German Sparkassen: a model to follow?  
April 2016  
German Sparkassen: a model to follow?  
Céline Choulet  
The stabilising role played by German savings banks in the country’s economy is regularly lauded. The  
Sparkassen” are members of a large network combining autonomy, economies of scale and range, regional  
roots and financial solidarity. Although their success is no myth, it is also true that it is based in part on  
distortions of competition. Although some argue for network structures following the German model, this  
seems hard to transpose to economies with structural characteristics which are less helpful to this model  
than in Germany.  
The German Sparkassen are attracting imitators. The the UK, think tanks and MPs from various parties have  
cornerstone of the financing of Germany’s industrial argued for the development of a similar network of retail  
fabric, the German tradition of the “house bank” has banks, investing in public interest projects.  
long been praised for its quality of governance and its  
proximity to a customer base of individuals and small The foundations of the German savings banks are,  
and medium-sized enterprises (SMEs).The business however, more complex than they look. First, far from  
model, serving the local economy and remote from the consisting of small isolated institutions, they are members  
capital markets, proved particularly resilient during the of a financial network, whose business model is, to a  
financial crisis of 2007-2008.  
certain extent, similar to that of a universal bank, albeit one  
that is incomplete because it is not integrated. Secondly,  
Historically, both savings banks and cooperative banks although the Sparkassen model has some undeniable  
have played a central role in most European financial benefits, it is based on distortions of competition that affect  
systems (Bülbül, Schmidt and Schüwer, 2013). The the profitability and stability of the German banking system.  
case of Germany is, however, unique, to the extent that Moreover, their success is intimately bound up with the  
these two types of institution have retained most of their structure of household savings. Their model is also based  
original characteristics, whereas in Austria, Spain, on the “recycling” beyond national borders of excess  
France and Italy, the wave of liberalisation in the 1980s savings. The regional public banks responsible for investing  
and 1990s changed the roles and institutional structures the excess liquidity of savings banks in the debt markets  
of such banks. In some European countries, savings are removed from any market discipline. Lastly, although  
banks and mutual banks have completely disappeared the good health of the German economy is an advantage  
as a separate class of financial institutions. In others for the savings banks, their model is put to the test in a  
they have adopted features similar or identical to those context of low interest rates and the management of their  
of commercial banks .  
liquidity constraint.  
The German Savings Bank Association (DSGV) has  
long promoted the model, but other voices have recently  
been added in support, notably in the UK and Latin  
America, where politicians and financial commentators  
Success of German savings banks: between  
alike have promoted the merits of the Sparkasse model. Germany is one of the few European countries to have  
Delegations from banks in Bolivia, Ecuador and Mexico retained a three-pillar banking system (see Box 1). With  
have been flocking to the DSGV seeking to find out strong roots in the real economy, savings banks make up  
more about the success of German savings banks. In the basis of the public network. Their model is generally  
April 2016  
associated with the competitiveness of the German Autonomous publicly-owned companies  
economy, and particularly that of the Mittelstand (or  
The savings banks make up the basis of the network.  
They are autonomous publicly-owned companies: they  
carry out missions in the general interest but without the  
government, town or district owning their capital. They  
were removed from municipal ownership in the 1930s and  
given the status of “public company”. As this status is  
based on the principle of subsidiarity, to a certain extent a  
Sparkasse “belongs” to its municipality. Or, as the  
Association puts it, “to the citizens”. Sparkassen do not  
have the same financial profitability targets as commercial  
banks, but this is not to say that they are ‘not-for-profit’  
organisations. Indeed, as they can only strengthen their  
equity through the incorporation of profits as reserves,  
maintain stable profitability is essential.  
SMEs), for which this network provides more than two-  
thirds of financing. Their close links with their business  
customers also have stabilising effects during a financial  
crisis (see Box 2). Their market share and financial  
performance, the envy of other segments of the German  
banking industry, provide a model for success.  
Business model and institutional structure of the savings  
Although established as legally independent entities, the  
German savings banks are members of a broad  
financial group (Sparkassen-Finanzgruppe or S-Group)  
within which they cooperate closely with other members  
Schackmann-Fallis, 2008; Schackmann-Fallis, 2011).  
The savings banks have specific public interest missions.  
They are involved in the development of their towns and  
regions and in financing retail customers (individuals,  
non-profit organisations, self-employed persons and  
SMEs). They are also very heavily involved in their  
We examine here the structure of the public network  
and the devolved role of each of its members.  
Box 1:  
The three pillars of the German banking system regional voluntary sectors. The network has more than  
5,000 branches and offices spread across Germany.  
Despite a continuous consolidation since the early 1990s, the  
German banking sector remains very dense. The Bundesbank  
listed 1,775 German credit institutions in December 2015 (from  
Under the principle, enshrined in German law, of local  
administration of certain services in the general public  
economic interest, they serve a local or regional market  
(depending on whether they were created by a  
municipality or a district). They are not allowed to open  
branches or conduct operations outside their region of  
competence. This regional principle is intended to  
ensure that the sums invested in a region are reinvested  
there. It thus avoids the risk that any region is under-  
served or impoverished. It also gives the Sparkassen a  
strong link to their local economies and protects them  
from competition from other regional banks. Lastly, it  
provides greater stability in financing. As we will see  
below, the regional principle has made a sizeable  
contribution to the success of Sparkassen. By way of  
comparison, in 1988, the abolition of the regional  
principle which had governed the Spanish savings  
banks, or Cajas, increased competition in the banking  
sector. Later, the bursting of the real estate bubble,  
against a background of excessive borrowing and a  
concentration of risk on the books of these same Cajas,  
caused a serious shock to these institutions.  
