Banking on the State: The Political Economy of Public Savings Banks
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Germany’s public savings banks – Sparkassen – are a remarkable and puzzling phenomena. No other advanced industrial country relies as heavily on such small, public financial institutions to fuel its economy and how is it that such small institutions can drive one of the biggest and most successful economies in the world?
In theory, their diminutive size should hinder their ability to function in an environment where they compete with the capital and muscle of major international banks. Yet at the height of the financial crisis, when other banks drastically reduced lending, new loans made by Sparkassen increased as they continued to provide liquidity and lend to start-up firms. How have they managed to survive the economic turmoil and global pressures of the last few decades? What has enabled them to stay at the heart of the German economy? In a period of neoliberal “too-big-to-fail” thinking, how have these relics of an ordoliberal past managed to flourish?
Mark Cassell answers these and many other questions in his exploration of the unique entity that is Germany’s public savings bank system and the lessons it offers to banking systems worldwide.
Mark K Cassell
Mark K. Cassell is Professor of Political Science at Kent State University. He is the author of How Governments Privatize: The Politics of Divestment in the United States and Germany.
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Banking on the State - Mark K Cassell
Finance Matters
Series Editors: Kathryn Lavelle, Case Western Reserve University, Cleveland, Ohio and Timothy J. Sinclair, University of Warwick
This series of books provides advanced introductions to the processes, relationships and institutions that make up the global financial system. Suitable for upper-level undergraduate and taught graduate courses in financial economics and the political economy of finance and banking, the series explores all aspects of the workings of the financial markets within the context of the broader global economy.
Published
Banking on the State: The Political Economy of Public Savings Banks Mark K. Cassell
The European Central Bank
Michael Heine and Hansjörg Herr
Quantitative Easing: The Great Central Bank Experiment
Jonathan Ashworth
BANKING ON THE STATE
The Political Economy of Public Savings Banks
MARK K. CASSELL
© Mark K. Cassell 2021
This book is copyright under the Berne Convention.
No reproduction without permission.
All rights reserved.
First published in 2021 by Agenda Publishing
Agenda Publishing Limited
The Core
Bath Lane
Newcastle Helix
Newcastle upon Tyne
NE4 5TF
www.agendapub.com
ISBN 978-1-78821-195-6 (hardcover)
ISBN 978-1-78821-196-3 (paperback)
British Library Cataloguing-in-Publication Data
A catalogue record for this book is available from the British Library
Typeset in Warnock Pro by Patty Rennie
Printed and bound in the UK by CPI Group (UK) Ltd, Croydon, CR0 4YY
For Kurt Moosdorf
CONTENTS
Preface
Acknowledgements
Tables and figures
1.Introduction
2.Context
3.The puzzle
4.Economic explanations
5.Administrative explanations
6.Political explanations
7.Conclusion
Notes
References
Index
PREFACE
I spent summers as a young child and teenager living with my grandparents in an enchanting, small town called Büdingen, located an hour’s drive from the metropolis of Frankfurt. Each summer, I was transported from the strip malls of southern California to the small forest-covered region of postwar West Germany. Büdingen was the county seat, and my grandfather, Kurt Moosdorf, served as county executive or Landrat, for more than 25 years. As Landrat, my grandfather oversaw local government, including the economic development and public infrastructure projects that were part of Germany’s postwar economic miracle.
My grandparents’ house overlooked the local Sparkasse. The Sparkasse was often the first stop my grandmother and I made each morning on our grocery-shopping rounds. She would chat with the staff, check her account, or pick up a deposit receipt. It seemed normal for her to know everyone in the bank. Several decades later, I realized the reason she knew everyone at the Sparkasse was that her husband, the Landrat, was the first line of supervision and governance in Germany’s public savings banks. My grandfather chaired the supervisory board of Büdingen’s Sparkasse for more than two decades, and it was my grandfather who oversaw the banks’ construction.
When I visited the Sparkasse in Büdingen in 2018, I learned it had merged and become part of a larger county system. The building was newer, the layout was different, and ATMs dotted the lobby. The name and brand were similar though: a giant recognizable red S
with a dot over the top. I wanted to know how this institution, which had played such a central role in my grandfather’s life and the life of Germany, had evolved and developed. It seemed to be thriving and I wondered why. How could a small local financial institution, governed and overseen by local politicians no less, survive global capitalism and privatization? What was going on?
