Banking Reform China May Copy Savings Banks Model

China is looking to Germany's small savings banks as a possible model to reform its own banking system. It's a pattern that is being repeated in many countries looking to avoid banks that are "too-big-to-fail" in the aftermath of the financial crisis.
China's central bank, the PBOC, might like to see a more decentralized banking model in the country. Germany could be a role model.


Shortly before the global financial crisis in the late 2000s, Germany's savings banks still had to endure scorn and mockery. These banks had a 200-year history that seemed out of date, relics in a brave new world of high finance and higher-flying investment bankers.

The near-collapse of the banking system has led to a rethinking. Suddenly the savings banks – which are decentralized, operate locally and are committed to lending to the communities that own them – are being seen as a role model by some countries hoping to break their reliance on a few large "too-big-to-fail" banks that dominate their economy and cost taxpayers billions.

Now, even in the economic superpower of China may be getting in on the act. On Tuesday, the German Savings Banks Association (DSGV) and the China Banking Association (CBA) signed a cooperation deal designed to promote talks between locally-orientated commercial banks in China and their German counterparts. Bankers in the world's second-largest economy believe Europe's largest economy may offer clues to how to set up a viable banking system for the future.

It's an old concept that seems to be enjoying a renaissance. From Britain to Greece, from Iceland to Cuba, governments and think tanks are toying with the development of smaller, regional banks to break the stranglehold of the world's largest global investment banks and stem the threat of another global financial crisis.

While Germany's savings banks are far from a perfect model, they just might be the best test case.

In our view, the city commercial banks form the nucleus for a stable cornerstone of the Chinese banking market for the Mittelstand and come closest to the model of the German savings banks. Georg Fahrenschon, President, DSGV

Perhaps the most radical proposal came from Britain. When the Royal Bank of Scotland was nationalized after the financial crisis, the New Economics Foundation, a think tank, proposed it be broken up into 100 local savings banks along the German model. The idea was to correct past mistakes – breaking a banking "oligopoly" that had been built up by deregulation in the Thatcher era.

Supporters note that Germany's decentralized system of nearly 2,000 individual banks, more than any other major developed country, has done a better job of helping to keep the credit flowing to consumers and businesses even in times of crisis. When one pillar of its banking system fails, the others can pick up the pieces.

To be sure, Germany's own banking model has suffered plenty of setbacks over the years – and continues to struggle with profitability today. The country's second-largest bank, Commerzbank, and a number of regional state-owned banks had to be bailed out for billions by the government in 2008 and 2009. Deutsche Bank has been mired in lawsuits and regulatory investigations that have sent its stock price tumbling.

And while smaller savings banks didn't join in the excess, many of these banks are burdened today with a branch-heavy community model that has saddled them with costs they may no longer be able to afford in today's digital age, when much of banking has moved online and fewer consumers feel the need to to do business with the local bank teller. The involvement of local politicians, who sit on the banks' non-executive supervisory boards, has also limited the wiggleroom of managers and arguably made savings banks slow to embrace change.

Still, the basic idea of taking in local deposits and offering them to local businesses in the form of loans is winning over many admirers, said Heinrich Haasis, who heads the Savings Banks Foundation for International Cooperation, which promotes the banking model abroad. While in developing countries it’s a matter of establishing micro-financial markets, the European Union member states are seeking alternatives to the existing banking systems.

After many years of being on the sidelines, Mr. Haasis said he's observing the growing interest with satisfaction. But he said he also knows that “you can’t just throw a switch and the institution will then sprout up from the ground.”

Political, private and community initiatives have been formed in several European countries, and organizers have spoken to the DSGV and the Savings Banks Foundation about their experience, the foundation’s annual report says. Consulting projects exist in Greece, Ireland and Estonia. Iceland is said to have also expressed strong interest in locally-owned institutions.

The Savings Banks Foundation achieved a notable success in communist-ruled Cuba. The government has demonstrated it’s open to the idea of savings banks, but it lacks the knowledge of how to gauge the creditworthiness of companies wanting bank loans.



