Dear Reader,
There is something charmingly old fashioned about small-town German life. At the centre of it is the local bank. Whereas in rural Britain, local branches of banks have been reduced to the status of in-person cash machines, with little authority left to make decisions on loans and financing, the Sparkasse is still a linchpin of German life outside the big cities.
What we call postbox red is Sparkasse-rot to Germans. Whether it be at a charity evening or a sporting event, the bank’s official colour is everywhere. In town, the head of the local Sparkasse is still a big name. He, or she, is the head of an organisation that looks after pensioners in small villages and major local employers alike.
The idea of a Sparkasse is something that seems quite unique to Germany. First set up in the 18th century, it is a system of publicly owned banks whose purpose goes beyond maximising profits. They have a mandate to foster local business and provide financial services in rural areas. Their profits go back into the bank or are used to support local projects and charities.
They are also highly decentralised. Although their number has fallen sharply in recent decades, there are still more than 340 separate Sparkassen around today, each with its own bank managers and supervisory board. Under the so-called regional principle, each Sparkasse is generally restricted to serving its own municipality or district.
At the same time, all of the Sparkassen exist under the umbrella of the German Savings Banks Association, or DSGV, and belong to a mutual protection scheme. If one gets into serious trouble, other members of the system can step in to support it.
The Sparkasse thus combines the local knowledge of a small bank with the security of a much larger financial network.
For countries looking for answers to Germany’s remarkable distribution of wealth throughout its regions, a closer look at the Sparkassen is a must. The UK’s House of Lords published a report this year that highlighted the benefits of the Sparkassen system. In contrast to Britain’s highly centralised banks that rely on data to make lending decisions, Sparkassen rely on local expertise. Sparkassen are much “better at assessing local regional conditions and, therefore, prepared to lend,” one expert told the committee.
For the regular customer, the Sparkasse model also fits with Germany’s strong culture of saving rather than investing. Traditionally, Sparkassen have promised security to customers. The image was reassuringly conservative: their money wouldn’t be gambled away in the capitalist casino abroad -- and they’d get steady interest on their savings.
This risk-averse attitude served the Sparkassen well during the 2008 financial crisis. Unexposed to the US subprime mortgage market, the Sparkassen were back in the black by 2009. A report published last year by the UK government found that in the five years after the financial crisis, lending by Sparkassen increased by 15 per cent, while UK bank lending shrank by 25 per cent.
Ironically, it was commercial competitors that needed government support to survive the crisis. The German government stepped in to establish a €500 billion financial stabilisation package to save the likes of Commerzbank, whose risky investments threatened to bring down the financial system.
But is the story of the Sparkasse purely one of the genial, moustachioed bank manager thinking about the long-term interests of the community that he belongs to?
That would, admittedly, be a somewhat too rosy description of the world of local German banking.