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: 1

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

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, 3
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-

Divergent aims 5
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.

6

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, 8
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.

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).
10
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-

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: 12
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.
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

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

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). 19
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

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. 21
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-

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.

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.