Foreword“In 2016, Savings Banks managed to grow their lending business at a rate significantly above the market, without having to accept a higher level of risk.”
2016 was a successful but challenging year for Savings Banks. Despite extremely low interest rates, customer deposits increased once again. We see this as a sign of customer confidence in Savings Banks. From a business management perspective, however, an increase in deposits poses a challenge for all credit institutions in the current market environment. Savings Banks have successfully coped with this challenge by exploiting earnings opportunities and consistently reducing costs. This enabled them to offset nearly half of their losses in net interest income and to limit the decline in their operating profit to a greater extent than expected.
“In terms of regulation, we are very much in favour of strengthening the focus on small, customer-focused institutions.”
Most importantly, Savings Banks managed to grow their lending business at a rate significantly above the market, and they did not accept a higher level of risk to achieve this growth. They increased their asset base considerably, thus preparing themselves for additional drops in net interest income and potentially higher write-downs. In the past fiscal year, Savings Banks were once again one of Germany’s biggest tax payers, with over EUR 2.9 billion in income taxes. In 2016, Savings Banks again clearly demonstrated their strength in the market due to their decentralised business model.
For this reason, we strongly suggest that more consideration should be given to the strengths of small, customer-focused institutions in regulation. For regulatory requirements to be effective and proportionate, they must be geared towards the size and the business model of credit institutions.
In 2016, the Landesbanken continued to pursue their consistent course of consolidation, further reduced their risk assets and increased their tier-1 capital once again. The new business generated by the Landesbausparkassen did not quite reach the level of the record year 2015. However, all members the Savings Banks Finance Group – under their own entrepreneurial esponsibility – made positive contributions to a strong group of companies.
In view of the interest-rate and market environment, we expect even greater challenges for 2017. The Group has prepared itself for these challenges by taking the necessary entrepreneurial action. We will further improve our cost position; however, we will also continue to invest in our customer business.
More than other banks, Savings Banks are responding to changes in customer habits. They are massively expanding access channels via media, and they have significantly broadened their range of digital services to complement their nation-wide network of branches.
However, this will not change the Savings Banks’ business model. We want to continue to be the first point of contact for customers in all financial matters, and we are committed as a Group to promoting vibrant municipalities, counties and local authorities throughout Germany.
DSGV’S BANKING REGULATION INITIATIVEConference: G20 and locally focused banks
“We need internationally coordinated and strict rules for big, systemically important banks.”
Germany will hold the G20 Presidency until the end of November 2017. One of the programme priorities under the German Presidency is the creation of a stable framework for a resilient international financial system. With the G20 July summit drawing near, it was the right time to organise the DSGV conference in Berlin in order to draw attention to the important role of the regional banks under the motto of “stability through diversity”. However, this role is jeopardised due to over-regulation by public authorities.
The amendments to the Capital Requirements Regulation (CRR) and the Capital Requirements Directive (CRD) proposed by the EU Commission in November 2016 did nothing to change this. From the perspective of the Savings Banks Finance Group, the proposed amendments were far too cautious to curb regulation so as to achieve relatively balanced regulation – one more reason for roughly 200 participants from Germany and abroad to meet at the conference organised by the DSGV in co-operation with the German Association of Co-operative Banks (BVR), the World Savings Banks Institute (WSBI) and the European Association of Co-operative Banks (EACB) to exchange information and discuss regulatory issues.
One of the key issues raised at the conference was how to set the right course at international level for reasonable regulation of small banks. “Large, internationally operating banking groups will need to be closely monitored in the future because of the big risk of contagion. For traditional retail banks of a moderate size and with a simple business model, it is sufficient to have stripped-down rules to ensure the same level of security. For this reason, we advocate a small and simple banking box for banking regulation”, said DSGV President Georg Fahrenschon.
Germany’s Minister of Finance Dr Wolfgang Schäuble and Bundesbank board member Dr Andreas Dombret – the two keynote speakers at the conference – shared this concern. Dr. Schäuble stressed the importance of Germany’s diverse financial sector as a foundation of Germany’s strong economy that was characterised by small and medium-sized enterprises. In this context, he stated: “We need internationally coordinated and strict rules for big, systemically important banks. These rules should be simplified and bundled to form a “Small and Simple Banking Box” for smaller banks.” In his capacity as the Bundesbank’s board member in charge of banking supervision and regulation, Dombret also argued that there were still too many regulatory burdens placed on small banks and Savings Banks.
