German Savings Banks Choking on Draghi Medicine Cheer Yellen

  • Savings banks are among most outspoken critics of ECB policy
  • Fahrenschon repeats rejection of joint deposit insurance

German savings banks cheered Wednesday’s landmark decision by the Federal Reserve to raise the benchmark rate for the first time in almost a decade, saying the European Central Bank should take similar steps to restore “normality” to monetary policy.

If ECB President Mario Draghi’s “medicine is working, he now has to step by step establish normality,” Georg Fahrenschon, President of the German Savings Banks Association, said in an interview in Berlin on Thursday. “You can’t say on the one hand I’ll continue to fight deflation and that’s the reason I’m setting such unorthodox rates and on the other hand say ‘Look, my medicine is working’ because it’s also a very dangerous medicine. In that case I would have to reduce the dosage and he’s not doing that.”

Savings banks, Germany’s largest source of credit, are among the biggest critics of ECB policy as record-low interest rates to stoke growth in weaker parts of the euro area shrink their profit margins. The lenders may see earnings fall by 20 percent over five years, Fahrenschon said in October.

Competition is increasing as other European banks seek to do more business with the small and medium-sized companies that make up the backbone of Germany’s economy. While most smaller German banks have sufficient reserves to weather lower interest rates, they’re under pressure to cut costs and build up capital to increase their financial strength. To avoid losses, banks must close branches, trim the number of products on offer and standardize their processes, according to Fahrenschon.

Deposit Insurance

"Our problem is, if in five years interest rates are still the same, the central mechanisms of classic credit supply will be rendered inoperative,” said Fahrenschon. “If regulatory costs rise at the same time, then we will have to find a way of compensating for these."

ECB policy isn’t the industry’s leader’s only cause for concern. The savings banks association is also railing against plans for a common euro-area deposit insurance system that would make lenders liable for the actions of banks in other member states.

The European Commission “is playing with fire by introducing an idea that dislocates the mutual risk and responsibility of the credit services sector,” he said. “I won’t contribute to a false system.”

In a reflection of Germany’s objection to the plan touted by European Commission President Jean-Claude Juncker, Chancellor Angela Merkel on Wednesday said “collectivization” of liability would have the opposite effect of reducing risk in the financial system.

The Commission is overstepping its area of competency with the plan as 14 member states have yet to implement insurance schemes at the national level, Fahrenschon said.

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