German Banker Gains Support for Narrower Banking Union

Dsgv President Georg Fahrenschon
Georg Fahrenschon. Photographer: Michele Tantussi/Bloomberg

Georg Fahrenschon, who led Germany’s savings banks in helping quash a proposal for Europe-wide deposit guarantees, is now seeking to limit the remaining aspects of a European banking union: a joint resolution fund and central supervision of all the region’s lenders.

“I’m hard put to find anyone who speaks in favor of common European deposit insurance these days,” Fahrenschon said in an interview in Frankfurt on Nov. 9. He stepped down as Bavarian Finance Minister last November and became president of the German savings banks association, or DSGV. “It’s a commonly held misconception that banking supervision, banking resolution and deposit insurance all has to be structured centrally via Europe.”

Germany’s 423 savings banks and 11 landesbanks provide 43 percent of the loans to the small- and mid-sized companies, known as Mittelstand, that power the country’s export-driven economy. The lenders oppose a joint liability plan because they say it would put German depositors at risk over bank rescues in countries like Spain, where a real-estate collapse forced the government to seek a European Union bailout for its banking system.

“Our mandate is against that,” said Fahrenschon, 44. “The savings banks have a mandate to operate regionally by taking deposits and lending regionally.”

Savings banks make up one of the three pillars of Germany’s financial system, which also includes more than 1,100 cooperative lenders and commercial banks such as Deutsche Bank AG and Commerzbank AG.

Government Support

As European policy makers attempt to hammer out the shape of a banking union, one question is whether lenders should be overseen by national regulators or the European Central Bank. Fahrenschon is finding increasing support at home for keeping savings and cooperative lenders outside a Europe-wide union.

Germany, joined by the Netherlands, Luxembourg and Finland, sought last week to limit the ECB’s planned supervisory role to the largest banks, according to a Nov. 6 document obtained by Bloomberg News.

The approach contrasts with EU Financial Services Commissioner Michel Barnier’s plans to put the ECB in charge of all euro-area banks. All 27 EU leaders last month affirmed their pledge to establish ECB oversight of euro-area banks and set a Dec. 31 goal for political agreement on the supervisor’s design.

“The German government supports our position and more importantly, we’re increasingly experiencing more support from within the European Parliament,” said Fahrenschon, a member of the Christian Social Union, a coalition partner of Chancellor Angela Merkel’s Christian Democrats.

‘Watered Down’

ECB President Mario Draghi has called for improved supervision to help break the bank-sovereign link that has prolonged the financial crisis, opening the door for direct bank bailouts from the European Stability Mechanism if the countries accept conditions. Draghi said last week that “financial union does not have to imply the pooling of deposit-guarantee schemes.”

German foot-dragging threatens to delay or scupper the banking union, said Simon Adamson, an analyst with CreditSights in London.

“The opposition by Germany and other nations puts the whole banking union project at risk as the big roadmap agreed in June -- banking supervisor, resolution fund and deposit insurance -- is clearly watered down,” Adamson said in an interview. “It is a typical EU project, with high ambitions in the beginning and many problems with the implementation.”

Changing Times

Fahrenschon’s position differs from those of lenders in Italy, Spain and France, which favor a broader banking union, as well as those of Deutsche Bank and Commerzbank, Germany’s largest banks.

A banking union is in everyone’s interest and Germany should be willing to make “concessions,” Deutsche Bank co- Chief Executive Officer Juergen Fitschen said in a speech in Hamburg on Nov. 8.

Funds set aside to pay for rescuing or winding down Europe’s systemically relevant banks in the event of a failure should come from those banks themselves, Fahrenschon said. Otherwise, there is the risk of “moral hazard,” whereby the largest lenders take risks in the knowledge their smaller competitors will have to pay, he said.

“The world has changed,” Fahrenschon said. The financial crisis is heralding the end of the dominance of the largest banks over smaller ones, he said. “The times of ‘hurrah globalization, size is all that matters,’ in which small entities were deemed to be standing in the way of European champions, are gone.”

Smaller Banks

The advantages of a “boring” model of collecting deposits and lending money to companies in the same region are becoming apparent, Fahrenschon said, describing savings banks as “very profitable and a stabilizing factor in the economy.”

The assets of banks in the EU make up 349 percent of gross domestic product, while in the U.S. they account for 78 percent of GDP, according to the European Banking Federation.

“If the liability regimes in Europe are too small for the banks, there are two options,” said Fahrenschon. “Either one increases the liability regimes or one makes banks smaller.” Making banks smaller is the trend, he said.

Germany’s savings and cooperative banks had a combined balance sheet of 2.16 trillion euros ($2.75 trillion) at the end of 2011, almost matching that of Deutsche Bank, Europe’s biggest lender by assets.