Wednesday 23 October 2019

Banking on the Germans: Can the Sparkasse model really put manners on Irish banks?

The Department of Finance may be lukewarm but moves are afoot to introduce German-style public banking to Ireland, writes Fearghal O'Connor

Sparkasse piggy banks outside one of the branches in Germany. The methods of the bank Sparkasse are winning over fans here, too — especially in the wake of the stories about people being left devastated by Irish banks over tracker mortgages. Photo: Stefan Kuhn
Sparkasse piggy banks outside one of the branches in Germany. The methods of the bank Sparkasse are winning over fans here, too — especially in the wake of the stories about people being left devastated by Irish banks over tracker mortgages. Photo: Stefan Kuhn

Fearghal O'Connor

German bank Sparkasse faces many hurdles if it is to fulfil its ambition to bring its community-focused, regionally-based lending model to Ireland. With public opinion of banks at an all-time low, one element of the model in particular may prove difficult to explain, said a supporter of the plan, half in jest: "Irish people are going to struggle with the concept that a bank would actually want to do something that doesn't involve profit."

And who would blame them? In a week filled with the stories of ordinary people left devastated by the actions of private and State-owned banks on tracker mortgages, cynicism of any banking industry proposal could be easily understood.

But as the tracker storm raged and attitudes towards Ireland's banking system soured further, Germany's biggest bank quietly and unnoticed laid out its proposal for a new type of not-for-profit, locally-focused banking in Ireland. Even better, it promised to bring highly competitive German-style interest rates for individuals and companies right across Ireland's regions.

The Sparkasse model has operated in Germany for 200 years as an interconnected network of 390 individual local authority-owned banks that, between them, operate 12,000 branches.

It is the bank's lending model that really catches the eye. In Germany it offers long-term SME loans at a 3pc interest rate. Its best mortgage rate for home buyers is 1.1pc fixed for 10 years. Asked could the proposed Irish Sparkasse match those rates, a senior Sparkasse executive told the Joint Oireachtas Committee on Finance that this was part of the Irish proposition.

"I do not see any reason why mortgages in Ireland should be more expensive than in Germany," said Niclaus Bergmann, managing director of the international arm of the bank, which has already brought the Sparkasse model to a number of European and South American countries.

"We are talking about competitive interest rates. We have an approach which is not shareholder-value driven. It is not about earning money but fulfilling a task," he said.

Any profits that do accrue are either used to strengthen the regional bank's capital position or passed back to the local authority to be used for "social purposes".

The organisation wants to help establish eight independent regional public banks in Ireland that share a single centralised back-office function for IT and other services. It is proposing a pilot bank in the midlands with five branches in key towns. The midlands pilot bank would need initial capital of between €15m and €20m. The entire proposed network of eight individual regional banks and central service provider would cost between €150m and €200m, said Bergmann.

But there is, of course, a catch. Just who would provide this initial capital is still to be decided and one thing is certain: it would not be the German organisation. Its role, said Bergmann, is to provide advice and expertise on adopting the public banking model.

Suggestions as to where the money to set up such a system would come from include local authorities with backing from the Exchequer, the ECB and the European Investment Bank (EIB), or, perhaps, a partnership with the cash-rich credit union sector. Regardless, the new public banks could break even within three years and could be up and running within a year, he said.

"We were in Luxembourg with the EIB. We talked to them and asked what they would think about such a local banking model for Ireland, and they were very positive about it. It will not be a big issue to have access to funding from the European Investment Bank for specific purposes, such as for loans for lending to clients," said Bergmann.

"There is considerable business opportunity for such a public bank in the midlands. It would offer the full range of financial services for all people living in the region, including SMEs."

Sparkasse has 70pc of the German loans market for companies with up to 10 employees and 40pc of lending to firms up to 500 employees, with SME loans ranging from €5,000 to €50m.

"Whoever comes to us, we try to serve them. A small entrepreneur or local plumber will get a small loan and if a large client comes which wants to build a plant, we will also try to serve that customer, as long as it is somebody from that region. Each bank only serves companies from the region," he said.

This, said Bergmann, means that local bankers know their clients and their circumstances.

"They need to know their clients. It does not make much sense if a loan application for a small enterprise is being processed somewhere in Dublin, or, even worse, by a computer system."

The chairman of the finance committee, Fianna Fail TD John McGuinness, is supportive of the Sparkasse proposal. He is under no illusions as to why the Department of Finance and the Central Bank are not greeting the idea with enthusiasm. "They are protecting the banks," he told this newspaper.

"They don't want anything that will disrupt the rebuilding of the pillar banks. But I have looked at this model over the last few years and I think it is what is required to fill the gap in the market. There is cross-party support on this. The main opposition are the institutions."

But a government source insisted that while it was true to say there was nervousness and some scepticism about the Sparkasse proposal, this was not due to fear of increased competition.

"People need to realise exactly what we would be getting into with this. They are pushing the idea that it would be a local bank, like the old days where the manager would know the businesses in the community. That is the soft, happy story, which is fine. But there are other things, for example, around the State capitalising and funding this bank despite having no role in its management. There are a lot of things to consider and it is not quite as easy as it sounds for the State to cough up hundreds of millions to start a new bank," said the source.

Even the most sceptical officials will agree that, in principle, a local bank, rooted in the community, where the manager knows the local clientele and can make decisions accordingly, is a good thing, said the government source. But, said the source, people might have a very different reaction to the notion of the State directly funding such a new bank.

