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?






Stefan Gärtner
Institute for Work and Technology
Munscheidstr. 14, 45886 Gelsenkirchen, Germany
email:


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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



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1 INTRODUCTION
Traditionally the objective of European as well as German cohesion and regional struc-
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.
Therefore in recent years a variety of different concepts and ideas for regional devel-
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.
However, trying to develop underdeveloped regions through subsidising inward in-

vestment - which seems to be less successful in the long-run - is just as inappropriate
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,


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the growth agenda as well as the aim of cohesion, regionally or locally interested insti-
tutions and persons are needed that are aware of the local economy and have an inher-
ent interest in the development of the region.
Germany has a unique system of decentralized public savings banks limited to the re-
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
‘Kreise’ (similar to the counties in Anglo-Saxon countries). This stabilizes the eco-
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.
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 struc-
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


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

2 REGIONAL STRUCTURAL POLICY BETWEEN GROWTH AGENDA AND COHESION ?
Cohesion, or rather regional structural policy in Germany, is a multi-level-policy, car-
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
‘Kreise’), their own individual economic development policies to promote local econ-
omy and to supply the region with workplaces, taxes etc. (bottom-up-policy).
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


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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.




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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 com-
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
on advantages, and the system has been further developed and has its roots in different regional
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


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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 T
HE THEORETICAL RELEVANCE OF SAVINGS BANKS
German savings banks are legal public institutions with a long tradition and have de-
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,


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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


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what benefit do savings banks provide for the general public and in particular for re-
gional development. Is their existence justified?
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 lit-
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.
Due to the fact, that the specific legal form of German savings banks can only be justi-
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).



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3.1 The Function of Banks: does space matter?
In theory, banking and financial systems can be divided into spatial neutral and non-
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).
But weaknesses in the classical financial market theories can be seen in relation to al-

location efficiency, availability of credit means, and the stability of financial systems.
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).


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According to modern banking theories, banking markets should, in principle, be dis-
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.)
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 bank-
ing market in Germany, one has to look at the market structure:


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The German financial system is to large extent bank-based. Businesses are predomi-
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
in other European countries has not occurred 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.

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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 charac-
teristic of German savings banks which curtails capital mobility, promotes an interest
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-


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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 sup-
ply, i.e. a market failure, can be anticipated in some regions, as is shown by reality. As
a consequence of lasting regional disparities in most countries, new concepts appeared
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 eco-
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-


15
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 re-
gion (see chapter 2) and thus accept local imbalances at the end of the day.
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 theo-
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.
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 R
EGIONAL BANKS AND LOCK-IN EFFECT:
I
S 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


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banks are better placed, by reason of their size and their better diversified loan portfo-
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’.
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


17
market about which reciprocal influence has banks and firms at the local level (1999:
74).
There is no single unique theory to describe and explain the correlation between the
economic success of bank and region prosperity. In fact both, spatial and regional eco-
nomic science and bank and finance theories need to be taken into account. As analysis
of the state of research has shown (Gärtner/Rehfeld 2007: 13) and as has been ob-
served by other authors (Petersen/Rajan 1995: 408, Fischer 2005), current research
lacks such trans-disciplinary approach. This is especially the case for empirical analy-
ses. However, the available analyses on the correlation between regional competition
intensity and regional disposability of credit loans (Fischer/Pfeil 2004, Petersen/Rajan
1995, Centroelli/Gambera 2001) give some ideas about the issue dealt with in this pa-
per, but they are not sufficient to answer the research question.

4.1 Methodical approach and research design
Whether saving banks in less favoured regions can be as successful as in regions with

high prosperity is the main empirical research question. Because the empirical research
- done until now - could not give an adequate answer on this it has had to investigate
the correlation between region’s prosperity and the economic success of savings banks.
Testing this question empirically is coupled with two main methodical questions: first,
how to measure region and bank success, and second, how to ensure data comparabil-
ity between regions and savings bank areas.


