Once Again Europe’s laws have to be adjusted to suit Germany

Date: 11-11-2013
Source: The Wall Street Journal
Subject: 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 postcrisis banking laws.

Untouched by the image problems that have beset big U.S. 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 euro zone’s banking policeman next year.

That deal, which limits direct supervision by the ECB to banks with more than €30 billion ($40.11 billion) in assets, looks set to keep the banks out of the reach of a new authority to wind down weak lenders, too.

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.

„The Sparkassen are better positioned politically than any other group of banks,“ said Jörg Rocholl, president of the European School of Management and Technology and an adviser to the German finance ministry.

Sparkassen, which specialize in deposit taking and lending to local companies, reach deeply into local life across the nation. Some of the more than 240,000 Sparkassen employees regularly visit local elementary schools, inviting students to open their first savings book and often recruiting customers and thrifty German savers for life.

Because they are publicly owned, Sparkassen profits flow back into local coffers. Their charitable activities—such as sponsoring local soccer teams or building municipal parks—provide mayors and other local politicians with handy side budgets to realize 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.

„My model for a future Sparkassen crisis is very much on the level of what happened in the U.S. in the 1980s,“ said Nicolas Véron of Brussels-based think tank Bruegel.

Back then, bad mortgage deals and a sudden increase in interest rates led to the failures en masse of U.S. savings and loan associations. More recently, problems at Spanish savings banks forced Madrid to request a €40 billion bailout from the euro zone.

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 euro zone—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.

„We’ve had this system for 30 years…and during those 30 years not a single bank has defaulted,“ said Lothar Blatt-von Raczeck, the Sparkassen’s chief lobbyist in Brussels.

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.

Until the financial crisis of 2008, the Landesbanken were the Sparkassen’s main gateway into international markets. Armed with billions of euros of cheap liquidity from the savings banks and government guarantees that have since expired, the Landesbanken delved into U.S. subprime mortgages and other risky deals.

When those investments soured, 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.

The rescue system „doesn’t work, because Sparkassen are not in the position to be able to truly take care of a Landesbank if it fails,“ said Gerhard Schick, a Bundestag member for the Green party and one of the few German politicians who dares to criticize the savings banks in public.

Sparkassen supporters, including Mr. Blatt-von Raczeck, argue that the postcrisis downsizing of several Landesbanken will protect them from future hits.

Despite the concerns, their common safety net has been at the center of the banks‘ lobbying efforts in Brussels, both as the base for exemptions and a system that needs to be shielded from potentially conflicting regulation. One such regulation is an EU proposal to force states to build up national deposit-guarantee funds, similar to the Federal Deposit Insurance Corp. in the U.S. Sparkassen executives feared that the law would force them to pay for the failure of other German banks and, eventually, could see them integrated in a pan-European guarantee fund.

As soon as the proposal was made, German members of the European Parliament sprang into action. They maneuvered themselves into the powerful negotiator positions in all four major parties—from the far left to the conservatives—and rewrote the bill so the Sparkassen rescue mechanism could remain separate.

„You cannot put a sheet of paper between me“ and the Socialist negotiator on the bill, Burkhard Balz, a representative for German Chancellor Angela Merkel’s conservative party, told the Danish diplomat who was leading the talks for EU member states. Mr. Balz confirmed the tenor of his comments.

Special deals for the Sparkassen are a „precondition“ when negotiating financial laws with German policy makers, said Martin Bresson, the Danish diplomat who is now a financial-services lobbyist. „You’re not subdued with massive lobbying, where you feel your arm being twisted and you are forced into it. But you just know.“

While most policy makers have avoided cozying up to bankers in the aftermath of the financial crisis, showing off their ties to the Sparkassen is seen as a boon for German politicians.

At their annual meeting this April in the eastern city of Dresden, Mr. Fahrenschon, a former Bavarian finance minister, hobnobbed with Ms. Merkel. Also there were Ms. Merkel’s rival in federal elections this fall, Peer Steinbrück; Bundesbank President Jens Weidmann and the head of the European Parliament, Martin Schulz, along with numerous local and regional politicians.

The Sparkassen draw on these ties when EU regulators make proposals the Sparkassen don’t like. „The people at the local level will always say ‚Hey, leave the Sparkassen alone!‘ “ said Mr. Blatt-von Raczeck, the banks‘ Brussels lobbyist. „My job here is just to supply additional information.“