German Perspectives on the Evolution of Financial Cooperatives - Lessons for North America

German Perspectives
on the Evolution
of Financial
Co-operatives
Lessons for North America
i
2016 | RWGV

1. The European
Banking Market
©EuropeanUnion,2016

Dominated by Big Banks
© RWGV 2016 | Stefanie Schulte 3
Market share of the five biggest banks in the EU
41%
44%
47%
2004 2009 2014
Source: ECB
EU population: ~ 500 million

Not All Markets Are the Same
© RWGV 2016 | Stefanie Schulte
94%
85%
69%
66%
58%
48%48%
41%
37%
32%
4
Market share of the five biggest banks by country
21
14
Germany EU average
Number of banks per 1 million people
Source: ECB

Unique in Europe
 “In some European countries savings and cooperative banks
have completely disappeared as specific groups of
financial institutions, and in some others, they have
changed so much that it suggests asking whether there is
still today any substantial difference between these banks
and conventional national and international commercial
banks (...)”
 “(...) much more than those in almost any other country, the
German savings and cooperative banks have maintained
most of their traditional features over the last decades (...)”
White Paper “Savings Banks and Cooperative Banks in Europe”, Goethe University
Frankfurt, Research Center SAFE, 2013

Three „Pillars“
2,0
1,1
0,80,9 0,9
0,3
private (270 banks) public (420 banks) cooperative (>1000 banks)
Total assets (trillion Euro) 1
The German Banking System
Other
private
banks
Sparkassen
(savings banks)
Landesbanken
Credit cooperatives
DZ Bank
Source: Deutsche Bundesbank
1) excluding foreign subsidiaries
Average total
assets of a local
credit coop.:
~ € 800 million
(~CAD 1,2 billion)
Big private banks

Bigger Than They Seem
8
Market shares
The Role of Credit Cooperatives in Germany
10%
28%
31%
Total assets SME loans Branches
Sources: Deutsche Bundesbank, ILO
 Loans make up the majority of
the cooperative banks‘ total
assets
 Very little proprietary trading,
derivatives etc.
 Focus on local clients (regional
principle)
 Objective: maximization of
member value (not profit)
 18 million members (~ 22%
of all Germans)

3. Why Small Banks are
Good for SMEs
i

Scientific Evidence
 "For large banks, business lending contributes to the rate of
return on equity very little“
Working Paper “Financialisation, business lending and profitability in the UK”, University of
Glasgow, Adam Smith Business School, 2015
 "(...) when a large bank incorporates a small bank, loans to
small firms tend to decrease significantly“
Working Paper “Banks, regions and development after the crisis and under the new
regulatory system”, Università Politecnica delle Marche, 2016
 “SMEs located in credit markets with branches with shorter
distances from their headquarters seem to face a lower
degree of credit constraints”
Working Paper “SMEs and access to bank credit: Evidence on the regional propagation of
the financial crisis in the UK”, Cardiff University, Cardiff Business School, 2015

31%
13% 12% 12%
10% 10%
6% 6%
Data from the EU
Percentage of SMEs for whom access to
finance is the most significant problem
Source: ECB
“(...) in the post-crisis period,
SMEs in countries with smaller
banking units have been better
served with credit (...)“
Working Paper “Interest rates,
corporate lending and growth in
the Euro Area”, WU Vienna
University of Economics and
Business, 2016

17%
15%
12%
6%
$250 million or
less
$250 million to
$1 billion
$1 billion to $10
billion
More than $10
billion
Bank size (total assets)
Data from the United States
Average small business loan holdings
(up to $1 million) as a share of assets
Source: Federal Reserve Board
“(...) large banks tend to be
proportionately less committed
than smaller banks to small
business lending (...)”
“Availability of Credit to Small
Businesses September 2012”,
Federal Reserve Board

Why Small Banks
Lend More to SMEs
1. Smaller banks are more familiar with local markets
2. Small business loans tend to be relationship-dependent
3. Small banks need local economies to thrive
4. Small banks (like big banks) need to diversify their
portfolios; for small banks, this is easier to achieve by
making a large number of small loans
5. Small business owners are often members of local
cooperative banks