18
Concerning the first, three indicators - return on equity, cost-income ratio (CIR) and
operation profit - have been chosen to measure bank success. The variables for the 463
savings banks in Germany have been kindly made available by the ‘German Savings
Bank Association’. Whereas the prosperity of all cities and ‘Kreise’ has been measured
using a regional indicator consisting of six different variables such as employment and
unemployment rates, gross value added etc.
As is shown in the following figure, measurement problems in terms of comparability
arise from the fact that regional administrative borders and savings banks areas do not
necessarily match. Thus, the regional data has been disaggregated onto the areas of
saving banks. (For in-depth methodical information see Gärtner 2007)
Fig. 2: Savings banks and the spatial structure

Kreis A Kreis B
Kreis
C
Kreis D
Savings B. 1
Sav
ings B. 2
Savings B. 3
Savin

g
s B. 4
Savings B.








Because of the political controversial discussion concerning public regional banks the
aim was to get reliable and exact data. Therefore the author did not work with a sam-
ple, but prepared the data for all savings banks and all regions in Germany (statistical
population).


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4.2 Empirical Results
The first results of the interrelation between regional wealth and the 463 saving bank
success, which can be drawn from Fig. 3, are interesting and somewhat surprising. The
scatterplot shows the regional economic situation on the x-axis (measured with the
described variables) and the banks economic success (measured here with return on
equity, CIR and the operation profit) on the y-axis. The poorer a regions is, the more
the regional indicator (x-axis) increases, and the more successful a savings bank, the
more the savings banks indicator (y-axis) increases. The pattern of dots in the chart
demonstrates at one glance a wide scatter, which says that there is no evidence for any
relationship between regional prosperity and bank success.
Fig. 3: Correlation between economic success of German savings banks and regional prosperity
0

0,2
0,4
0,6
0,8
1
1,2
0 0,2 0,4 0,6 0,8 1 1,2
Regional Indikator
Savings Banks Indikator

Source: Statistische Ämter der Länder 2004 and 2005, BBR 2004 and 2005, own calculation



20
Furthermore, empirical data allowed the deduction that no ‘lock-in effects’ exist for
regional banks and that these are as successful in poor regions as they are in wealthy
ones. The ‘line of best fit’ in the diagram - which slopes a bit from left to upper right -
suggests even a very small positive correlation. This means here that savings banks are
somewhat more successful in poor regions than in rich regions from a statistical point
of view.
Against the background of the steep incline in regional prosperity and the heterogene-
ous economic structure between Western and Eastern German (former German De-
mocratic Republic) regions the statistical population had to be split accordingly to get
a more detailed picture and to validate the first results.
The correlation coefficients (Spearman) have been calculated for both West and East.
This coefficient indicates the direction and strength of linear relationships between two
variables (here success of banks and regions). The coefficient can reach values be-
tween +1 in the case of an increasing relationship and -1 for a decreasing relationship.
The closer the coefficient is to +1 or -1, the stronger the correlation (Brosius 2002:

496ff, www.statsoft.com/textbook/stathome.html).
Figure 4 shows the result of the correlation analyses for West and East Germany. A
correlation coefficient between 0 and +1 represents a positive statistical relation, indi-
cating here that savings banks are more successful - respectively earning a higher in-
terest margin - in poorer regions than in prosperous ones. An exception is the CIR for
which an inverse connexion occurs: The higher the values of the CIR, the less efficient
a bank is working. Accordingly, a positive coefficient indicates here that banks are less
efficient in poorer regions.


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Fig. 4: Table with Correlation Coefficients (Spearman) between the Regional Indicator and the
economic success of Savings Banks
Regional Indicator
Savings bank variables
West Germany East Germany
return on equity before tax -0,04634 0,03136
CIR 0,07999 -0,22206
Operation of profit before estimation. 0,06604 0,24276
Operation of profit after estimation. 0,02573 0,01954
Interest margin 0,30716 0,23789
Source: Statistische Ämter der Länder 2004 and 2005, BBR 2004 and 2005, DSGV 2006 (extra analyse),
own calculations)
* Please note that statistical significance tests are unnecessary in this case due to the fact that statistical population
(all savings banks and all regions in Germany) has been used.