Politics is another driver for this book. Three recent global challenges underscore Sparkassen’s significance. The first is the Great Recession of 2007/08. For more than 200 years, Sparkassen have been at the centre of Germany’s model of capitalism. The global recession taught us that history does not predict the future. Sparkassen’s long history does not guarantee their future. The financial crisis in the 2000s hurt Germany’s economy and undermined trust in the country’s financial system. Yet, Sparkassen stayed away from the opaque and risky investments that brought down the global economy. Local savings banks also kept credit flowing to firms and families during and after the financial crisis.
Second, during the refugee crisis in 2015/16, millions of refugees from Africa, the Middle East, and Central Asia poured into Europe. Most credit institutions denied refugees banking accounts because they lacked identification. This was a major problem for refugees and Germany’s local governments who rely on bank transfers to provide social assistance. Sparkassen rose to the challenge: giving hundreds of thousands of refugees access to credit, a safe place to keep their assets, and ways for local governments to provide social assistance when it was needed most.
Finally, as the book was being completed, Sparkassen were playing a central role in the federal government’s response to the economic downturn caused by the Covid-19 pandemic. Germany passed a €750 billion aid package to stabilize the economy in March 2020, €600 billion of subsidized loans to businesses. Small and medium-sized enterprises, the backbone of Germany’s economy, applied for the federal aid through credit institutions, primarily Sparkassen. In the United States, businesses also applied for federal assistance through banks. However, US banks were mainly private commercial banks and widely criticized for adopting policies that favoured large companies (with larger fees) over small businesses. Sparkassen, by contrast, lobbied on behalf of their small-business customers to ensure aid reached Germany’s SMEs on time.
The Great Recession, the refugee crisis, and Covid-19 underscore Germany’s local savings banks’ important political role today. They are for-profit entities that also serve the public interest. While my grandfather’s connection made me aware of Sparkassen, it was their role in the recent global challenges that prompted this research. How was such a system sustainable? How were Sparkassen able to avoid the risky behaviour and corruption that plagued private banks? How had the institution my grandfather used to rebuild his community in the aftermath of the Second World War adjusted to a world of global finance, European integration, digitalization, and the wake of the financial crisis?
In short, the book is motivated by a single simple question: what explains Germany’s public savings banks?
The book is written for several readerships. Scholars interested in the role credit and finance play in Germany’s economic model will appreciate a book that offers a clear and concise account of Sparkassen. There is a robust literature on financialization and Germany’s model of capitalism that includes comparative political economists, economic sociologists, and German studies scholars. However, with the notable exceptions of Reinhard Schmidt, Richard Deeg, Christoph Scherrer, Oliver Butzbach, and Kurt von Mettenheim, few scholars have written about Germany’s public savings banks and their role in Germany’s economic system for an English-speaking audience.
Public administration scholars are the second readership. Sparkassen constitute unique hybrid institutions that combine elements of the private and public sectors. As such, Sparkassen share administrative elements and challenges of government sponsored enterprises (GSEs), quasi-governmental organizations (Quangos), and special authorities. This book’s central contribution is a clear explanation of how Germany harnesses what are typically private entities and private markets in the pursuit of public interests; what are the accountability and governance mechanisms that keep Sparkassen focused on their public mission? How is administration a comparative advantage? These issues are at the centre of public administration. Banking on the State builds on the work of scholars such as Donald Kettl, Anne Khademian, Susan Hoffmann, Reinhard Schmidt, Wolfgang Seibel, Jonathan Koppel, and Thomas Stanton.
Finally, this book is written for the growing number of scholars, activists, and US policymakers interested in establishing an American version of Sparkassen. The Bank of North Dakota is America’s only public bank. It is successful and surprisingly popular in one of the most conservative states in the nation. A growing number of states – California, New Mexico, New Jersey, Washington – are actively considering public banks modelled, in part, on Germany’s Sparkassen. This book seeks to contribute to those promoting and developing more public banks in the United States.