“For traditional retail institutions of a moderate size and with a simple business model, it is sufficient to have stripped-down rules.”
The conference in March was the highlight of a whole series of regulatory initiatives by the DSGV, which the Association had stepped up towards the end of the year under review. Along with public appearances of leading representatives of other institutions such as the Association of German Public-Sector Banks (VÖB), these initiatives seemed to have had an impact on the regulatory authorities by the end of April 2017. At a meeting with executive board members of Savings Banks, Dombret announced that, in co-operation with the Federal Financial Services Supervisory Authority and Germany’s Ministry of Finance, the German Bundesbank was drafting a concrete proposal for a “Small and Simple Banking Box”, for which it would also engage in a dialogue with the associations. Before this meeting, Karl-Peter Schackmann-Fallis, member of the DSGV’s Executive Board, had again underlined the Association’s position at a hearing held on 25 April 2017 by the European Parliament’s Committee on Economic and Monetary Affairs. However, one question remains open: what factors will be used to decide to which credit institutions the separate set of rules will apply.
German G20 PresidencyOn 1 December 2016, Germany took over the G20 Presidency from China. Under the motto: “Shaping an interconnected world”, the German government will pursue the following three objectives during the year of its presidency: “Building resilience”, “Improving sustainability”, and “Assuming responsibility”.
Conference “G20 and Locally Focused Banks”The conference organised by the DSGV was held on 9 March 2017 in Berlin. The purpose of the conference was to explore the key G20 financial topics from the perspective of locally focused banks and to highlight the importance of these banks for the stability of the financial markets. s.de/G20locally
Small and Simple Banking Box at a Glance
Regulatory framework for institutions of the SSBB
Exemption from big bank standards
The institutions should only have to apply the current Basel III and CRR I / CRD IV rules.
Reporting requirements should be considerably reduced in terms of volume and frequency.
Institutions that are not publicly traded should not have to prepare disclosure reports.
The full scope of regulation should be limited to systematically important institutions.
Establishment of committees
The establishment of committees (risk, nomination and remuneration committees) should be optional.
Suitability of office holders
(“fit and proper“)
It should be possible to assess the suitability of office holders ex post.
Recovery and resolution planning
Recovery and resolution planning should not be required.
Limited user group
The SSBB is only an option for banks that do not pose any risk to the financial system as a whole.
The right focus
The classification for the purposes of the SSBB is not based solely on the balance sheet total. Instead, the risk profile of each individual institution is also taken into consideration.
Highly objective and transparent
The SSBB is based on the regulatory concept of systemic importance, which was developed by the European banking regulator.
SMALL AND SIMPLE BANKING BOXWe propose a ›Small and Simple Banking Box‹
“We want to reduce regulatory burdens where it is justifiable from a risk perspective.”
First of all, it was important and quite right that politicians and regulators took rigorous action in the years following the onset of the global financial crisis. Corrections to the regulatory regime were urgently needed at the time, from risk weighting for securitisation to rules on remuneration for investment bankers. And above all, there was a recognition of the core problem that some banks were simply too big – or too important within the system – to fail. A great deal has happened in this area, even if it has not been properly focused. We have higher capital requirements for those banks, stricter regulation and, last but not least, clear rules on bank resolution – including our very own European resolution board. However, the flood of complex regulatory measures that this unleashed places small and medium-sized banks under increasing pressure. The original aim of preventing a “too big to fail” scenario is threatening to morph into one of “too small to succeed”. This is mainly due to the administrative fixed costs of regulation, which are even incurred when all the requirements have been met, and which impose a disproportionate burden on these banks. Current regulation also has a highly distorting effect on competition.
We have proposed a “small and simple banking box” for small to medium-sized, low-risk banks. We want to use it to achieve differentiated regulation, and to reduce the regulatory burden wherever this is justifiable from a risk perspective. In the United States, for example, a clear distinction is drawn between Wall Street and the much smaller main-street banks, the banks you might find on any town-centre high street. In Europe, however, the banking sector is very diverse, and the response should not be determined solely by a bank’s size or balance sheet, but also by its risk profile. This is why our small and simple banking box centres on whether a bank poses risks to the financial system as a whole. If we know that it does not, the differentiated regulation comes into play. This, by the way, is definitely not about seeking relief from “tough” regulation on matters like capital or liquidity ratios.