As can be drawn from Figure 4 the success of savings banks in West German cities
and ‘Kreise’ is statistically marginally dependent on the regional economic situation of
bank areas. Depending on the variable observed, savings banks earn sometimes more
or less profit in poorer regions than they do in prosperous, but the correlation coeffi-

cient is marginal. On the other hand the coefficient representing the relationship be-
tween regional wealth and interest margin of savings banks (last row in the table) is
meaningful, due to the fact that a definitive correlation exists between weak regions
and high interest margins of savings banks.
However, the results are in general more explicit for East Germany as shown in the
next column in figure 4. All coefficients show that savings banks in Eastern German
cities and ‘Kreise’ are slightly more successful in weak than in prosperous regions.
Even though the most coefficients are low, the relation has become most apparent for
the indicator “Operation of profit before estimation”. Concerning the variable ‘Margin
of interests’, savings banks in East German regions show dependencies - similar to the
western savings banks: The structurally weaker the region, the higher the interest
earned.


22
Data interpretation could lead to the assumption that savings banks in weak East Ger-
man regions are successful because of fewer investments in regional credit loans and
higher investments at the international capital market (proprietary trading). If this as-
sumption proved true - that savings banks would ration credit loans in order to make
easier and eventual higher profit on the international capital market - their legitimation
as public institutions would be in question.
But further analyses have shown that there are no such hints and therefore, no credit
rationing of savings banks from a statistical point of view. The correlation coefficients
representing the relationship between regional wealth and the amount of credit loans
are for East Germany very small, but positive (for details see Gärtner 2007), meaning
that savings banks in weak East German regions deal in credits rather more than those
in prosperous regions.
For both West and East Germany, the empirical results show that savings banks are at
least equally successful in poor and structurally weak regions as in wealthy regions.
The fact that these results are based on the examination of the statistical population

makes them stable and feasible, also in political discussion. In summarising, the statis-
tical data provides evidence that regional savings banks are able to avoid ‘downward
spirals’ in weak regions and thus, are able to promote a balanced regional develop-
ment. Considering common thinking on the function of economy and banks, this is by
no means self-evident.




23
To understand the results - especially the fact that in weak East German regions sav-
ings banks are slightly more successful than in prosperous ones - it has to be acknowl-
edged that East Germany is still characterised by a core-periphery structure, meaning
that in particular the peripheral regions are economically undeveloped. From the per-
spective of banks, these regions are less interesting in an economical sense, and thus,
competition is low. Moreover, it has to be taken into account that co-operative banks
are less represented in the East of Germany. The higher banking-profit realized in
these regions derive indirectly from the incentives of these banks in establishing lend-
ing relationships.
Following modern banking theory, the meaning of good relationships between banks
and customers has gained in importance (see chapter 3). “Long-term relationships be-
tween banks and firms may be an important instrument for counteracting informational
asymmetries” (Harhoff/Körting 1998: 1318). If banks acting in highly competitive
markets they do not expect profits from a long-term customer-bank relationship, com-
pensating short-term losses, they would not invest in the relationship. Following this
thought, less competitive regional markets therefore bear more incentives for local
banks to invest in relationships and to finance even start-ups companies. In general,
loans to start-up companies, which involve higher risks and are quite work-intensive,
are usually only worthwhile if a long-term customer relationship can be anticipated
(Deutsche Bundesbank 2005: 106). The mode of functioning is shown in figure 5.

24

Fig. 5: Relationships in regional Banking Market: effects, social capital
and regional market power

Espe-
cially
relevant
by small
credit
loans
High power of
regional markets
Intertemporal margin-
compensation
Investing in Rela-
tionsships
Learning
by Lending
Konventional theories:
Rents of Oligopoly

Enhanc-
ing of the
profit

Banks investing in bank-customer relationships in less competitive markets will in
addition profit from learning effects. This applies particularly to smaller credit en-
gagements which are common for local or regional banks. These regional information
advantages lead in the long run to higher success of savings banks which will be am-
plified through their specific business model and affiliation in the savings bank finan-
cial group (see chapter 3). Of course savings Banks are also profiting from less compe-
tition in these regions, due to higher prices for financial service, for which the higher
interest rates provide an indication.