Many countries have state-run banks but few date back two centuries. Today, Germany has several hundred of these loosely affiliated public banks, comprising a major leg of a financial system older than the country itself. They are distinct from the larger banks both in their history and their objectives and, together, these small lenders are larger than any other component of the German financial system, controlling 40% of German bank deposits. They formed to provide the working classes with banking services and serve local economies ignored by the larger private banks. Though they survive to this day, they thrived after sprouting up everywhere in the country in the 19th century.
Banking and Industry
In Germany, the number of private joint-stock banks grew in the 1850s and 1870s. Out of these waves of bank formation arrived the large ‘universal’ banks of Germany today, those largest banks that operate in a myriad of different business lines. Indeed, Deutsche Bank and Commerzbank, modern Germany’s two largest banking firms were founded within two weeks of each other in early 1870. These firms emerged just as Germany, which unified in 1871, was going through its industrial revolution. The large banks financed German industrialization, then still in its earlier stages. Industrial companies relied on these firms to market their shares and make long-term loans.
This industrial focus was peculiar when compared to British or American banks of the day which avoided long-term direct lending. In America, the lack of a lender of last resort and relatively well-developed bond markets meant banks were disinterested in locking up their capital in illiquid loans and industrial companies had alternatives anyway. Whatever the occasional crisis intervention of the Bank of England, conditions were not altogether different in Britain and banks there also focused on suppling shorter-term credit. By contrast, the industrial mission of the German banks was not unlike that Crédit Mobilier in France founded around the same time, though the latter had more exposure to the public securities markets which were even less developed across the Rhine.
With the largest German banks focused on serving industrial concerns, other sectors relied on alternative sources of credit. The likes of Deutsche Bank were disinterested in serving small businesses and the real estate and agricultural sectors. To serve these parts of the economy, local governments established their own banks, called ‘sparkassen’.
In truth, the sparkassen had actually pre-dated the creation of the large banks in the mid-19th century. Perhaps the first ‘sparkasse’ was established in Hamburg in 1778 and another early one started business in Göttingen in 1801. By 1836, there were already 281 of them in Germany. These banks were formed by governments and favored by them; the sparkassen were exempt from certain taxes and deposits in them were guaranteed by public authorities.
At their inception, the sparkassen were savings banks intended to provide ordinary people with bank accounts. By contrast, the large private banks tended to focus less on collecting deposits from retail customers, a fact that remains somewhat true to this day. Even in 2011, the sparkassen controlled a portion of retail deposits twice as large as the large commercial banks. States were motivated to aggregate small deposits. In the early 19th century, heavily indebted German governments like that of Prussia encouraged the savings banks to invest their deposits in public debt, financing state borrowings.
In providing access to deposit accounts, the small banks were successful and most depositors in the sparkassen were working class. Some jurisdictions specifically limited maximum account balances to discourage the banks from catering solely to wealthy or middle-class customers. The savings banks expanded access to basic financial services; in Prussia, the number of sparkasse savings books per one-hundred people rose from just two in 1850 to eleven in 1880 and to thirty-two in 1910. By that year, deposits per capita reached 276 marks, or about four months wages for a well-paid industrial worker.
That said, the small savings banks did not always provide much convenience. In the early 1860s, more than a quarter of Prussia’s sparkassen were open no more than two days per month and most required a notice before withdrawals. One sparkasse in Berlin required three months’ notice for withdrawals of over one-hundred marks. Even those banks that were open more often limited their hours, typically to just two hours per day. The situation was similar to that of small working-class oriented savings banks in Britain which also proliferated in the 19th century.
Whatever their limitations and small size individually, the sparkassen grew to tremendous scale in aggregate. They went on to supply a quarter of total credit extended in Germany in the second half of the 19th century and this went disproportionately to non-industrial sectors. Indeed, their scope was limited by regulation as governments were keen to keep the small lenders away from risky lending. Recall that their deposits were typically guaranteed. As an example, for some time in Bavaria, sparakassen were prohibited altogether from making loans not secured by real property. Other jurisdictions placed looser restrictions. Regardless though, the sparkassen were always vulnerable; their small size and limited geographic scope made it difficult for them to diversify their assets and liabilities.
