussels.
There are more than 400 independent savings banks in Germany. Through a national savings bank association, they hold more deposits than Deutsche Bank and Commerzbank, the No. 1 and 2 banks, put together.
The heirarchy in the savings banking system also includes much larger state-level regional banks, real-estate lending banks and insurance companies.
Ralf Fleischer is a prominent merger advocate.
He heads Munich’s Stadtsparkasse, among the largest of the community savings banks. The sector’s leaders do more to drive consolidation, he said recently. With more than 400 savings banks, six regional banks, nine regional building societies and 11 associated insurance companies, the network is simply far too big and complicated, he added.
Leaders of other large savings banks agree.
“Having this many component companies in the network is not sustainable in the medium- or long-term,’ said Arndt Hallmann, the head of Düsseldorf’s Stadtsparkasse.
Andreas Schulz, the head of Central Brandenburg Savings Bank, a group near Berlin, agrees. “It isn’t just the regional savings banks, we need more efficiencies among the independent regional banks, the building societies and the public insurance companies,” he said.
The sector has been slowly shrinking. The historical trend within the savings bank sector is a slow, steady movement towards fewer banks. In the 1970s, there were nearly twice as many savings banks in Germany– more than 800.
But Rolf Gerlach, the president of the regional savings banks in Westphalia in northwest Germany, believes many savings bank are not consolidating, but deliberately trying to avoid consolidating.
Instead of combining forces in difficult times, some organizations are increasingly competing against each other across the country, he said, diluting their resources and making the network even more complex.
Experts say consolidation would pay off for savings banks, if they’d only agree to merge.
“If it happens, synergies could mean €500 million in savings over the coming years,” said Bernd Nolte, a finance industry consultant.
But the banks have deep political ties and have effectively blocked needed mergers. The big regional banks, called Landesbanken, typically backed by the one or more German states, have been under fire after many had to be bailed out in the financial crisis. Consolidating these banks has proven extremely difficult, because powerful state politicians sit on their supervisory boards and depend on their profits to fund the state’s finances.
“A consolidation only happens when individual institutions are doing badly and their own independent existence is in danger,” said Martin Faust, a banking professor at the Frankfurt School of Finance.
One example he points to is HSH Nordbank, a troubled northern German lender which ran aground from shipping loans.
HSH is now in the process of being privatized – but only because the European Commission demanded it of the German government.
Mr. Fleischer said a much broader reform is needed: “Two Landesbanken are enough. One Landesbank in the north and one in the south would be powerful institutions that, for example, could take advantage of the gap that has opened up in business loans because of the weak phase of Deutsche Bank.”
The rising calls for mergers and rationalization is pressuring Georg Fahrenschon, the president of the German Savings Bank Association (DSGV), which oversees the entire network.
But Mr. Fahrenschon – originally a politician with the Christian Social Union, the conservative Bavarian political party – is reluctant to get behind the push for consolidation, which is controversial among the association’s members, say sources within the savings bank network.
Mr. Fahrenschon did one time publicly suggest a wave of mergers, early in his time in office in 2012, but the bruising response he received seems to have cooled his ardor.
“The current structure and number of regional banks is pretty close to optimal. We do not foresee a move to unify them into a single overarching bank, as with the cooperative banks,” he told Handelsblatt this week.
The “cooperative banks” that Mr. Fahrenschon mentions have benefited from consolidation.
About 1,000 cooperative institutions, known as “Volksbanken,” are relied on by more than 18 million customers in Germany, and increasingly by businesses too. Cooperative banksm similar to savings and loan banks in the United States, have also steadily increased their market share in corporate loans over the past few years.
By the end of 2015, they accounted for 17.2 percent of that market, according to Bundesbank figures. This flexibility has allowed them to adapt to lower returns from customer deposits in the current climate of near-zero interest rates.