2,015 in 2007) or 2.2 institutions for every 100,000 people,  
compared to 0.7 in France. Taken together, the five biggest  
German banks accounted for only 32% of total banking assets,  
against 48% for the five biggest French banks. The German  
banking sector has three main pillars. The 271 private  
commercial banks make up the first pillar. The second pillar  
consists of the credit cooperatives, which comprise 1,023  
independent institutions linked by their federations and two  
central institutions (DZ Bank and WGZ Bank). Public-sector  
credit institutions, which also have a network structure, make  
up the third pillar. They include 414 local savings banks  
Sparkassen) and 7 public regional banks (Landesbanken) .  
This network also includes Dekabank (financial services  
provider and centralised asset manager), regional real estate  
savings banks (Landesbausparkassen) and public-sector  
insurance companies . The Sparkassen are the shareholders  
in Dekabank (owning all shares since June 2011) and in the  
Landesbanken (alongside the Länder regional governments).  
Alongside these three main pillars are private mortgage banks  
and building and loan associations as well as banks with  
special functions and the development banks (including KfW,  
the public-sector investment bank).  
April 2016  
The advantages of a network structure  
solidarity mechanism could also be considered as an  
alternative solution to the resolution framework  
scheduled in application of the EU’s Bank Recovery and  
Resolution Directive (BRRD). To do this, it would need  
to be triggered sufficiently early and eliminate any risk of  
failure within a reasonable period. This structure is  
advantageous for all members of the network (lower  
financial cost, regulatory advantages).  
The structure of S-Group allows the savings banks to  
operate under a single banner whilst remaining  
independent in the management of their balance sheets,  
to generate economies of scale by the pooling of certain  
functions (particularly the back office) and to offer a  
large range of services to their customers by  
outsourcing some business areas to central institutions  
that form part of the network.  
The structure consists of thirteen rescue funds: eleven  
regional funds, which the savings banks pay into, one  
fund financed by regional public banks and another  
funded by the regional building societies  
Activities that lie outside the ambit of savings banks,  
such as securities trading, financing requiring  
substantial exposure or foreign investment support for  
German companies, are covered by the Landesbanken,  
which are very active in the capital markets. The  
Landesbanken also act as regional banks, and central  
banks and clearing and settlement houses for the  
savings banks. They manage cheque payments and  
transfers for the Sparkassen, as well as their liquidity  
management and long-term lending. The savings  
banks are both shareholders in and net creditors of the  
Landesbanken. They invest their surplus resources  
with the Landesbanken in the form of short term  
deposits, or by subscribing to Landesbank share  
issues (on their behalf or on behalf of their clients).  
These interbank, intra-network relationships are  
advantageous for all members. They reduce the  
dependence of Landesbanken  which lack access to  
a stable deposit base  on market financing, and allow  
the Sparkassen to manage the maturity transformation  
risk more effectively (see below). However, they  
increase the exposure of the Landesbanken to interest  
rate risk.  
Landesbausparkassen). If a Sparkasse experiences  
difficulties, the regional fund to which it belongs is called  
on first, followed by those of the other regions and then  
finally the Landesbanken and Landesbausparkassen  
funds. Similarly, a Landesbank would first be supported  
by the Landesbanken fund, with the Sparkassen funds  
only being called upon if this fund is exhausted. The  
European criterion, of fund reserves equivalent to 0.8%  
of the deposits covered, will increase the structure’s  
capacity. This will require funding of EUR 4.9 bn,  
compared to the current level of EUR 1.6 bn. In order to  
remove all moral hazard, the contribution of each  
member is weighted by volume of deposits covered by  
the guarantee and also by the risk profile (in 2013,  
contributions from the Sparkassen, Landesbanken and  
Landesbausparkassen were 49.4%, 44.1% and 6.5%  
respectively). Three-quarters of the deposit guarantee  
fund can be used in the event of a rescue situation, but  
resources must be rapidly rebuilt through exceptional  
contributions. Aid to a network member can take the  
form of loans and advances, capital or guarantees. The  
preventative structures, which should allow the system  
to be triggered early enough to avoid the collapse of a  
member, have been strengthened. Measures to clean  
up the balance sheet, restructure or adjust the business  
model may be imposed on the institution in difficulty.  
These enhanced powers could help better align the  
business models of the Landesbanken with the interests  
of the Sparkassen. Since its creation in 1973, none of  
the network’s members have defaulted on their debt.  
Only thirty-three institutions have ever had recourse to  
the funds and the supra-regional funds have been used  
on only four occasions.  