4. Competitiveness
through Cooperation
i

Credit Cooperatives are Doing Well
-30,00%
-20,00%
-10,00%
0,00%
10,00%
20,00%
30,00%
40,00%
50,00%
Cooperative banks Big private banks
Avg. (coop. banks) Avg. (big banks)
Coop. banks
(avg.): 12%
Big banks
(avg.): 6%
15
Return on capital (pre-tax) Cost-Income-Ratio
60,00%
65,00%
70,00%
75,00%
80,00%
85,00%
90,00%
95,00%
100,00%
105,00%
Cooperative banks Big private banks
Avg. (coop. banks) Avg. (big banks)
Coop. banks
(avg.): 72%
Big banks (avg.): 82%
Efficiency and Profitability of German Banks

The Structure of the Cooperative Financial Sector
1. Primary Institutions
Local credit cooperatives (voluntary regional principle)
Other networks of regional cooperative banks (voluntary regional
principle)
Institutions serving particular groups of customers, e. g. doctors and
pharmacists, civil servants, church institutions, people interested in
sustainable investments
Volksbanken and
Raiffeisenbanken
Sparda-Banken,
PSD Banken
Other cooperative
banks

Voluntary Regional Principle –
Why?
 Focus on local clients reduces risk
 Regional principle facilitates cooperation within a
(cooperative) banking group
 Abolishment of regional principle contributed to various
banking crises internationally, e. g. the recent crisis of the
Spanish Cajas (savings banks)

2. DZ Bank Group
Central institution for the local cooperative banks, liquidity
management, product specialist for private clients and corporate
clients, capital markets business and transaction banking
Mutual funds (Union Investment), consumer credit (Teambank), home
savings (Schwäbisch Hall), life insurance (R+V) & others
Commercial real estate (WL Bank, DG Hyp), leasing/factoring (VR
Leasing), equity finance (VR Equitypartner), financial investments (DZ
Privatbank) & others
DZ Bank AG
Retail banking
Corporate banking

Merger of DZ Bank
and WGZ BANK (2016)
 Completion of a decades-long consolidation process
(52 central institutions in 1903)
 Total assets of the group: ~ €500 bn
(WGZ BANK in 2015: ~ € 90 bn)
 Non-recurrent cost of merger project:
approx. € 300 – € 350 million
 Synergies: € 100 – € 150 million
 Holding structure bundling general strategic and
management functions
 Focus on the interests of the cooperative financial network
 Main owners of DZ Bank Group: local cooperative banks
©DZBank

3. Other institutions within the network (selected examples)
Exclusively privately financed deposit guarantee fund for banks,
prevention through institutional and social control
Financial IT-services for the co-operative banks (merged in 2015)
Mandatory annual auditing of the cooperative banks & additional
services
Protection scheme
Fiducia GAD
Cooperative
auditing
associations

Misperceptions...
 “SME lending is currently highly concentrated among
a handful of large banks that have the scale and
capacity to diversify idiosyncratic risks by investing or
lending to a broad enough range of SMEs”
Yves Mersch, Member of the Executive Board of the
European Central Bank, 2014
 We disagree with Mersch, because in relation to their
size, small banks tend to lend a lot more to SMEs
than the big banks

... and Lobbying
 According to the CEOs of Germany’s big private
banks Deutsche Bank and Commerzbank, John
Cryan and Martin Zielke, the country has “too many
banks”
 According to Deutsche Bank’s CEO, cooperative
banks distort competition because investors don’t
expect them to maximize their returns
 We disagree with Cryan and Zielke, because in
Germany, small cooperative banks are more efficient
than big banks, and their owners expect both
member value and a sound economic performance

Result of Big Banks‘ Lobbying
“the EU is keen to apply the same prudential rules to all
banks irrespective of size, a longstanding choice which
may in turn be viewed as the result of the influence of
the larger banks on EU policy.”
European Think Tank Bruegel, 2014

Goals of
German Cooperative Banks
 A more differentiated regulation within the EU (“Small
Banking Box”)
 A better public understanding of the role of cooperative
banks within the economy
 Regained popularity of the model of local cooperative banks
in other EU countries

Thank you!
Questions?
Stefanie Schulte
Tel.: + 49 251 7186 - 1062
stefanie.schulte@rwgv.de
Twitter: @schulte_stef

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