The number of savings banks grew nonetheless, multiplying in number over the course of the 19th century. There were 2,700 by 1900, almost ten times the number in 1836. This grew still further to over 3,000 in 1913 by which point the small banks controlled a quarter of bank and insurance assets in Germany.
Most of these new sparkassen were created by city or provincial governments, though some were formed by firms or professional organizations for the benefit of their employees or members. Even the public ones operated under a system of ‘municipal trusteeship’, a status still employed today. Under this system, even the public banks were not ‘state owned’ per se. For example, a sparkasse couldn’t actually be sold by its ‘sponsoring’ government. That said, they did nonetheless consolidate by different means.
One way of resolving some of the disadvantages and risks associated with small banks was to consolidate them but this was often legally or politically infeasible. Instead, larger regional associations of savings banks, called ‘landesbanken’, were formed to provide certain centralized services to the smaller banks. The landesbanken also deployed surplus funds for the sparkassen and lent to sparkassen needing liquidity. This structure mitigated some of the risk posed by the limited footprint of an individual bank. Loosely speaking, the landesbanken acted as central banks of sorts to the sparkassen; they borrowed and lent funds on a ‘wholesale’ basis, giving the system some further advantages of scale without a formal amalgamation.
The first landesbank was the Westfälische Provinzialhilfskasse, established in Westphalia in 1832. From there, many others were founded with the aim of diminishing the disadvantages faced by small savings banks. For example, as centralized institutions, the landesbanken facilitated the transfer of balances between individual banks, enhancing the convenience of the sparkassen and encouraging their use, especially for workers who frequently travelled or relocated. For this reason, savings bank customers favored, and workers associations encouraged, the formation of the landesbanken.
For decades, German banking has been described as being comprised of three pillars: the large private commercial banks, the public sparkassen and landesbanken, and cooperative banks which make up the smallest piece of the industry. Though their numbers shrank, the public banks thrived through the 19th century. It helped that the borrowings of the landesbanken were guaranteed by German state governments until 2005 when this generosity succumbed to pressure from the European Union on the grounds that the guarantee constituted unlawful state assistance.
Together, the sparkassen and landesbanken controlled a third of the German banking business going into the 2007-09 financial crisis. At the start of the crisis, the first experienced by the system after the abolition of the explicit state guarantee, the sparkassen were still numerous, with roughly 600 in operation alongside 13 landesbanken in 2007. Since the crisis, mergers and dissolutions have reduced the number of landesbanken from 13 to 8 between 2007 and 2011 alone, and the number of sparkassen has also shrunk from 600 to 426 over those same years and have continued to shrink since.
The German states did not at all abandon their creations in the most recent crisis though. In 2008, German state governments bailed out their landesbanken with a sum of €70 billion. Some have argued that state assistance to the public banks has helped prolong the weakness of private banks in Germany, many unable to return to healthy levels of profitability even more than a decade after the 2007-09 crisis. However, this state support may have been beneficial economically, enabling the banks to continue to lend to the mittelstand, the small and mid-sized German firms that drive the economy. Even after the crisis, 40% of German bank deposits remained with the country’s gargantuan system of small banks.
The sparkassen and landesbanken form a pillar of the German financial system. They have faced trouble, have had to reinvent themselves, and have become less numerous over the last few years and decades. However, they are still a massive enterprise, among the largest banking firms in the world when the system of loosely affiliated sparkassen are tallied collectively. The savings banks also share a history distinct from that of most banking firms, especially those of any size today. Small yet extensive, decentralized yet publicly-run, this pillar of German banking gives the country’s financial sector unique market dynamics and a peculiar relationship with government that has lasted two-hundred years.
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