Tài liệu The Significance of German Savings Banks in regional Structural and Cohesion Policy: Can they avoid regional downward Spirals? pdf

The Significance of German Savings Banks in regional Structural and Cohesion Policy: Can they avoid regional downward Spirals?. Abstract: This paper deals with savings banks in Germany

The Significance of German Savings Banks in regional

Structural and Cohesion Policy:

Can they avoid regional downward Spirals?

Stefan Gärtner

Institute for Work and Technology

Munscheidstr 14, 45886 Gelsenkirchen, Germany

email: gaertner@iat.eu

Abstract: This paper deals with savings banks in Germany (Sparkassen) in the context

of regional structural and cohesion policy, as well from a theoretical as an empirical point of view What benefits the savings banks provides will be discussed, on the one hand in terms of growth agenda, and on the other hand in terms of cohesion policy While making research on this topic, the question arises if the regionally-limited sav-ings banks are able to be as economically successful in poorer regions as in prosperous ones This leads to the question if savings banks can outrun ‘downward spirals’ in less developed regions?

Content

1 Introduction 2

2 Regional Structural Policy between growth agenda and cohesion ? 4

3 The Theoretical Relevance of savings banks 7

3.1 The Function of Banks: does space matter? 10

3.2 Banks and Capital Mobility and their Effects on Regional Development 13

4 Regional Banks and Lock-In Effect: Is there any weakness of strong ties? 15

4.1 Methodical approach and research design 17

4.2 Empirical Results 19

5 Regions and their Savings Banks: A qualitative comparison 25

6 Some Final Remarks 28

1 INTRODUCTION

Traditionally the objective of European as well as German cohesion and regional tural policy, is to develop structurally weak regions in order to reduce regional dispari-ties Therefore huge amounts of public money have been invested in poorer regions in the past, for instance by subsidising inward investment Lasting weak rates of growth, persisting high unemployment rates, a shrinking population, and windfall gains, as well as only short-term results of company recruitment pose the question if such a pol-icy is still reasonable

struc-Therefore in recent years a variety of different concepts and ideas for regional opment have been worked out which emphasize the regional or local potentials, in-stead of promoting company recruitment into poorer regions These new approaches are well accepted by regional economic scientists, and also increasingly by regional, national and European policy-makers The concept even found its way into cohesion policy in order to support disadvantaged regions by strengthening or promoting ‘clus-ters’ – which are mostly not located in the structurally weaker regions In consequence, public money does not always go to the poorest regions any longer

devel-However, trying to develop underdeveloped regions through subsidising inward vestment - which seems to be less successful in the long-run - is just as inappropriate

in-as a regional policy only orientated towards growth

Therefore a structural and cohesion policy with an orientation to growth and regional balance is needed: on the one hand, growth potentials should be promoted where they exist; on the other hand, structurally weak regions should receive special help in order

to enable the participation in, and the fostering of, economic development For both,

the growth agenda as well as the aim of cohesion, regionally or locally interested tutions and persons are needed that are aware of the local economy and have an inher-ent interest in the development of the region

insti-Germany has a unique system of decentralized public savings banks limited to the gional level by public law This means that the reinvestment of the accounted savings (e.g savings books) has to take place in each bank’s own area – mostly cities or

re-‘Kreise’ (similar to the counties in Anglo-Saxon countries) This stabilizes the nomic development especially in weaker regions, due to the fact that they are reducing the drain of capital from the weaker into the richer regions Thus banks could play a vital role in regional economic development as well in prosperous as in poor regions

eco-But concerning the latter, the question arises if the regionally-limited German savings banks are able to be sufficiently successful in weak regions There could be a danger that the regional ties of savings bank lead to negative effects in the context of a bal-anced regional development This leads to the question whether savings banks are locked in ‘downward spirals’ in weak regions or, if they are - due to less competition

in these regions for instance - as successful in poor as in prosperous regions

In order to be able to judge the importance of saving banks in the context of the tural and cohesion policy, the next chapter will discuss structural/cohesion policy in more detail Chapter 3 deals with the significance of savings banks in regional and bank theories Meanwhile chapter 4 and 5 provide the empirical part of the paper Chapter 4 has a quantitative character by inspecting the correlation between the eco-nomic success of regions and savings banks How German savings banks act in regions

struc-is the question in chapter 5, in which four savings banks and their areas are gated The paper will close with some final remarks in chapter 6

investi-2 REGIONAL STRUCTURAL POLICY BETWEEN GROWTH AGENDA AND COHESION ?