In China, the goal of Tuesday's cooperation deal is an exchange “with the clear emphasis on offering banking services that revolve around SMEs’ business,” said Georg Fahrenschon, head of the German savings bank association, the DSGV, using an acronym meaning Germany’s small and medium-sized enterprises, also known by the catch-all term Mittelstand.

Mr. Fahrenschon said he believed China's city commercial banks, which number 134 across the country, currently come closest to the German savings bank model. "In our view, the city commercial banks form the nucleus for a stable cornerstone of the Chinese banking market for the Mittelstand,” he said.

Yuannian Chen, head of China's CBA, which has about 380 members and is the central contact in China for banking and regulatory issues, wants to benefit from the German savings banks’ long experience with regional structures. In concrete terms, the savings banks are to help with training personnel and provide support for management when needed.

But the cooperation isn’t a one-way street: China currently chairs the G20, a group representing the world’s 20 largest industrial and emerging nations, and Germany's savings banks are hoping they will leverage that position to get a better regulation deal for regional banks on the global stage.

Germany's small banks have long argued they're getting a raw deal from regulators, forced to fight against being lumped together with private commercial and investment banks. During the global financial crisis, savings banks and credit unions argue they ensured the smooth financing of the German Mittelstand. The banks’ simple business model, collecting deposits from customers and handing the money out as loans, proved to be stable even during the most unstable of times.

But the small, resilient savings banks don’t enjoy special status in the European Union’s de-facto capital of Brussels, which for the past decade has increasingly taken over responsibility for financial regulation from national capitals like Berlin, where savings banks had long enjoyed a much cosier relationship.

Now, the savings banks are welcoming any international attention sparked by the institution’s special business model – especially if it could help them fight onerous regulation.

China, meanwhile, has been trying to reform its fossilized financial system for years. Big state banks built up in the 1980s continue to dominate the business. For that reason, the central government had business banks set up city- and community-focused institutions in the mid-1990s to support local businesses. But these city commercial banks are still accused of being too entangled with local governments and of not working with a long-term outlook.

So far, that hasn’t hurt the city business banks. On the contrary, they profit from many local state-owned companies that require their employees to have their accounts at the local banks.

At the end of 2015, the Chinese government counted a total of 134 city commercial banks. They managed around 11 percent of the overall balance sheet totals of all Chinese banks. In the fourth quarter of 2015, the institutions showed a notable increase in assets – by about 25 percent compared with the previous year – to around the equivalent of $3.5 trillion.

Compare that to Germany's savings banks, which number around 400 and together serve about 50 million customers – more than any other banking group in Germany and more than Deutsche Bank and Commerzbank combined.

The cooperation agreement with China’s banking association marks a high point in relations with German savings banks. But the first contacts reach far further back. For example, 10 years ago the Berlin-based Sparkassen International Development Trust GmbH entered into a financial participation at the Nanchung City Commercial Bank –  together with the German Investment and Development Corporation (DEG) – to the amount of €1.1 million ($1.2 million).

The International Development Trust, a subsidiary of the savings bank association DSGV, currently holds 2 percent of the shares of the institution and the DEG owns 6 percent. The goal had been to develop the Nanchung City Commercial Bank along the lines of the business model of a large savings bank, according to the DSGV. The strategy apparently succeeded. The balance sheets totals increased in the past 10 years from €1 billion to €19 billion.

Getting out is a problem at the moment, however. Two years ago, the DSGV tried to get rid of its stake via a public listing. But since the Chinese government bans going public in the banking sector, the savings bank association says it is still involved in Nanchung.


Frank Drost is a Handelsblatt editor based in Berlin, covering financial supervision and banks. Stephan Scheuer is Handelsblatt's China correspondent, based in Beijing. Christopher Cermak of Handelsblatt Global Edition also contributed to this story. To contact the authors: [email protected]  and [email protected]