Because of the growing regulatory pressures on smaller banks combined with the persistent low interest-rate environment, it is becoming increasingly important that politicians and regulators take action. Our idea for a small and simple banking box provides a concrete opportunity to reduce this dual burden within a field that can be influenced by policymakers, i.e. regulation.
In its latest proposal on revising European banking regulation, the European Commission suggests, for example, that institutions with a balance sheet total of up to 1.5 billion euros might qualify for simplified reporting and disclosure requirements. This amount is far too low as considerably less than half of the Savings Banks would fall below this threshold. On the whole, these proposals are well-intentioned, but they are far too modest to effectively reduce the distortions of competition and the burdens.
“A fundamental willingness to introduce such a box seems to be taking shape.”
We developed our concept for a small and simple banking box in the summer of 2016, and since then we have consistently canvassed support for it among politicians and regulators. Alongside many other initiatives, we organised the highly regarded conference “G20 and Locally Focused Banks” in March 2017, where the German Minister of Finance and the German Bundesbank came out in favour of more proportionate regulation for smaller banks.
Europe has baulked for a long time at committing to differentiated banking regulation. And Europe has done so despite the fact that the diversity of the European banking sector is a stabilising factor for the financial system. In our conversations, however, we have lately sensed more and more indications that awareness of the problem has grown. A specific date for the introduction of the box is not yet foreseeable, but a fundamental willingness to take action does seem to be taking shape. One or two years ago, this would have been totally inconceivable.
If the current regulatory trends were to continue without major policy adjustments, small and medium-sized banks would be increasingly forced into a corner and placed at a disadvantage compared with big banks. This would not be acceptable for us, and we would continue to campaign vigorously for improvements.
In ProfileDr Karl-Peter Schackmann-Fallis has been a member of the Executive Board of the German Savings Banks Association since November 2004, where he is in charge of economic and political affairs, bank management and regulation. Prior to his current position, he served for several years as Undersecretary for Finance in the German federal states of Brandenburg and Saxony-Anhalt. He began his career at the German Ministry of Economic Affairs after obtaining a doctorate in economics. In addition to his role on the Executive Board, Dr Schackmann-Fallis holds many other positions, including that of Chairman of the European Banking Industry Committee (EBIC), Chairman of the Supervisory Board of S-Rating GmbH, and Managing Director of the Savings Banks’ Institutional Protection Scheme, as well as being a member of the Advisory Committee to the Federal Financial Supervisory Authority (BaFin) since 2004.
An interview with Dr Christian BurmesterRegulation in practice
Our biggest headache, and this goes for Aachen too, is the pace of change: we have to digest updates and new regulations on an almost daily basis. What we need is a phase of consolidation, so we can cluster all the measures into a bundle, implement them in a concentrated fashion and then let them take effect.
“Regulation costs us a great deal of time and money.”
The idea of proportionality is all very well. In the final analysis, however, regulation cannot simply be scaled down at will. This is like steadily shrinking the cabin of a plane – sooner or later the wings and engines will be too big and too expensive by comparison. In the same vein, having to report figures less often does not really help small banks if they still have to compile the same data as big banks.
The business model, because the kind of transactions a bank enters into will determine the risks it takes – and how dangerous this bank might potentially become to the stability of the financial system. As a Savings Bank, we have to comply with almost the same laws as a large, internationally networked, wholesale bank that caters for the capital markets. Proportionality brings relief in some respects, but in my view it has not been properly thought through, and it is not geared towards the business model. We always have to study all the laws and regulations to find out whether they are relevant to us or whether we can claim proportionality.
I think we need our own regulatory constituency, which would specifically cover the typical business models of small or less complex credit institutions. This gives rise to risks that relate to the lending business, the deposits business and maturity transformation results. For these typical transactions, we would need customised regulation like the small and simple banking box proposed by the DSGV, which also has the backing of Dr Andreas Dombret on the Executive Board of the German Bundesbank.