A solidarity mechanism within the network  
The savings banks, in common with the mutual banks,  
have for several decades had a mechanism in place  
aiming at two objectives: protecting the solvency and  
liquidity of members and guaranteeing customer  
deposits (Institutssicherung or Institutional Protection  
Scheme). In July 2015, the German supervisor  
confirmed the compliance of this structure with the  
German law transposing the new European directive on  
deposit protection, requiring only a few changes  
Deutsche Bundesbank, 2015a). The intra-network  
April 2016  
Within the framework of this solidarity mechanism, the exposure of a savings bank to a regional bank (or vice  
German regulator considers the financing of versa) is weighted at 0% in the calculation of capital  
Landesbanken by the Sparkassen as intra-group ratios . The large exposure rule (which limits exposure  
transfers: whether it concerns loans, Pfandbriefe , to any given counterparty) is also removed where it  
unsecured debt securities or capital instruments, any relates to a network member.  
Box 2:  
The stabilising effects of a local bank  
During the financial crisis of 2007-2008, the problems of Germany’s major private commercial banks and public regional banks,  
which were very active in the international markets, highlighted the merits of the small “house bank” in such circumstances. The  
savings banks had virtually no recourse to government support and their close cooperation with German companies had  
stabilising effects.  
Savings banks were not a drain on public finances...  
S-Group as a whole was severely affected by the 2007-2008 financial crisis. Five Landesbanken (BayernLB, HSH Nordbank,  
LBBW, NordLB and WestLB) suffered substantial losses, requiring recapitalisation programmes and a clean-up of balance sheets.  
Some drastically scaled back their balance sheets, some merged, and others went into liquidation under pressure from the  
European Commission. Considered in isolation, the savings banks came through the crisis virtually unscathed and required  
virtually no state aid. The structure of the network protected them from direct exposure to risk products and the debt market.  
Depositor confidence in the deposit guarantee scheme (and in the German government) saved them from the threat of a run on  
their resources. Their regional roots, which ensure stable resources and comfortable margins, allowed them to absorb the defaults  
caused by the economic slowdown. The rare cases where some of their number experienced difficulties were handled internally  
by the rescue fund.  
... and protected the financing of German companies  
Overall, lending by German credit institutions to domestic non-financial corporations suffered in the period from 2009 to 2010 to an  
extent greater than the euro zone average (outstanding loans in Germany were down 3.4% on average in December 2009,  
against 2.2% in the eurozone as a whole [see Figure 1]). The contraction of demand for lending may well have contributed to this  
(the fall in investment rates in capital goods in 2009, capacity of large businesses to generate excess cash flow). The substantial  
repayments of debt in 2009 and 2010 also affected outstandings.  
Outstanding loans did not, however, fall at all credit institutions. Indeed, the stability of the financing provided by the savings  
banks and cooperative lenders to German non-financial corporations helped attenuate, to an extent, the contraction of the lending  
by the banks with the greatest risk exposure (structured products, sovereign debt of the PIIGS countries) and those engaged in a  
deleveraging process (namely the private commercial banks and Landesbanken -- see Figure 2). The resilience of the  
Sparkassen had even greater stabilising effects because the German banks with the greatest exposure to the US real estate  
markets made their biggest cuts in lending in the most fragile regions and industries (with high default rates -- see Ougena, Tüner-  
Alkan and von Westernhagen, 2015).  
Between 2007 and 2009, German savings banks were not able to maintain their outstanding loans to households, in contrast to  
the cooperative lenders and private commercial banks (see Figure 3). Using individual statistics on refusal rates at a sample of  
instituions, Puri, Rocholl and Steffen (2011) observed that although household demand for credit fell slightly in 2006 to 2008 for all  
banks in the sample, the savings banks that were shareholders in those Landesbanken most exposed to sub-prime loans made  
more significant cuts in their credit offering than did other savings banks.  
April 2016  
MFI loans to non-financial corporations (NFC)  
Enviable market share and financial performance  
Savings banks and mutual groups make up three-  
quarters of German credit institutions (86% if one  
excludes foreign banks). Their approach, based on  
retail customers and a dense coverage of their  
regions, explains why they account for such a high  
proportion. They have very modest balance sheets:  
average assets of EUR 2.8 billion for the savings  
banks (with most being under EUR 1 billion) and EUR  
0% Annual growth rate  
Euro area MFI loans to domestic NFC  
German MFI loans to German NFC  
00 million for the mutuals. Thus their assets account  
for less than a quarter of total assets for the German  
banking system. Although their central structures  
have substantial balance sheets, the total weighting  
of the two networks in terms of assets is half that  
when measured in terms of number of institutions  
07 08 09 10 11 12 13 14 15 16  
Source: ECB  
Chart 1  
Figure 4). By way of comparison, commercial banks  
account for 14% of German credit institutions, but  
5% of total assets. However, the two networks  
Sparkassen: stability in financing to German NFC  
0% Contribution to bank lending growth (yoy) to German NFC  
Commercial banks  
dominate lending to non-financial corporations (51%)  
and to domestic households (54%) and collect more  
Credit cooperatives (with central institutions)  
than half (53%) of household deposits in Germany  
Other banks  
All banks  
Figure 5) .  
