Finanzgruppe Sparkassenstiftung
02.01.17

Ambitious, but feasible: Regional savings banks model for Ireland

Sparkassenstiftung presents first cooperation results of political dialogue on the conference “A New System of Banking for SMEs – Simply Different” held in Dublin

Heinrich Haasis, President of the World Savings and Retail Banking Institute and Chairman of the Board of the Sparkassenstiftung für internationale Kooperation (Savings Banks Foundation for International Cooperation), explains the significance of a functioning system of regional banks like that of the German Sparkassen (savings banks) for the stability of financial markets worldwide.

From left to right: Seamus Boland, Chief Executive Officer of Irish Rural Link (IRL) with Dr. Karl-Peter Schackmann-Fallis, Executive Member of the Board of the Deutscher Sparkassen- und Giroverband (German Savings Banks Association – DSGV) and Noel Kinahan, Research Assistant of IRL.

In the wake of the financial crisis, the Irish banking sector has melted down to an oligopoly of state-backed banks and small credit unions. In particular in rural areas, private households and especially small and medium-sized enterprises (SME) are only insufficiently provided with financial services and financing opportunities. A regional banking system according to the German Sparkassen (savings banks) model is underway to establish in Ireland and proving to be a suitable alternative. It was proposed to examine the potential of the Sparkassen model within the scope of the current government programme.

The venerable Royal Dublin Society (RDS) was deliberately chosen as place for the conference to be held on 16 November. Thomas Prior, its philanthropic founder, was a close friend of George Berkeley, the progressive thinker and father of the first public banks in the 18th century.

Since 2014, the Sparkassenstiftung für internationale Kooperation (Savings Banks Foundation for International Cooperation) pursued the establishment of savings banks in Ireland, together with the umbrella association of communal and regional interest groups, the Irish Rural Link (IRL) as well as representatives of the Trinity Business School and the Dublin City University (DCU). The results of project cooperation are now being presented to enable its discussion in public on a broad scale and push the required political decision process.

In his speech, Dr. Eoin O’Dell, Associate Professor at the Trinity College School of Law, explained to the audience, comprising representatives of the Irish (financial) politics, economics and science, how a savings banks model could work in Ireland based on a newly created legal basis: closely following the German model of savings banks under public law, but with Irish characteristics.

Dr. Charles Larkin, Research Associate at the Trinity Business School, brought the developed business plan and the possibility of founding about eight savings banks and one central service provider in Ireland into line with the current Brexit referendum and Apple’s tax issue. His bottom line was: Difficult, but feasible.

System of regional banks as anchor of stability: Opportunity for the global financial market

The speeches of Heinrich Haasis, President of the World Savings and Retail Banking Institute and Chairman of the Board of the Sparkassenstiftung für internationale Kooperation (Savings Banks Foundation for International Cooperation), and Dr. Karl-Peter Schackmann-Fallis, Executive Member of the Board of the Deutscher Sparkassen- und Giroverband (German Savings Banks Association – DSGV), were awaited with suspense.

According to Haasis, the opportunity to change an economic and banking system in such a way that terms like “social partnership, social participation and social responsibility” gain back stronger importance in Irish financial institutions is a clear example that a united Europe and its representatives have to embody not only an economic union, but also a union in terms of values to be able to convince its citizens of the vision of an enduring peaceful cooperation of so many different nations in the long run. In his speech, Haasis underlined the historical parallels between Germany and Ireland with regard to the foundation of savings banks. The first savings banks were not only founded at the same time in Ireland and Germany, i.e. some 200 years ago, but also for the same reasons and with the same characteristics: They were founded against the backdrop of serious economic, societal and social dislocations, similar to those we are again facing today, and based on the claim for socio-political responsibility, regional proximity and a business model, enabling all people and enterprises access to financial services.

Haasis continued with explaining the constitutional features and the enormous significance of regional banking systems like that of the German Sparkassen: “Through special features like public ownership, social welfare orientation, regional principle and along with it customer proximity and cooperation within a network system, the savings banks have achieved an outstanding position within the German banking sector during the past 200 years.” Functioning regional banking systems give impulses for local economic development, particularly in rural regions, and thus contribute to generating jobs and income, which eventually leads to an improvement of people’s living conditions.

With respect to the case of Ireland, Haasis explained that the lack of exactly these development opportunities leads to a lack of prospects among the population and is often a reason for migration. In addition to that, functioning regional banking systems are not only an anchor of stability for their home countries, but are also of utmost importance for the stability of financial markets on a global scale. “The financial crisis of the past years has given distinct proof of it and led to a change of thinking not only in Brussels but also on the part of the IMF.”