Fast, result-oriented advice is a thing of the past. Even the most experienced and creditworthy customers now have to undergo the whole procedure and put up with a huge amount of bureaucracy and paperwork. For our part, regulation is costing us a great deal of time and money. And quite a few of our customers are simply irritated by it.
New residential space for the historic centre of WeimarActive despite
Anyone who visits the construction site located in the historic centre of the city of Weimar can immediately appreciate the enormous challenge: In the narrow alleys with traditional multi-storey architecture and post-war buildings, space is limited, very limited. Brigitte Enders-Burlein, head of the real estate management unit of the Savings Bank in Central Thuringia, and the chief architect start their inspection with a flying visit to the construction-site container, where they are brought up to date about the ongoing construction work by the site manager and the foreman.
In the meantime, work is continuing outside, as on every working day. Today, the 14-member construction crew will mainly be carrying out steel and masonry work. Together with the site manager, the two inspectors walk around the large construction site on Teichplatz and across to the four interlocked town houses on Rosmariengasse. In fact, the site is sub-divided into two sections: the future large apartment building with 24 apartments, one commercial unit and underground car parks for 34 parking spaces on Teichplatz and the four detached houses in the directly adjacent alley.
Building in the tightest of spaces
While 95 percent of the shell of the town houses was already completed during our on-site inspection, not much of the apartment building project was visible in the excavated pit. This was also due to the specific circumstances of this project, explained the architect, as we climbed the stairs in one of the houses: “To be able to make optimum structural use of heavy equipment like the crane, we started by building the smaller houses. For this reason, we are still working below ground level in the pit of the large building.” The roof terrace of the town house provides a view of the approx. 800 square metre excavation pit, in which construction workers are in the process of putting iron reinforcing into the ceiling of the first ground floor. What is striking is the narrowly positioned row of heavy concrete piles on the sides of the pit. “The piles are also needed because of the narrowness of the construction site. Anchored at a depth of 18 metres, the roughly 150 piles prevent the surrounding buildings from beginning to slide”, said the site manager.
Ms Enders-Burlein is satisfied with what she has seen. Despite some delays this year, the project is progressing well. This project is yet another example of our Savings Bank’s aspiration to make different levels of affordable housing available to the people in our service area. At the same time, the rental income enables us to generate a return above current interest rates in the capital market. This helps to compensate for the lower earnings generated from our core business“, she explained. “The regulatory requirements imposed on banks fortunately affect a project like this one only marginally if banks retain the necessary staff and expertise.”
We are back at the main construction site. For decades, it was just a large car park – for the city administration an urban planning grievance. Ms. Enders-Burlein explained: “Twenty years ago, there were already plans to do something with the property. Since 2014, we have been able to tackle this project seriously.”
“TENANT” FOUND: THOUSANDS OF YEARS OLD
Standing on the edge of the large excavation pit, Ms. Enders-Burlein and the architect are taking another look at the work done on the ceiling of the underground car park. After all, satisfied tenants are to enjoy their high-end apartments in a year’s time at the latest. Obviously, this quarter – which is one of the city’s oldest settlement areas – was also attractive for inhabitants in earlier times. When the site was developed, archaeologists were called to the site. They discovered not only medieval vaulted cellars and pottery, but also a 4,800-year-old female skeleton from what is referred to as the Corded Ware period. The young woman, who was 16 to 18 years old when she died, was nicknamed “Rosie” after the site on Rosmariengasse where she was found. She has since left Weimar for a trip around the world’s museums. The historic site at the centre of Weimar will soon be ready for its new tenants. “We are approaching the end of the contract negotiations for 15 apartments, and the contract for the commercial unit has already been signed”, said Ms. Enders-Burlein. She reports that a young doctor has decided to rent the commercial premises and open her surgery on the first floor of the new building on Teichplatz. The young doctor was convinced by the central, attractive location and by the fact that she was given a say in the design of the floor plan.
The acceptance inspection of the shell has been completed. “In three weeks’ time, we want to be out of the mud – i.e. the basement – and start building the upper floors”, said the architect looking ahead. Ms. Enders-Burlein nods in agreement. The most ambitious project of the Savings Bank of Central Thuringia is continuing to take shape.