Savings banks and credit cooperatives account for  
/4 of German credit institutions  
Chart 2  
Source: Bundesbank  
Importance of each category of banks  
By number of institutions  
By aggregate total assets  
2% 24%  
Sparkassen: household loans less resistant during  
the crisis  
Contribution to bank lending growth (yoy) to German households  
Commercial banks  
Credit cooperatives (with central institutions)  
Other banks  
All banks  
Commercial Sparkassen  
banks and  
Banks with Foreign banks  
Landesbanken (with central  
Chart 4  
Source: Bundesbank  
Reflecting their core business, a large share of assets  
(two-thirds) and resources (three-quarters) at the  
Sparkassen consist respectively of loans and deposits  
to and from non-bank customers. It is clear that their  
Chart 3  
Source: Bundesbank  
April 2016  
strong local ties give them access to a broad deposit On average, since the 1990s, savings banks, in common  
base, which comfortably covers their lending portfolios. with the credit cooperatives, have posted very good financial  
By way of illustration, in December 2015, deposits performances: net interest margins have been very  
from domestic households covered 140% of the loans comfortable in comparison to other types of credit institutions  
made to them by the savings banks.  
(Figure 6), cost to income ratios lower than those of private  
commercial banks (Figure 7) and net returns on capital  
higher than and more stable than at private banks (Figure 8).  
Sparkassen post comfortable net interest margins  
Market shares  
Networked institutions dominate lending to non-financial companies...  
Net interest income as a % of average assets  
All banks  
Credit cooperatives  
Commercial banks  
Commercial banks  
Credit cooperatives (with  
central institutions)  
Mortgage banks  
Banks with special  
Foreign banks  
74 78 82 86 90 94 98 02 06 10 14  
Source: Bundesbank  
Chart 6  
..lending to households...  
Cost to income ratios by category of banks  
Operating costs as a % of net banking income  
All banks  
Credit cooperatives  
Commercial banks  
Commercial banks  
Credit cooperatives (with  
% central institutions)  
Mortgage banks  
Banks with special  
Foreign banks  
94 96 98 00 02 04 06 08 10 12 14  
Chart 7 Source: Bundesbank  
..and collect more than half of household deposits  
Sparkassen post stable profitability*  
Commercial banks  
Return on average equity, %  
All banks  
Credit cooperatives  
Commercial banks  
Credit cooperatives  
with central institutions)  
Mortgage banks  
Banks with special  
Foreign banks  
*the peak reached in 2011 is due to an accounting change  
96 98 00 02 04 06 08 10 12 14  
Source: Bundesbank  
Chart 5  
Source: Bundesbank  
Chart 8  
April 2016  
Thanks to their influence with German public authorities, market share makes the management of operating  
and the power of the latter within European bodies, the coefficients all the harder. The downturn in the credit  
savings banks (with the exception of the Hamburg and cycle (which is relative, as the fall in lending rates and  
Frankfurt Sparkassen) have not been placed under the the good prospects for employment and income have  
ECB’s direct supervision . Although the share of credit driven an increase in mortgage lending in recent  
institutions falling outside the Single Supervisory months) and the concentration of market share in the  
Mechanism (SSM) is small in most countries, it is much hands of the savings bank and mutual bank networks  
larger in Germany (and also in Austria and Italy). not only limit the business volumes of the commercial  
Measured in terms of outstanding loans, a large section banks, but also deprive them of a stable source of  
of the German banking sector thus remains under the revenue which could help offset the volatility of  
supervision of the national authorities  Bafin and the investment banking revenues.  
A lack of market discipline at the regional public banks  
In the Mittelstand market, there is competition from the  
..and reality  
Landesbanken on top of that from savings banks and  
mutuals. Benefiting from the explicit support of the  
Länder (their shareholders alongside the savings banks),  
the regional banks have remained insulated from any  
market discipline, at least until the financial crisis,  
offering their clients products on terms that the  
commercial banks could not match without threatening  
their own profitability. Although the public liability  
guarantees enjoyed by the Landesbanken have been  
abolished, the Länder's commitment to protecting their  
banks and the advantages flowing from the intra-  
network solidarity mechanism help preserve a favoured  
business framework.  
The Sparkassen clearly offer a successful model. Their  
intimate knowledge of their customers, their responsible  
lending policies and their conservative risk management  
all contribute to this. But their success is also based on  
distortions of competition, that have persisted for many  
years, which deprive German commercial banks of  
recurrent revenue streams. Moreover, their business  
model could be hard to transplant to economies with  
structural features that are very different from those of  
Germany. Lastly, the climate of persistently low interest  
rates could eat into their profitability.  
Significant distortions of competition  
Granted, the Landesbanken no longer benefit from the  
same advantages as they enjoyed before the financial  
The public body status of the members of the  
Sparkassen network, together with favoured business  
conditions, produce competitive distortions. Structurally,  
the profitability of the German banking sector suffers  
from the fragmentation of this market and these  
distortions of competition.  
First, their debt is no longer backed by public guarantee.  
The European Commission took the view that they  
represented a distortion of competition and decided in  
001 to abolish the public guarantees granted to  
An oligopolistic structure in the retail banking market  
Landesbank creditors (for debt issued after July 2005) .  