This strong showing has come as the cooperative network has seen a steady pattern of mergers. Last year, there were 20 mergers in the cooperative sector. “In 2016, we expect to see around 50 more mergers,” said a spokesperson for Fiducia GAD, the main provider of IT services to the cooperative network. Since bank mergers necessarily mean data mergers, the IT company is well-placed to survey the state of consolidation. And it is expecting more to come: “We are setting ourselves up for an even bigger wave of mergers in the future,” the spokesperson added.
Unlike the regional savings banks, cooperative banks have also merged at the top. The last remaining two regional cooperatives, DZ Bank and WGZ Bank, finally agreed to merge their operations at the end of last year, creating Germany’s third-largest bank in the process.
Industry observers identify three key factors underlying the pressure for consolidation in the sector. Chris Helbing, a banking expert with consultants Accenture, listed them off: “First, falling returns because of near-zero interest rates. Second, rising costs from increased E.U. regulation. And third, the large investment demanded by digitization.”
Of these, regulation may present the heaviest burden. Many smaller banks complain that their biggest challenge in the past few years has come from the tough new demands presented by Europe’s regulators since the financial crisis.
Keeping closer tabs on loan requests, reporting financial data, and recording the exact details of all securities transactions – the average cost of dealing with the litany of regulation is typically higher with smaller community banks than with larger national ones. All banks, no matter what the size, now have to report any loans of over €25,000.
For the average cooperative bank, the cost of meeting these regulatory requirements runs to about €100 million per year, according to a study by the cooperative banking association, the BVR. For some very small banks, the cost of regulation actually has been higher than the revenue generated by the securities business.
“We need more differentiation, not a one-size-fits all,” Gerhard Hofmann, a board member of the BVR, told Handelsblatt. “A small cooperative bank with 70 employees doesn’t have the resources and the specialists of a larger bank, but is burdened by the same, often complex rules.”
The dangers posed to community-oriented banks is something that should worry everyone, he argued, because it could actually increase risks in the global financial system by pushing banks once again to become bigger rather than smaller. “If we learned one thing from the financial crisis, it is that diversity in the banking system, and especially different business models, ensures a stable and productive financial system,” he said.
As well as regulation, the actions of the European Central Bank are also putting pressure on the banking sector. In recent years, the bank has pushed interest rates across the 19-nation euro zone to historic lows, in a bid to revive lending on the continent.
The ECB’s policies are above all aimed at the stagnant banking sectors of southern Europe. In Germany, where households tend to save more money and borrow less than many developed economies, the low interest rates are instead affecting the bottom line of smaller banks that have long relied on customer deposits to earn money.
Not all small bankers share the enthusiasm for mergers. Some point to the downside: Uwe Fröhlich, who heads the BVR association of cooperative banks, said that many smaller banks have gained the trust of Germany’s rural population precisely because they can maintain close personal contact with the communities they serve.
“The number of mergers will increase moderately,” Mr. Fröhlich told Handelsblatt. “But mergers are not the answer per se. Our locally-oriented business model is a defining aspect of the community banks.”
“The savings banks have survived world wars and recessions. We will also survive this low interest rate phase,” said Mr. Fahrenschon, the head of the German Savings Bank Association (DSGV). While the next few years will be difficult, he argued that Germany’s network of savings banks remains “stable” and well-equipped to deal with downturn.
Mr. Fröhlich, who heads the association of cooperative banks, echoed those remarks: “We can live a long time with this situation. The community banks have built high reserves in the last years and are well-capitalized. But they are also steering against the situation by reducing costs – for example in the back office or by critically reviewing their branch network.”
Elizabeth Atzler is a banking correspondent for Handelsblatt in Frankfurt. Frank Drost covers banks and banking regulation for Handelsblatt in Berlin. Kevin O’Brien is the editor in chief of Handelsblatt Global Edition. Christopher Cermak is an editor covering finance for Handelsblatt Global Edition. To contact the authors: firstname.lastname@example.org, email@example.com, firstname.lastname@example.org and email@example.com