Cohesion, or rather regional structural policy in Germany, is a multi-level-policy, ried out at European, national and regional levels (federal states), as well as by sub-regional and local bodies The different levels are shown in figure 1 At the spatial higher levels these policies are traditionally motivated by the objective of reducing regional disparities, like the cohesion policy of the EU (top-down-policy) But in addi-tion, all regions - even the prosperous ones - have, at the sub-regional level (cities or

car-‘Kreise’), their own individual economic development policies to promote local omy and to supply the region with workplaces, taxes etc (bottom-up-policy)

econ-Fig 1: Levels of regional policy

EU, National state, Federal state…

Redistribution of Resources Regional Policy / Regional Cohesion and Structural Policy (top-down)

‘Kreise’ or cities wishing to participate in structural/cohesion programs of the higher bodies (federal, national or EU) are obliged to fulfil the guidelines required by these higher bodies

Cities and ‘Kreise’

Location Policies, e.g Communal Business Development (bottom up)

Improvement of own location conditions

Common aims Divergent aims

A new orientation of cohesion policy more strongly directed towards growth is taking place both in the EU and in Germany (and in many other OECD-Countries) at the fed-eral and regional levels The European cohesion policy, which traditionally follows the aim of reducing regional disparities, is starting to shift from helping the poorest re-gions to supporting regional strengths These policies place “much more stress on the links between cohesion and the Lisbon agenda, arguing ( ) that promoting regional competitiveness will boost the growth potential of the EU economy as a whole” (Bachtler/Wishlade, 2004: 12) Bachtler and Wishlade expect, that “there is a potential conflict between the objectives of competitiveness and cohesion” (2004: 50)

In earlier times the main preconditions for taking part in structural/cohesion programs have been that regions possess a special grade of economic weakness A shift in re-gional structural or cohesion policy to the ‘strengthen the strength’ approach modified the requirements It is more and more common that these programs enhance endoge-nous competencies and economic clusters These lead to the consequence that not only the poorest regions get aid money but also the regions with special strengths, in other words: the poorest regions are getting a smaller piece of the cake (Hübler 2005, Rehfeld 1999)

The common ideas shared by regional researchers promoting these policies are that concentration and specialisation of economic activities in a spatial sense will induce advantages for the single regions as well as for the whole national economy as illus-trated in the following textbox

Concentration and specialisation of economic activities in modern regional development

concepts: A case of uneven regional development?

More recent approaches, namely the cluster approach, are directed towards locally available petences and potentials: everyone knows about the local concentration of businesses or small work- shops in the old parts of European or Middle Eastern cities The spice markets in Istanbul, the tex- tile markets in Montmartre or the craft shops in the old town of Bucharest can be mentioned here Thus, these represent local concentrations of economic activities, a "geographical cluster'' in the area The essential advantage is that customers find a comprehensive geographically concentrated choice; a place frequented by specific suppliers with a corresponding infrastructure and the busi- nesses are bound by a certain knowledge network, and so possess specific information The basic principles of such so-called clusters (e.g Porter 1993, 1999, Rehfeld 1999) are of course founded

com-on advantages, and the system has been further developed and has its roots in different regicom-onal economic theories Regional economics state, that concentration and specialisation are require- ments for growth

From an overall economic point of view such an approach could bring advantages: But seen from the single regions perspective, one has to take into consideration that regions can mostly benefit from these approaches where internationally competitive potential has reached a critical mass, and components of a corresponding value-creating chain are located These conditions are mostly ful- filled in advanced regions

As already mentioned in the introduction, it is necessary to have a policy orientated towards growth potentials as well as to develop the poorest regions Due to the fact that such a policy which focuses on the endogenous potentials needs regional or local support In this context a closer look at the specific German system of public savings banks is of interest as they are deeply involved in local and regional economy They are not only hidden champions, because of their knowledge of regional economy and

of the supply of financial services, they also spend the regional savings only in the region, and therefore reduce capital drains from the poorer to the prosperous regions (back-wash effect)