The Sparkassen and the cooperative banks, that is to  
say two-thirds of German credit institutions, follow the Secondly, the cohesion within the public pillar of the  
principle of a regional division of their areas of activity. banking industry was seriously shaken during the  
This oligopolistic structure in the local retail banking financial crisis. The Landesbanken, fearing  
market makes competition difficult. Hit by the significant increase in the cost of resources,  
fragmentation of market share, net interest margins in anticipated the effective withdrawal of public  
Germany are narrow when compared to those in other guarantees by issuing a large stock of guaranteed debt  
eurozone countries, particularly for private commercial between 2002 and 2005. They then increased their  
banks. By compressing margins, the fragmentation of borrowing from the Sparkassen and expanded their  
April 2016  
balance sheets beyond what was necessary to remain mechanism would be triggered if required. The  
viable. Although far removed from their core business, law would also appear to protect the ability of the  
they used these resources to finance non-domestic Länder to recapitalise their banks under certain  
customers, most notably investing in higher-risk conditions (sufficiently early detection of difficulties,  
markets (structured products backed by US sub-prime involvement of all shareholders and network  
mortgages, shipping, other international financing in members, viability of the business model of the bank  
the aviation and commercial real estate sectors). receiving support).  
Concerned by the difficulties of the Landesbanken, the  
Sparkassen played a very small role in the rescue of A refusal to implement the solidarity mechanism would  
the banks experiencing the greatest difficulties. have negative effects on the network and could have an  
Although historically the ownership of the impact on the financing conditions for regional  
Landesbanken was equally split between the Länder economies. This would affect the reputation of the group  
and the Sparkassen, it has shifted since the financial and increase borrowing costs for the Landesbanken.  
crisis, with the burden of recapitalising the regional Ratings agencies and investors alike continue to take  
banks falling largely on the former. The indefatigable account of the close ties between the Landesbanken,  
support of the regions (and thus the German taxpayer) the Sparkassen and the Länder in their assessment of  
thus saved the Sparkassen from heavy losses. Last the quality of Landesbank debt. The yields paid to  
year, at the time of the revision of the solidarity investors on unsecured Landesbank debt are thus well  
mechanism, the tone of negotiations showed just how below the price of protection against the risk of their  
fragile cohesion within the public pillar has become. default.  
Some rumours suggested that regional groups of  
savings banks intended to create informal alliances  
The advantageous prudential treatment of intra-group  
with a view to potentially vetoing assistance to a  
exposures could also be called into question. Whilst it  
Landesbank in difficulty. Unlike the protection of  
looks unlikely that the German regulator would seek to  
depositors, the triggering of the mutual support  
punish the savings bank network in this way, the  
structure is not legally mandated, but is subject to a  
European Commission could become concerned by the  
vote by representatives of the savings banks sitting on  
repeated reluctance of the banks to trigger the  
the DSGV (the use of the funds of other members  
requires a 75% majority).  
Moreover, in the absence of any rescue, circumstances  
Thirdly, the European Commission has called on all the  
where a Landesbank was put into resolution would be  
costly for the Sparkassen; although they are no longer  
the principal shareholders they are significant creditors  
Landesbanken to review their business model. The  
failures in governance and supervision revealed by the  
crisis are likely to become less common now that the  
Fitch Ratings calculated in June 2015 that they  
regional public banks have been placed under direct  
ECB supervision. For several years now, it has seemed  
essential for the Landesbanken to restore the viability of  
their business models and increase their profitability  
levels if they are to survive and protect the financing of  
provided between 40% and 60% of unsecured  
Limits on the transposition of the model  
companies and regions. Moreover, this would help Contrary to its generally accepted presentation, the  
remedy some of the structural deficiencies of the German savings bank model does not simply boil down  
German banking sector.  
to a network structure combining a regional focus and a  
public interest mission. It is also based, in part, on the  
Although cohesion looks fragile, we believe that the availability of a large base of stable resources and, in  
German law enacting the European BRRD directive addition, on the “recycling” outside Germany’s borders  
makes it more likely that the financial solidarity of excess savings held.  
April 2016  
A strong preference for liquidity  
German banks enjoy better loan to deposit ratios  
than other European banks  
German households save a larger share of their income  
than other Europeans. Savings by households in the  
Loan to deposit ratios (households and non-financial corporations)  
Euro area  
United Kingdom  
broad sense of the term represented 17% of Gross  
Disposable Income (GDI) in September 2015, compared  
to averages of 13% in the eurozone and 10% in the  
European Union as a whole. Although cultural and  
demographic factors make a contribution, this high  
savings rate is due largely to low levels of borrowing.  
This is because the savings rate measures savings  
flows (real and financial) net of credit flows. In  
September 2015, German household debt stood at 83%  
of GDI (54% of GDP) compared to an average of 96% in  
the eurozone (61% of GDP), and figures of 87% in  
France, 108% in Spain and 127% in the UK.  
04 05 06 07 08 09 10 11 12 13 14 15 16  
Source: ECB  
Chart 9  
The tight control of public finances, a relatively robust  
economy and high-quality domestic loan books are  
further strengths of the German banking system.  
of German  
Thus although the savings rate  
households is relatively high, their financial wealth  
relative to GDI or their stock of debt is lower than that  
of their European neighbours. It represented 2.7 times  
GDI of German households in September 2015,  
compared to an average of 3.3 in the eurozone, 3.4 in  
France and 4.8 in the UK, and 3.3 times their stock of  
debt, compared to 3.9 in France and 3.8 in the UK.  