* **
The method used in this work is known as grounded
research (Glaser & Strauss 2009; Hoffmann & Cassell 2010). Pioneered by Anselm Strauss, grounded theory seeks to explain and theorize using field data and experiential data. Field data include a range of materials from the field: notes of observations, transcripts of interviews, visual materials such as art or photos, and documents. Experiential data – data in the head
of a researcher – includes bodies of social science literature, life experiences that are germane, and professional experiences. These lead to insights, hypotheses, and questions that are verified with field data.
The emphasis on data does not mean the research is entirely inductive. Grounded researchers like James Q. Wilson, Herbert Kaufman, and John Dewey, emphasize the interplay among induction, deduction, and empirical verification in developing an understanding of a social phenomenon like Sparkassen and generating theory. I build on the insights of James Q. Wilson to explain the resilience of Sparkassen from the perspective of the operators, managers, and executives in the organization as well as the institutional actors and competitors outside the organizations (Wilson 2000). The process begins with a generative question
. In this study, the generative question was: What explains Germany’s public sector savings banks’ resilience?
The question was triggered by an earlier investigation of the failure of regional public banks and the surprising success of Sparkassen during the financial crisis.
According to Strauss, after developing a generative question, the researcher gathers and analyzes field data. Field data analysis starts with coding
and memoing
. In coding, the researcher searches the data for categories, or concepts, and relationships among the categories. Axial coding
looks for subcategories, essentially dimensions of the concept. I use NVivo, a qualitative data processing software, to code interview data and other documents, extracting passages that cover similar concepts. Memo writing occurs when data analysis is underway. Memos are used to suggest a hypothesis, add clarity, make connections, and raise questions. In this study, memos take the form of annotations within the coding process.
Grounded theory is an iterative process. The researcher collects field data, codes it, and returns to the field for additional data and to the library for additional literature. In this study, an initial round of interviews was conducted in 2014 with public and private banking officials, federal regulators, Sparkassen managers, and journalists and academics writing about the financial crisis. It was this initial set of interviews that led to the generative question that informed the research. Based on the first collection of interviews and data collected, I designed additional interviews, collected documentary data from government sources, and read additional periodic and scholarly work on Sparkassen. According to Strauss, the grounded theory that results from the iterative process is conceptually dense and reflects the assumption that the social world is complex, and relationships are often contingent.
In 2018–19, I conducted a second round of semi-structured interviews with managers, executives, and politicians managing Sparkassen, including those in the regional and federal associations. Four banks were selected based on two criteria: size (large and small) and location (East vs West). The size of an institution was identified as significant in earlier interviews with bank officials and the broader literature on banking. Larger banks are assumed to have more power, resources, and tools than smaller institutions. At the same time, larger institutions often face higher expectations and more significant challenges than smaller institutions. The East vs West criteria were also triggered by interviews and scholarship. Despite the unification of East and West Germany in 1989, the country remains deeply divided. Eastern regions are poorer and economically weaker than their western counterparts. Although Sparkassen existed in East Germany before 1989, their relationship with the local community was significantly different from that in West Germany. To tap into a broad range of experiences, I selected one large and one small Sparkasse in the east and one large and one small Sparkasse in the west.
Interviews with managers and supervisory board members of particular Sparkassen shed light on how internal governance structures and external regulatory frameworks shaped Sparkassen’s investment behaviours during the financial crisis and on the value Sparkassen contribute to local governments and communities.
Second, I interviewed leaders from Deutsche Sparkassen-und Giroverband (DSGV), the trade association for Germany’s Sparkassen. The DSGV serves two essential roles. As the formal representative of Sparkassen interests in Germany and Brussels, the DSGV leadership explains the political and policy debates surrounding the EU banking union, particularly the efforts to adopt a single European-wide depository insurance scheme. In cooperation with regional Sparkassen associations, the DSGV also plays a role in the governance and strategy of Sparkassen, helping make sense of the institutional arrangements that hold Sparkassen accountable. As the primary representative for Sparkassen at the national and EU level, the DSGV sheds light on the European Commission’s politics over the banking union.