"This is about whether the State wants to get further involved in the banking sector. The primary motive here is not to protect the banks, it is to protect the State. Government policy is to eventually get rid of its shareholding in the banks so it is certainly not about protecting them."

The key issue is the availability of credit to SMEs but caution was required, said the source.

"We had a situation previously where banks lent huge amounts of money to developers on foot of a property bubble that was always going to burst. We don't want a situation where banks - particularly a State bank - is lending to individuals who should not be getting credit. It might only be €50k here and €100k there but it all adds up. So I think we will tread carefully. Having said that, there is an open mind to this at the highest levels and it is certainly being considered."

One key question that remains unanswered is just how much lending would be leveraged through the €200m in funding that Sparkasse is proposing would be required to establish the model in Ireland: "Not a lot," said the government source. "It is unlikely it would actually solve the key problem of credit availability."

But McGuinness believes there is an easy answer to the funding question and took initial steps last week to see if it can be put into action.

"If the credit unions decide that this is a good idea they could capitalise any one of those new local banks. The credit unions have a fund of €7bn that is on deposit in the main banks at the moment and it could be used to capitalise any of the Sparkasse type banks around the country."

McGuinness said he had discussed the plan with senior people in the credit union movement this week and that they are open to the idea.

"The credit union movement is trying to find a way to access the market for mortgages and other banking matters and they are being restricted from doing it because the Central Bank says they don't have the experience or the skillsets. But the Sparkasse bank model would provide the expertise to get the model up and running. All the ingredients are there. It's just waiting for someone to put them together," he said.

McGuinness is planning to take up an invite for the Oireachtas finance committee to go to Germany to see the model in action. He has also invited decision makers in the credit union movement and An Post to a meeting with Sparkasse in the coming weeks in advance of the German visit.

"I am setting up that meeting to see if we can move things forward and there is no reason that cannot happen. Once we agree some sort of platform with An Post and the credit unions then the next step is to bring the Department of Finance and the Central Bank to the next meeting."

Bergmann told the Oireachtas committee last week that he saw Ireland's credit unions as "our natural born partners".

"I could imagine credit unions working as agents and selling products of the public bank," he said, adding that credit unions could benefit from using the IT and other shared services set up as part of the model.

"I think we can support and strengthen the credit unions with our public banking system. The commercial banks will probably feel increased competition, which is bad for an individual institution but good for society," said Bergmann.

Former Fine Gael government minister, Senator James Reilly, believes that there is growing support at senior levels of his party for the proposal. He believes it presents a real opportunity for credit unions to be a part of the model and he raised the matter at last week's parliamentary meeting.

He has called on the Department of Finance to publish a report that it promised when it officially received the proposal from the German bank last March.

Reilly points out that when he was Minister for Health the credit unions had offered money to help develop primary care centres.

"It wasn't ultimately used because Finance weren't in favour of it. I know there is an appetite in the credit union movement to spend their money in the community where it was raised in the first instance.

"I understand the need for the Department of Finance to be cautious, but I absolutely believe there is a desperate need for a bank of this nature at a time when people are disillusioned with our pillar banks and at a time when they have shrunk their services and withdrawn from the ordinary business person," said Reilly. Reilly is particularly keen on the emphasis in the Sparkasse model of building a real relationship with its customers. "This could be a hugely important addition to the Irish financial services sector, particularly with regard to small and medium enterprise. It's the type of bank where the manager comes down and walks the land with you if you are a farmer who wants to buy more land or who comes to your business to see what you are doing and try to understand what you are at. It is about getting back to the era when banks actually lent for business as opposed to purely property. A lot of the skillset in relation to that was lost during the property boom."

Larry Broderick of The Financial Services Union also welcomes the Sparkasse proposals to establish a public banking pillar in Ireland and believes it could help change the culture of banking in Ireland.

"The ongoing tracker mortgage scandal highlights the deep problems in the culture of Irish banking and change is urgently required," he said.

He believes that the establishment of a public bank in Ireland can bring benefits for customers, particularly in rural Ireland.

"Rural Ireland has borne the brunt of branch closures and other restrictions imposed by the commercial banks in recent years. Having a new entrant to the market, regionally located, would be positive," said Broderick, who also supports a link with An Post or the credit unions.

"We would urge the Government to approve the principle of public banking and then take an active role in establishing a pilot. Then important issues such as the level of capitalisation required, the core market for the public banking pillar and the relationship with other institutions can be advanced," he said.

For his part, Bergmann was very clear about what Sparkasse will and will not bring to Ireland. "We do not bring capital but we bring a reputation," he told the committee. "Not only would we bring a successful model to the country but we could also give our German reputation to it so people in Ireland can trust the system. I think when it comes to financial matters at least, people tend to trust the Germans," he said.

By helping - at least initially pro bono - to set up public banks in Ireland "we put our reputation at risk because if this does not work here with all our support, this will backfire and it will hurt us in Germany and on the European level, so we are very serious about making this successful, more serious than if we just gave capital".

But, said Bergmann, a new Irish public banking system has to be an Irish model.

"Many things can be taken from Germany, but not all. The closer to the German model, the easier it is for us, but at the end of the day it is a political decision here in Ireland as to how an Irish public banking model should look. We can be involved as technical experts but the decisions are for the Government to make."

He probably shouldn't hold his breath.

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