The role of local banks in regional development has seldom been researched in spite of the fact that it is known that a deficient capital supply can be a bottleneck of regional development (Chick/Dow 1988: 220) If banks or financial intermediaries are missing

in peripheral or structurally weak regions the corporations cannot be as successful as in productive areas: This can perpetuate a cumulative process, in which fewer credits or funds means slower growth in the periphery with the consequence that the banks with-draw from these regions further (Klagge/Martin 2005, Dybe 2003, Dow 1999, Chick/ Dow 1988, Myrdal 1959) In such cumulative process the banking system may rein-force a core-periphery structure In the case of Germany the savings banks are of spe-cial interest because of their ubiquitous existence and their publicly legal form This will be explained in more detail in the following

3 THE THEORETICAL RELEVANCE OF SAVINGS BANKS

German savings banks are legal public institutions with a long tradition and have veloped from the philanthropic necessity to promote the concept of saving among the poorer population into regionally orientated general banks As legal public institutions they are bound to their responsible body, which is generally a local or municipal au-thority or specific-purpose committee They fulfil a variety of tasks which can be sum-marized in the concept: of ‘public duty’ The regional principle is a fundamental rule which is to ensure that the public duty is met Loans may be allocated to institutions,

de-businesses and private persons only in the region and, branch offices may also only be opened in their own regions The objective is that money saved in the region should primarily be invested to promote the local economy and local population

Although savings banks are indeed locally independent, however, they are at the same time linked together as a kind of local system supplier in a complex financial group based on voluntary principle, interconnected assets, economic calculation and ideal-ism

This savings bank financial group efficiently provides specialized know-how and back office support (Gärtner 2003: 19 ff) The German savings bank financial group consists of savings banks, regional and federal associations, regional banks, public insurance groups etc., and amounts to about 670 businesses and approximately 390,000 employees with a turnover of 3.3 billion Euro (www.gutfuerdeutschland de/nachrichten/globaler_cham-pion.html) The division of labour between the institu-tions in this group enables even small savings banks to act both, cost-effectively by using ‘economies of scale’, and flexibly by reaching solutions on the spot

The fact that savings banks in Germany are public in their legal form, nonmarketable, and therefore preventing the consolidation in the German banking market, are criti-cized by the EU Competition Commission as well as the German private banks (Som-merfeld 2005, Engerer/Schrooten 2004) These banks are unceasingly asking for the privatisation of public banks Legally doubtful is from their point of view above all the regional principle, which represents – according to their arguments - a regional cartel (Bundesverband deutscher Banken 2004) Against this background the question arises

what benefit do savings banks provide for the general public and in particular for gional development Is their existence justified?

re-Savings banks have an important function as financial intermediaries They provide access to financial services for all sectors of the population and businesses in all re-gions Being near the customer and knowing the customer personally as well as the market is especially important for the commercial allocation of smaller loans

Many further advantages of German savings banks are mentioned in the pertinent erature (Möllring 2003, Städte- und Gemeindebund Nordrheinwestfalen 2005) such as generating high local tax revenue, providing employment and training and supporting cultural and social activities in the region through sponsorships, donations and pay-ment of foundation dividends The distribution of profits to local authorities and coun-cils should not be ignored These benefits are positive side-effects which, however, would not give sufficient reasons for public authority activity in the banking sector

lit-Due to the fact, that the specific legal form of German savings banks can only be fied with respect to market failure in the financial sectors, e.g because of asynchro-nously distributed information, the focus will be on banking markets and their theo-retical function (chapter 3.1) as well as the significance of local banks for the devel-opment of regions (chapter 3.2)

justi-3.1 The Function of Banks: does space matter?

In theory, banking and financial systems can be divided into spatial neutral and neutral systems (e.g Klagge/Martin 2005: 392, Chick/Dow 1988) Neutral banking and financing systems are derived from neo-classical theory According to this, and considered from a model perspective, high competition ensures that every profitable investment receives financing independent of its location “Thus, all market partici-pants know whether an investment will be profitable It implies that all profitable in-vestment projects receive funding, and consequently that investment cannot be pre-vented from taking place because of a lack of finance” (Klagge/Martin 2005: 390) Capital moves to the location offering the best possible interest return Banking sys-tems are efficient if the banking sector concentration is low, that is, many banks are competing with each other and competition intensity is high “This is exactly why in-dices of market concentration ( ) play such an important role in almost all recent as-sessments of US and European banking markets They are widely used in empirical work“ (Fischer/Pfeil 2004: 308)

non-But weaknesses in the classical financial market theories can be seen in relation to location efficiency, availability of credit means, and the stability of financial systems

al-As international developments in recent years and the significant number of financial market crises have shown, privatisation and liberalization aiming on high competition intensity do not necessarily contribute to high stability in the banking and financial markets Studies also show that perfect competition does not inevitably provide the best results for the economy as a whole At least in parts of their business, banks ap-pear to operate in less than ideal-typical markets (Deutsche Bundesbank 2005: 107)

