German State-backed Savings Banks Face Uncertain Future

The European Commission charged a group of specialists with making suggestions for the EU's banking sector several months ago. According to a report by the Süddeutsche Zeitung this week, EU financial experts are concerned the state-backed banks present a hurdle to free competition in the bloc's internal market.

The newspaper said the 21-page study, which has not yet been made public, criticized that in some EU states banking takeovers were prevented by law or through government opposition. The European Commission should work to remove the barriers as soon as possible, the experts concluded. The EU executive is set to recommend change to the bloc's financial market in June.

Action on the part of the commission would be sure to affect Germany, since the country's banking sector is based on a three-pronged system of cooperative, savings and private banks. The first two are often state backed and control around 60 percent of the market and are virtually impossible to buy by private sector investors.

German state governments have to give permission for savings banks to be privatized. Sale of a bank in Stralsund, in northern Germany, was prevented earlier this year by the local government. The financially-stricken Frankfurt Sparkasse is currently awaiting a decision on whether it can be privatized. Germany's Commerzbank is said to be interested in buying the fourth biggest savings bank.

Savings banks under fire

The study's finding have reportedly been well received by Frits Bolkestein (photo), the EU commissioner responsible for the internal market.

Bolkestein has already set his sights on the German savings banks in another matter. In the rare cases that private investors are allowed to buy them, they are prevented from using the name Sparkasse, which means "savings bank." Bolkestein has said the rule hinders the common financial market and has initiated legal action against Germany on the issue.

The savings banks have also been under fire within Germany this week. One of the country's leading economics institutes also determined that private investors should be able to buy state-owned savings banks, the Financial Times Deutschland reported, quoting an unpublished report by the German Institute for Economic Research (DIW).

Commissioned by the Finance Ministry to investigate banking sector perspectives, DIW wrote that the state-run savings banks should follow the example of cooperative banks. DIW financial market expert Mechthild Schrooten said that all credit institutes should by faced with the same rules by 2005, when public assurances for the state-run banks are largely eliminated. But that that didn't mean that privatization would necessarily by the result, she told dpa news agency.

Unfair competition?

German private banks complain that the banking sector is kept from much-needed consolidation and thus earning higher returns, since state-owned savings banks can't be privatized. Last year, the International Monetary Fund (IMF) also said the German Sparkasse banks should be privatized.

But the German Savings Banks Association DSGV criticized the DIW report, saying it equates the banking market's performance and the high profits of private banking firms. Privatizing the savings banks would lead to limited competition and endanger financing for small and medium-sized companies, DSGV executive board member Holger Berndt said.

The German finance ministry is expected to comment on the study in May. Deputy Finance Minister Caio Koch-Weser is in favor of privatizing the savings banks, according to the Financial Times Deutschland.