Small banks

Where the IMF Agrees with Germany

Savings banks are already feeling pain the IMF is warning about. Source: DPA

Germany’s savings banks and insurance companies won’t have found much of interest in the International Monetary Fund’s latest semi-annual report on the state of global finance. That’s because they’re already living the dangers that the IMF, using a series of complex theoretical models, is now warning against.

The Washington-based institution in its “Global Financial Stability Report” Wednesday warned that a prolonged world of record low interest rates can lead to a flattening of the so-called yield curve. In other words, the difference between longer and shorter term interest rates on loans is narrowing. What that means in practice: banks are earning less cash on credit.

The problem, the IMF says, could soon come to a head for smaller banks that rely on traditional loans to earn their keep and can’t easily pass costs onto their customers. These banks lend out long-term mortgages to households and usually make the money back on customer deposits, which they invest in shorter-term options. That kind of business model becomes impossible if there’s no difference between short and long-term interest rates.

Small banks are something Germany has in spades. Europe’s largest economy has nearly 2,000 individual financial firms – more banks per capita than any other developed country. The lion’s share of them are either state-backed savings and loan banks or community-backed cooperative banks. Both groups have suffered of late, as have German insurance companies that need to make money off insurance premiums to survive.

Savings banks rely on the yield curve the IMF wrote about in Tuesday’s report for about three quarters of their profits.

Low interest rates is something Germany suffers from more than most. Not only has the European Central Bank kept interest rates at record lows, but foreign investors have piled cash into Germany, a country viewed as a safe pair of hands for much of the European debt crisis. That, too, has driven yields down further than in other European countries.

It’s a rather unique German problem that its banking sector and insurance firms have been loudly complaining about for the past few years – without much sympathy from international regulators or institutions like the IMF. The ECB’s record low rates – particularly its deposit rate on overnight loans that has been pushed into negative territory at 0.4 percent, essentially forcing banks to pay to park reserves with the central bank – cost savings banks about €560 million last year. Georg Fahrenschon, head of an association that represents the network of some 400-odd savings banks in the country, last year complained he may need to move to Brussels if he really wanted to get his message across.

And yet for all the complaining, Germany’s savings banks aren’t doing all that badly: They earned about €2 billion as a group last year and together handle 40 million checking accounts – more than any other banking group in Germany. If you add the state-backed regional banks or ‘Landesbanken’ that fall under the savings bank rubric, the group is also the biggest creditor of Germany’s vaunted ‘Mittelstand’ of small and medium-sized companies.

But that doesn’t mean low interest rates aren’t a risk: Savings banks rely on the yield curve the IMF wrote about in Wednesday’s report for about three quarters of their profits. Mr. Fahrenschon has said he expected a significant effect on profit margins the coming years.

Savings banks have already cut back on costs to deal with the coming deluge, closing about 900 bank branches last year, though that still leaves 10,600 across the country. About 20 or so have also merged in the last year, cutting the total number of savings banks to 396.

The IMF may be recognizing the problem, but savings banks won’t necessarily like the answer. Wednesday’s financial stability report said a stronger consolidation of the industry should help reduce costs. Essentially, small banks should get a little bigger.


Christopher Cermak is an editor with Handelsblatt Global in Berlin. Frank Wiebe is a correspondent for Handelsblatt covering financial issues from New York and Elisabeth Atzler is a correspondent covering banks for Handelsblatt out of Frankfurt. To contact the authors:, and

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