According to modern banking theories, banking markets should, in principle, be tinguished from other markets for following reasons: Firstly, information is asynchro-nously distributed between depositors and investors and is only incompletely available Secondly, it is a loan business, the amount of credit, interest payments and repayments taking place inter-temporally Thirdly, the distribution of loans is based on confidence (e.g Deutsche Bundesbank 2005, Klagge/Martin 2005, Fischer/Pfeil 2004, Engerer/Schrooten 2004.)

dis-In connection with this, more recent theoretical approaches assume that markets with lower competition intensity and stable customer-bank relationships (typical house bank relationships) can lead to improved credit availability at lower prices The idea behind this is that strong customer-bank-relationships reduce asynchronous information, but competition in banking can induce credit rationing in the sense that potentially high quality entrepreneurs may not get funded if banks in these markets are not investing in relationship (Cetorelli/Gambera 2001: 621) The more intensive the competition of banks in a region is, the smaller is the readiness of banks to invest in the acquisition of information Starting out from a banking system which is not neutral in a spatial sense, the key to credit allocation to small and medium-sized businesses consequently lies in proximity Therefore, for regional development an efficient banking environment is important However, proximity to borrowers is also of central importance to banks engaged in credit dealings with SMEs in order to enable them to operate successfully

To relate these theoretical model-based approaches and findings to the specific ing market in Germany, one has to look at the market structure:

bank-The German financial system is to large extent bank-based Businesses are nantly financed by bank loans and not – as is usual in Anglo-Saxon countries – by eq-uity or share capital (Hackethal/Schmidt 2005) The structure of the banking market in Germany is characterized by a strict separation into three columns (private banks, pub-lic institutions (above all savings banks) and co-operative banks) The legal reorganisa-tion and (partial) privatization of the banking market that was extensively carried out

predomi-in other European countries has not occurred predomi-in Germany (Engerer/Schrooten, 2004: 74) But this does not mean that German savings banks are acting in a sealed respec-tively monopolistic market They are in competition with domestic and foreign banks The non-saleable situation of co-operative banks and savings banks exhibits high com-petition intensity at the national level Measured against earning ratios in European comparison, German banks have had to take a back seat in the last years, but German banks are extremely efficient A current study of the KFW Bank Group demonstrates the high efficiency and low price structure of the German bank market (KfW Banken-gruppe, 2005).This is mainly caused by very intense price competition, which leads to falling prices of banks services and low returns on capital for the banks

However, the competition intensity and the distribution of banks can differ regionally within a nation state, as is also the case for Germany All private commercial banks, co-operative banks and savings banks have branches in some regions, especially in the prosperous conurbations, whereas only the latter two have significant representation in other regions Overall, a higher concentration and lower competition intensity can also

be seen at the regional level, since co-operative banks and savings banks as a rule do not compete within their own group

If one confronts reality with the new and traditional financial theories, the picture is even more complex: on the one hand, there is the thesis that higher competition, leads

to higher allocation efficiency If we look at the concentration indices at the national level and the reasonable bank service prices in comparison to international charges, then this relationship is comprehensible for Germany On the other hand, derivations from the more recent financial and banking market science lead to the thesis that the disadvantages, resulting from lower competition in the supply of credit to smaller and medium sized businesses, can be (more than) compensated by the advantages of prox-imity and stable customer-bank relationships This can also be understood when con-sidering the favourable conditions with respect to lower competition intensity at the regional level From the viewpoint of the savings banks, it can be claimed that they ensure high competition intensity at the national level and stable bank relationships at the regional level However, further research in this area is needed, however

3.2 Banks and Capital Mobility and their Effects on Regional Development

As has been outlined in the introduction, the regional principle is an essential teristic of German savings banks which curtails capital mobility, promotes an interest

charac-in the economic development of the region and could theoretically thereby contribute

to a balanced regional development

However, neo-classical economists assume that free market forces and unrestricted production factor mobility will finally produce a distribution optimum According to this, a balance between the regions will then occur in the mid to long-term if the state does not intervene The existence of local and regional banks – which slow down capi-

tal mobility – is difficult to justify according to this concept Thus, for example, Nürk, author of a study of the largest private bank in Germany, states that savings should always be brought to their most productive use and not artificially kept in a given re-gion by the neglect of efficiency considerations (Nürk 1995: 22)