In his capacity as Chairman of the Board of the Sparkassenstiftung für internationale Kooperation (Savings Banks Foundation for International Cooperation), Haasis illustrated with the help of some practical examples, how Sparkassenstiftung promotes the development of functioning regional banking systems according to the German Sparkassen model in its worldwide project work in developing countries and emerging economies. But also in Europe, the interest in the model role of German Sparkassen has regained impetus. Haasis emphasised that the Sparkassenstiftung does not pursue any financial goals; particularly in Ireland, the Sparkassen-Finanzgruppe (Savings Banks Finance Group) – as the German umbrella association of savings banks – is mainly interested in finding new allies, acknowledging the values, benefits and necessity of a regional banking system. “The foundation of savings banks in Ireland does not only require a broad consensus among the society, but as a precondition it must also be supported by legislation and public administration.”

Then, Dr. Schackmann-Fallis illustrated in his lecture, how a savings bank can have positive impacts on the living conditions of the people living in its business area in manifold ways. Starting from the competent serving of customers by excellently trained staff, leading to long-term customer relations, to the savings bank’s role as investor and taxpayer in its business area. Thus, a cycle is created, which is of benefit for everyone by supporting a balanced, regional economic development and essentially contributing to increasing the quality of life in the region. In a vivid discussion round, the question was posed why the Spanish savings banks model had failed. In his response, Dr. Schackmann-Fallis emphasised the decisive principles of the savings banks model, such as the regional principle. Spain had abandoned this very important principle early on, which was one of the reasons leading to crisis.

Finally, he stressed how important it is to have a diversified banking market with smaller financial institutions that are anchored in a solid regional and economic environment, which is not going to be easily cooped by large banks at the first possibility. The German Sparkassen-Finanzgruppe (Savings Banks Finance Group) will gladly assist Ireland in its endeavours to develop an own regional bank model.

Seamus Boland, Chairman of the Irish Rural Link, followed this route in his lecture and explicitly expressed the necessity of a functioning banking sector, offering life prospects in rural regions, too. He called for an official and binding examination of the potential of the Sparkassen model within the scope of the government programme.

Ireland’s banking sector and the current situation of Irish credit unions

Following the financial crisis, the Irish banking sector mainly comprises three state-backed banks, which are supervised by the European Central Bank as so-called PCAR Banks (Prudential Capital Assessment Review Banks). The manifold, but very small credit unions do not alter the fact that the market share of these three major institutions sums up to over 90 percent.

The adjustment process of the Irish banking system has not yet come to an end. The banks continue to decrease their loan portfolios, and the balance sheets of those banks, affected by the state guarantees, have declined significantly since 2010.

On the whole, the situation has improved during the past few years: The private indebtedness has dropped, the prices for real estate have stabilised or are even on the rise in some regions.

Nevertheless, the Irish banks still hoard huge amounts of non-performing loans (NPL). For that reason, the Central Bank of Ireland has introduced restructuring measures, in particular for mortgage loans, which have priority over other loans. On the one hand, there are efforts to cater to the economic performance and solvency capacities of the indebted private households, on the other hand, this arrangement causes problems, as the consumer loans and credit card loans do not have to be paid back according to the original terms and conditions. In particular, the credit unions suffer from these restructuring measures and feel disadvantaged. In the wake of the financial crisis, their number has rapidly decreased. Further drastic cutbacks are anticipated, partly due to mergers and partly due to close-downs of credit unions. On the other hand, the number of members has significantly increased. The credit unions are supervised by the Central Bank of Ireland. In general, the credit union sector has a similar structure like in other countries: There are many credit unions which have developed for different reasons – as regional unions, as interest groups for different professions or religious groups, or as special interest groups of employees of a big company. All these credit unions are represented by different associations, for instance the Irish League of Credit Unions (ILCU) or the Credit Union Development Agency (CUDA). Similar to the banks, the operational results of this sector are burdened by strong depreciations as a cause of high NPL rates of some 19 percent. Many credit unions even report NPL rates of more than 30 percent. They are subject to special supervision through the regulating authorities and were demanded to cut back their lending business. By prohibiting real estate financing respectively allowing only very small financing ceilings (on average 8,000 euros), this kind of lending business has already been strictly limited.

In particular, the smaller credit unions have difficulties in meeting the requirements of a professional management of their institutions, as they are in many cases managed on a voluntary or honorary basis. Against this background, a further shrinking of this sector is highly probable.

The oligopolisation of the Irish banking market is furthermore intensified by the trend that most of the foreign banks have withdrawn from the Irish market in the previous three years.

 

Sparkassenzeitung Online, 1. Dezember 2016

Sparkassenzeitung Print, 2. Dezember 2016

 

Ansprechpartner:

Harald Felzen / Carina Lau
Sparkassenstiftung für internationale Kooperation
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53113 Bonn

Phone: +49 228 9703 6605 / 6608
Fax: +49 228 9703 6613