Savings surpluses  
The Sparkasse model is also based on the international  
allocation of surplus German savings. The major  
moderation in wages following the labour market  
reforms of the 2000s and the outsourcing of a share of  
production to lower-cost countries have helped improve  
Germany’s cost competitiveness. This, coupled with  
However, whilst British households invest their savings strong non-price competitiveness, has allowed Germany  
primarily in pension plans or real estate investments, to run substantial trade surpluses for more than ten  
their German counterparts hold a higher proportion of years. Germany’s current account surplus reflects the  
their savings in bank accounts. Bank deposits country's status as a net exporter of goods and services  
represented 37% of the financial assets of German and a net investor internationally. The deficit of domestic  
households in September 2015, compared to 23% in the investment relative to the savings of households and  
UK (and an average of 31% for eurozone households).  
companies has as its corollary net outflows of capital  
and low interest rates.  
As a result, German banks enjoy an abundant source of  
stable resources: in December 2015, deposits by One of the key features of the savings bank network is  
households and non-financial companies represented the circulation of liquidity between members. The  
3% of liabilities at German credit insitutions, a higher savings banks direct their surplus resources (in this  
proportion than at their French or British peers (22% and case deposits) towards other members of the network  
3% respectively). In Germany, since the beginning of that are active in securities markets (the Landesbanken  
the 2000s, the rapid growth in deposits has resulted in a and Dekabank) either by lending them the cash or by  
continuous improvement in the rate of deposit coverage subscribing to their debt issues. With a lack of  
of loans. Thus for ten or more years now, German opportunities to invest in the domestic market, the  
banks have enjoyed better loan to deposit ratios than Landesbanken generally “recycle” the surplus savings  
banks in other eurozone countries (Figure 9). The collected by the Sparkassen by lending or investing  
German savings banks and mutual banks have abroad. The revenue generated from these loans and  
particularly low ratios (85% in December 2015).  
investments by the major institutions in their networks  
April 2016  
allows the savings banks to offer the best returns to their end of 2007 sight deposits represented 30% of the total,  
savers, without exposing them to risks. Without such a with term deposits making up 46% and savings  
system, the recurrent surplus deposits would no doubt accounts 24%, the figures eight years later were 52%,  
have driven down the rates paid on deposits (even in 29% and 19% respectively (Figure 10). Against a  
the absence of a highly accommodating monetary background of low rates and dull economic prospects,  
the reduced opportunity cost on sight deposits which  
receive little or no interest and the increased preference  
Thus the development of the German savings bank for liquidity have encouraged households to create  
model, applied in an economy such as the UK, would no provident savings reserves in sight accounts, thus  
doubt run into difficulties faced with the lower availability reducing the cost of banking resources (Deutsche  
of deposits and be very different faced with the current Bundesbank, 2015b). The Sparkassen and mutual  
account deficit that the country has run since the mid- banks have benefited more than others.  
Shift in the structure of deposits  
Sparkassen facing the challenges of low interest rates  
Structure of deposits from non-banks  
As mentioned above, backed by their networks and  
sheltered from the competition of their peers, the  
Sparkassen have higher net intermediation margins  
than German commercial banks. As part of their client  
Sight deposits  
Time deposits  
Savings accounts  
relationships they also carry out  
a substantial  
transformation of maturities by holding the loans they  
make to maturity and collecting substantial deposits.  
They are thus highly exposed to interest rate and  
liquidity risks. The persistent context of low interest rates  
could hit their profitability and increase the risks  
associated with the transformation of maturities.  
Chart 10  
Source: Bundesbank  
However, persistent low rates raise fears of a lasting  
erosion of margins. First, the transmission of lower market  
Towards an erosion of net interest margins  
According to Bundesbank figures, the low interest rate rates to the cost of banking resources (deposits and debt  
environment and the flatting of the yield curve have so securities), which had been observable since 2012, came  
far had only a limited effect on Sparkassen margins to a stop during 2015. The weighted average cost of debt  
Figure 6). Admittedly, interest income and costs, for German credit institutions (which is amongst the  
expressed as a proportion of average assets have fallen, lowest in the eurozone) thus seems to have reached its  
but by similar amounts. The savings banks have been floor. Secondly, although the unprecedented increase in  
able to stabilise their net interest income thanks to lending to households (up 2.9% in February 2016) is  
growth in low-yield deposits and in their loan books.  
welcome, new loan production and the renegotiation of  
loans at lower rates will have a lasting effect on the  
The share of deposits from non-bank customers on the margin on the loan book. Moreover, any sudden increase  
balance sheets of all German banks rose by 7 in rates, which would affect the cost of resources sooner  
percentage points between December 2007 and than it would feed through into the average return on the  
December 2015 (and by 10 points for the Sparkassen). loan portfolio, would also be highly negative. Thus in mid-  
As with other banks in the eurozone, German banks 2015, the Bundesbank estimated the losses arising from a  
have in addition benefited from a marked shift in the sudden 200 basis point increase in interest rates could  
structure of deposits (particularly those from wipe out 21.5% of savings bank capital, compared to a  
households) towards sight deposits . Whereas at the figure of 18.3% at the end of 2011.  