On the other hand a regional dissimilar development with poorer economic credit ply, i.e a market failure, can be anticipated in some regions, as is shown by reality As

sup-a consequence of lsup-asting regionsup-al dispsup-arities in most countries, new concepts sup-appesup-ared

in the middle of the last century, like the ‘Polarisation Theory’ by Mydral, according to which the growth poles are distributed unequally in geographical space (Mydral, 1969, 1959) Myrdal assumed that the growth poles would attract the production factors and therefore weaken the poorer regions (back-wash effects) Thus, positive external ef-fects occur in conurbations that produce self-reinforcing growth at the expense of weaker peripheral regions This can lead to a regional imbalance if there is no state steering mechanism Human resources and capital are moving to the centres where the production factors yield a higher return (Wengler 2002: 109ff.) This can not only be established in the context of ‘Polarisation Theory’, but also by the ’New Economic Geography’ (Krugman 1991, Fujita/Krugman/Veneables 1999) which has become popular in recent years

Therefore, the justification of savings banks is also a question of the theoretical nomic viewpoint: If the aim is a policy of balance in the context of regional develop-ment, a nationwide complete coverage of the distribution of means definitely makes sense If, however certain growth centres or poles are to be promoted, the means should be (supra-regionally) concentrated (Wengler 2001: 299) In the context of struc-

eco-tural or cohesion policy traditionally directed towards balancing, newer strategies, such

as the cluster approach, also aim for the concentration of economic activities in a gion (see chapter 2) and thus accept local imbalances at the end of the day

re-Does this then mean that savings banks are counterproductive against the background

of newer regional structural and cohesion policy approaches? Not at all, from a retical point of view This is because the new approaches can only be successful when they develop growth potential and at the same time are oriented towards balance, as local institutions require, as already mentioned Savings banks are therefore also ac-ceptable, since, on the one hand, they can recognize local growth potential and play a part in its development; on the other hand, they are able to contribute to a regional pol-icy that is directed towards balance

theo-But as a matter of particular interest is the question, if the regionally-limited German savings banks are as successful in structurally weaker regions as in prosperous regions

or if they are locked in cumulative processes This will be discussed in the following

4 REGIONAL BANKS AND LOCK-IN EFFECT:

IS THERE ANY WEAKNESS OF STRONG TIES?

At first glance the regional principal of saving banks proves to be an important asset to regional development, especially to growth and cohesion policy On closer examina-tion the question arises whether this regional principal not only implies positive, but also negative effects: Firstly there is the disadvantage of undiversified investments in regional economies which “can leave the banks vulnerable to bankruptcy Centre

banks are better placed, by reason of their size and their better diversified loan lios, to lend to the periphery” (Chick/Dow 1988: 240) In structurally weaker regions, where corporations are less successful and corporations have lower equity bases, risks are even higher for banks acting there An aggravating factor is the lower economic activity in these regions, leading to fewer possibilities in earning money with financial products Negative effects eventually arising from the strong regional ties of regional banks can - according to the regional science literature (Hoppe 2000, Grabher 1990, Kunzmann 1986, Granovetter 1973) - denominated as ‘lock-in effects’

portfo-If banks in disadvantaged regions cannot be as successful as in regions with a higher prosperity - which seems to be obvious at a first glance - they might have negative effects on balancing regional development This means, if savings banks in economi-cally disadvantaged regions were be financially less successful they could not - due to less profit - be a sufficient promoter of regional cohesion This implies the question if the regional principal of savings banks leads to regional darwinism?

However, references to this dilemma can be found in literature: Chick and Dow for instance stated in 1988 in their often quoted article: “One can think of reasons why a regionally distinct banking system may not be an unmixed blessing to the periphery: while such a system may guard against a monetary outflow to the centre, periphery banks are exposed to extra risk where peripheral regions have, as they tend to do, quite specialised and strongly cyclical economies” (1988: 240) Dybe produced a connection between the wealth of regions and the economic success of local or regional banks (Dybe 2003: 225) Allesandrini and Zazzaro asked the question for the Italian banking