10 November 2013

WSJ: German savings banks flex political muscle

Germany's public savings banks have become the most powerful little lenders in the world, exploiting their political clout to punch loopholes into Europe's post-crisis banking laws.

Untouched by the image problems that have beset big US and European lenders, the banks, known as Sparkassen, can count on political ties reaching from local councils all the way to the federal government in Berlin and the European Parliament. In late-night negotiations last December, German Finance Minister Wolfgang Schäuble ensured that day-to-day supervision of all but one of the 417 Sparkassen — the largest, the Hamburger Sparkasse is the exception — will remain in German hands, even when the European Central Bank becomes the eurozone's banking policeman next year.

The Sparkassen, whose combined balance sheet has grown to more than €1 trillion, have also preserved exemptions from EU rules on capital requirements that continue to save them billions of euros and have blocked progress on a unified system for deposit insurance and a planned tax on financial trades. Because they are publicly owned, Sparkassen profits flow back into local coffers. Their charitable activities provide mayors and other local politicians with handy side budgets to realise politically convenient projects.

Sparkassen President Georg Fahrenschon and the banks' supporters in Brussels say exceptions to EU banking rules are necessary to shield small retail lenders from laws designed for big financial conglomerates. But some experts fear that they create dangerous black holes in Europe's new financial-oversight system. 

The Sparkassen say they can't be compared to other savings banks and that the EU's push to integrate them into a Banking Union — including common funds to help weak banks across the eurozone — is an attempt to get its hands on German money. German law prevents the banks from doing business outside their home region, and they have built up their own rescue system, which commits them to bail out each other, either through mergers or their shared rescue fund.

But the banks' rescue system has a major weakness: It also includes the Landesbanken, big accident-prone public banks co-owned by the savings banks and regional governments. When those delved into US subprime mortgages and other risky deals, the banks' common safety net was too weak to catch the Landesbanken, and, partly to protect the Sparkassen from the fallout, they were bailed out by Germany's federal and regional governments with some €67 billion in emergency loans and guarantees. Many EU financial officials expect that stress tests scheduled for next year may uncover further problems at the Landesbanken and again test the savings banks' willingness to step in.

Full article

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