The Economist explains
LARGE banks are generally accepted to be more “systemically” dangerous than small ones, and governments are quicker to save big institutions when they run into trouble. But small institutions can still cause a lot of havoc, especially if they are all doing the same thing. The collapse of America’s savings and loan industry (thanks to bad bets on real estate that were supposed to have helped them "earn their way out" of the punishment they endured in the 1970s) cost billions of dollars. The resulting damage to the banking system was one of the factors behind the original “jobless recovery” in the early 1990s.
More recently, Spain’s bubble and bust can largely be blamed on the poor decisions of its local savings banks, or “cajas.” (Decisions made possible by reckless lending from the northern countries.) Bigger players like Santander and BBVA were less directly involved. According to an article in today’s Financial Times, Germany might be vulnerable in a similar way thanks to its enormous network of savings banks that operate underneath the regulatory radar:
Savings banks’ combined assets exceed €1tn and they are also bound up, through ownership stakes and mutual guarantees, with the larger regional Landesbanken. According to Moody’s, the credit rating agency, the savings bank family has more assets than Deutsche, the eurozone’s largest bank, while savings banks grab a 38 per cent share of German bank lending and almost 37 per cent of deposits…Ask those outside the Sparkassen group about why they complain of its privileges and one thing that crops up is its member banks’ right to consider loans to each other—or the closely linked Landesbanken where many regional savings bank associations are co-owners—as, in effect, risk-free. It means no capital needs to be held against such exposures. That anomaly “leads to a de facto underestimation of capital requirements” and could encourage more leverage and interconnectedness to the detriment of stability, the International Monetary Fund argued last year.
At the same time, the 423 savings banks do not need to file combined accounts as a single financial group. Their accounts are first overseen by auditors from within the savings bank group, not external auditors. The savings banks have also argued they should be able to remain outside of European deposit insurance plans, saying their traditional unlimited guarantees for each others’ survival are more than adequate. Critics say Landesbanken bailouts during the crisis show that the robustness of the joint liability scheme is exaggerated. In some cases savings banks did not contribute a share of aid that reflected their ownership stakes.
To be fair, the German savings banks have had a good record—so far. Their past success seems to have made them particularly resistant to proposals for pan-European banking supervision and deposit insurance:
Some of the loudest objections to EU banking union plans have come from Germany, and particularly from its savings banks, or Sparkassen, which believe they are central to the country’s tradition of strong regional industries. They say home regulators better understand their characteristics and way of doing business…Inside Germany, opponents of ECB-led supervision believe it would be an unnecessary and distracting burden on banks that weathered the crisis and pose no systemic danger. “We are in favour of improved European supervision [but] we want supervisors who can concentrate on the places where the problems are,” says Georg Fahrenschon, the head of the DSGV, the association representing all savings banks. “Customer-focused, small, regional banks bring stability. They should not be at the centre of new measures.”
An executive of one of these small banks is quoted elsewhere in the article:
“You don’t impose the safety rules you’d need for a 2,000-passenger cruise ship on a yacht taking five people up the coast,” he says. “There would be enormous administrative costs that I would have to pass on ... it would hit Mittelstand companies and the local economy.”
I wonder if the managers of the cajas said similar things back when times were good for them...
Readers should remember that the Landesbanken were among the biggest buyers of the very worst debts produced in America and Europe. It would not be unreasonable to think that, so far anyway, the euro zone bail-outs have been very helpful to German (and French) financial firms, not just to the peoples of the periphery. Given all this, Germany’s opposition to a banking union that would include its network of small institutions may not be in its own best interest.