April 2016  
The preservation of the profitability of the Sparkassen, and The net credit position of the Sparkassen relative to other  
thus their ability to generate capital internally, is essential to German banks increased significantly from 2005 onwards.  
their survival. However, the inherently lower profitability of The available data does not allow the savings banks’  
the Sparkassen’s lending business will combine with the counterparties in the interbank and negotiable debt  
lower returns provided by the Landesbanken, under securities markets to be identified. However, the  
pressure from the European Commission as well as their Bundesbank (2000) and Ehrmann and Worms (2004)  
shareholders to change their fundamental approach and have estimated that three-quarters of the Sparkassen’s  
thus withdraw from their higher-risk activities. Encouraged net credit position was held with their central institutions.  
to refocus on their core business, the public regional banks This increase is echoed in the change in the structure of  
are increasing competition in the business lending segment. the Landesbanks’ liabilities: the period of excess issuance  
This increased competition, and the associated opening of of negotiable debt securities in the run-up to the ending of  
new offices, is denting margins and operating coefficients public guarantees (to investors outside the network,  
whilst their cost of risk remains high. Although the definition between 2001 and July 2005, see above) was followed by  
of viable business models remains a prerequisite, mergers a period of growing interbank borrowing by the  
between these banks, to benefit from synergy and Landesbanken up until the end of 2007 (see Figure 11).  
economies of scale, would be beneficial. However,  
although the savings bank association, the DSGV, has long  
Landesbanken' liabilities: from one debt instrument  
argued for the maintenance of only two or three  
independent Landesbanks, the Länder themselves have so  
far hampered any move towards greater consolidation.  
Issues of regional sovereignty, political prestige and the  
preservation of jobs continue to win out over economic logic.  
Against a background of gloomy international conditions,  
maintaining this excess capacity could become  
incompatible with new solvency and liquidity requirements.  
to the next  
of bank balance sheets  
Growth of interbank debt  
Issues of  
negotiable debt securities  
Increased transformation risk  
Growth of customer deposits  
2003 2006 2009 2012  
Within the two major networks, interbank relationships  
are structured to allow small banks specialising in retail  
customer finance (the savings banks and cooperative  
Chart 11  
Source: Bundesbank  
banks) to transfer some of the maturity transformation Since 2009, deleveraging programmes and the  
risk to their central structures, which are better placed to reduction of the Landesbanks’ balance sheets (-40%  
cover these risks in the derivatives markets (Deutsche between the end of 2007 and the end of 2015) have  
Bundesbank, 2000). The banks borrow on the medium been accompanied by a rebalancing of the structure of  
to long term from the Landesbanken, which in turn they liabilities in favour of deposits from their customer base  
finance on the short term. The net debtor position of the of financial and non-financial firms (Figure 11). On the  
savings bank on the interbank loan market is offset by Sparkassen’s balance sheets, credits to domestic banks  
their holding of bank debt securities, which gives them a (loans and debt securities) have fallen: at the end of  
net creditor position. As a result, they have liquidity 2015 they represented only 15% of total assets (4% in  
which can easily be mobilised in the event of a shock. net terms) from 30% (20% net) at the beginning of the  
The circulation of liquidity within these networks explains 1990s and 25% (7%) at the end of 2008.  
why the theoretical hypothesis that small banks tend to  
restrict their lending offer more tightly than their larger However, although the maturity mismatch between  
rivals following a monetary tightening is not empirically loans and deposits of non-bank customers has tended  
verified in Germany (Ehrmann and Worms, 2004).  
to increase, that between interbank loans and deposits  
April 2016  
is falling. The maturity of the loans by the Sparkassen to  
domestic banks is rising. In the mid-1990s, 90% of such  
loans were for less than one year; today that figure is  
only around 50%. The structure of interbank debt has  
shifted slightly, to the detriment of term deposits .  
The savings banks are clearly major players and a  
structural factor in the German banking sector. They are  
members of a large financial structure, organised as a  
network, which deftly mixes the autonomy of its  
members, the pooling of processes, a public interest  
mission and the regional principle, all under the  
benevolent eye of the government authorities. It is clear  
that the Sparkassen have many virtues, but the financial  
crisis revealed the weaknesses in the three-pillar system,  
under which some generate profitability at the expense  
of the others. More generally, the imbalances in the  
German economic model, particularly in terms of the  
size of the current account surplus, are regularly  
criticised by European bodies but have provided fertile  
ground for the growth of the Sparkassen model.  
April 2016  
On the European level, savings banks and mutual banks are now a very heterogeneous group. For an overview of the history of  
these two types of institution in Europe, see Bülbül, Schmidt and Schüwer (2013).  
In November 2015, the two central institutions of the cooperative banks announced proposals to merge (by the end of July 2016).  
The European Commission and German federal government agreed on 21 March 2016 that following restructuring, the regional  
HSH Nordbank would be privatised (by 2018).  
The seven independent Landesbanken are Bayerische Landesbank, HSH Nordbank, Landesbank Baden-Wuerttemberg,  
Landesbank Berlin, Landesbank Hessen-Thueringen, Norddeutsche Landesbank and Landesbank Saar (following difficulties  
experienced by BayernLB, SaarLB, which had been under its control since 2002, regained its independence in 2010). The eighth  
Landesbank, Bremer LB, belongs to the Nord LB group.  