I also interviewed institutional actors including staff to Members of the European Parliament (MEP) who served on the Committee on Economic and Monetary Affairs (ECON) during the time banking union legislation was debated; public banking interest groups; private banking interest groups; representatives of cooperative banks; and federal regulators in the Bundesbank and the BaFin. I visited over a dozen Sparkassen throughout eastern and western parts of the country, spent time observing how they operated and spoke with dozens of commercial and individual customers who bank with Sparkassen.
Secondary sources of field data supplement my findings. These include German auditing reports, legislative hearing documentation produced by the German federal government and several state governments and reports produced by the European Union. I also rely on financial data from the DSGV and the Eastern Regional Sparkassen Association. These detail the location, size, and fiscal performance of Sparkassen across the country over time. And finally, a good deal of information derives from accounts from journalists and scholars.
ACKNOWLEDGEMENTS
Any errors and mistakes in this book rest squarely with the author. However, I could not have completed this project without incurring several significant debts. Conversations with Horst Gischer Michael Schwan, Richard Deeg, Shawn Donnelly, Jonas Markgraf, Elliot Posner, Rachel Epstein, Martin Rhodes, Wolfram Morales, Mirko Weis, Sigurt Vitols, and Kathryn Lavelle were invaluable in helping hone my arguments. I am indebted to the US and German Fulbright Commissions for the financial support that enabled me to conduct the first round of interviews. I also owe a debt of gratitude to the Wissenschaftszentrum Berlin für Sozialforschung (WZB) for giving me the opportunity to connect and interact with some of the smartest social scientists on the planet. Also, this book would not have been comprehensible without the help of Amy Hanauer, William Cassell, Alison Howson, who helped cull much of the jargon and academic prose. Finally, I wish to thank the anonymous reviewers for their thoughtful and helpful suggestions.
In addition, this research would not have been possible without the willingness of dozens of respondents to share their perspectives and insights into Sparkassen. It is their stories and experiences that form the basis for this book. Dankeschön!
Mark K. Cassell
TABLES AND FIGURES
Tables
3.1 Sparkassen aggregate data, 2007–18
6.1 Comparison of EU lobbying by financial firm, 2018
6.2 Three faces of political power
Figures
2.1 The business districts of the Sparkassen and Sparkassen regional associations, 2020
2.2 Structure of the public banking sector
2.3 Total assets of banks in Germany
3.1 Credit provided to businesses and self-employed by banking group (in € billions)
3.2 Sources of income for German banks, 2000–17
3.3 Profit/loss by bank type, 2000–18
3.4 Return on equity by bank type, 2000–18
3.5 Cost/income ratio by bank type, 2000–18
3.6 Cost/operating income ratio by bank type, 2000–18
4.1 Relationship between Sparkassen profitability and regional economic health
5.1 Organization of the Savings Bank Finance Group
7.1 Annual public banking bills in the US state legislatures, 2010–17
7.2 US cities and states that have introduced public banking legislation, 2020
1
INTRODUCTION
Public banks like Sparkassen shouldn’t really exist in a capitalist system
– Manager at a German private commercial bank.
Germany’s public savings banks, known as Sparkassen, present a three-fold puzzle for today’s world of global capitalism. First, Sparkassen – relatively small financial institutions with comparatively few assets – are nonetheless the economic engines that drive Europe’s largest economy. Sparkassen are the most important source of capital for consumers and small-and medium-sized enterprises in Germany, a country whose high-skill, export-based economy is built on small-and medium-sized enterprises. Sparkassen account for 43 per cent of all business lending (Simpson 2013), 70 per cent of lending to self-employed and trades, and more than half of all consumer lending (Deutsche Bundesbank 2020). No other advanced industrialized country in the world – let alone one with an economy as large as Germany’s – relies as much on such small public institutions to fuel its economy.
A second puzzling aspect of Sparkassen is that their recent experience contradicts two key narratives in comparative political economy and international political economy: that global pressures and ascendance of neoliberal ideas will lead to the demise of Germany’s unique form of capitalism and that in an era of global financial capitalism, competitive pressures force banks to grow in size and breadth (see Schmidt 2018). Smaller financial institutions lack the capital and know-how to compete; Sparkassen should be relics of the past. Yet, Sparkassen remain a central part of the German model. They embody the country’s ordoliberal economic ideas and democratic principles of