The scope of action of each member of the network differs: the savings banks operate at the local level; the Landesbanken, public  
mortgage lenders and public insurance companies operate at the regional, or Länder, level; the other institutions, such as Dekabank,  
operate on a federal level. There are various regional associations and a national association, the German Savings Banks  
Association (DSGV), which represents the savings banks in their dealings with the authorities.  
Members of the public pillar use a central computing system, which is considered one of the most powerful retail banking IT networks in  
the world. A company, operating a very large company and SME ratings database, develops and manages the internal rating process for  
the whole network. Client ratings are based on standard rating criteria but also take account of more qualitative variables such as the  
personality of the entrepreneur, the quality of succession planning (95% of companies registered in Germany are family firms) and the  
company’s environmental behaviour. The network has a single database that compiles anonymised company balance sheet and income  
statement data to produce activity forecasts for more than 400 branches (Schackmann-Fallis, 2011).  
German covered bonds.  
Before the abolition in 2005 of public liability guarantees (see below), the Sparkassen were fairly significant subscribers to issuance  
of guaranteed debt securities by the Landesbanken (who in turn were subscribers to issues from other Landesbanken).  
The Bundesbank does not provide credit flows data by type of credit institutions, meaning that it is not possible to calculate average  
annual growth rates under the ECB methodology. The advantage of this methodology is that it eliminates changes in scope (not  
corrected for in outstanding loan statistics).  
After World War II, the German banking market was highly segmented, which allowed the savings banks and cooperative banks to  
become the main provider of local banking services to German households and SMEs. The major private banks did not turn their  
attentions to the mass market until the mid-1960s (Bülbül et al. 2013).  
With their strong local roots, the penetration of the retail banking market by new competitors, particularly foreign groups, or by the  
redeployment of the major commercial banks, has not, to date, weakened the savings banks’ market share. However, costly  
measures are still required to adapt to the digitalisation of customer relationships and to protect against competition from on-line  
The initial plan was that all eurozone banks would be placed under the direct supervision of the ECB, but under pressure from  
Germany, small banks were removed from the SSM’s scope. Only those institutions with total assets of more than EUR 30 billion, or  
whose weight in national GDP is greater than 20% are considered as “significant” and thus under direct ECB supervision.  
These guarantees allowed the regional banks to benefit from very strong ratings and therefore to refinance at lower cost. Contrary  
to expectations, the removal of these guarantees did not give rise to a movement of either consolidation or adaptation of the  
Landesbanken to market conditions, for two reasons: the main ratings agencies continued to assess the quality of Landesbank debt  
on the basis of their close links with the Länder and with the regional federations of savings banks (ownership structure, intra-group  
protection mechanisms and political considerations). The second factor for the slow transition lies in the fact that the Landesbanken  
anticipated the abolition of the guarantees and as a result ensured the coverage of their refinancing needs during the four-year  
transitional period prior to the effective ending of the guarantees. Bond issues prior to July 2005 which matured before 31  
December 2015 still enjoyed state guarantees (with bonds issued before 18 July 2001 covered by guarantees irrespective of their  
maturity date).  
With the exception of SaarLB.  
The household sector here includes individuals, self-employed persons and non-profit organisations providing services to  
At the macroeconomic level, the very high savings rate in the German economy is related to the labour market reforms of the 2000s,  
which slowed the growth of wages relative to GDP and the weighting of consumer spending within GDP.  
Whilst the share of household financial savings held in sight deposits in the eurozone rose by 4 percentage points between 2007  
and 2015, the increase for German households was 9 percentage points.  
The latter nevertheless still account for 90% of their interbank lending (from 96% before the financial crisis).  
April 2016  
Bourgeois I. (2011), Solidarité financière – l’expérience allemande, Regards sur l’économie allemande, Bulletin  
économique, n°102.  
Bulbul D., Schimdt, R. and Schuwer, U. (2013), Caisses d’épargne et banques coopératives en Europe, Revue  
d’économie financière, n°111.  
Deutsche Bundesbank (2000), Longer-term trend in German credit institutions’ interbank operations, Monthly  
Report, January.  
Deutsche Bundesbank (2015a), Deposit protection in Germany, Monthly Report, December.  
Deutsche Bundesbank (2015b), German households’ saving and investment behavior in light of the low-interest  
rate environment, Monthly Report, October.  
Ehrmann M. and Worms A. (2004), Bank networks and monetary policy transmission, Journal of the European  
Economic Association, vol.2, n°6, p. 1148-1171.  
European Savings and Retail Banking Group (2014), The legal structure of savings and retail banks in Europe.  
Ongena S., Tümer-Alkan G. and von Westernhagen N. (2015), Do exposures to sagging real estate, subprime or  
conduits abroad lead to contraction and flight to quality in bank lending at home ?, Deutsche Bundesbank,  
Discussion Paper n°09/2015.  
Puri M., Rocholl J. and Steffen S. (2011), Global retail lending in the aftermath of the US financial crisis:  
distinguishing between supply and demand effects, NBER, Working Paper n°16967.  
Schackmann-Fallis K.-P. (2008), Les Sparkassen, facteur de stabilité pour l’économie allemande, Regards sur  
l’économie allemande, Bulletin économique, n°88.  
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l’économie allemande, Bulletin économique, n°101.