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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 savings 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 1 INTRODUCTION Traditionally the objective of European as well as German cohesion and regional structural policy, is to develop structurally weak regions in order to reduce regional disparities. 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 policy is still reasonable. Therefore in recent years a variety of different concepts and ideas for regional development have been worked out which emphasize the regional or local potentials, instead 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 ‘clusters’ – 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 investment - 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, 2 the growth agenda as well as the aim of cohesion, regionally or locally interested institutions and persons are needed that are aware of the local economy and have an inherent interest in the development of the region. Germany has a unique system of decentralized public savings banks limited to the regional 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 economic 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 balanced 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 structural 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 economic success of regions and savings banks. How German savings banks act in regions 3 is the question in chapter 5, in which four savings banks and their areas are investigated. 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, carried out at European, national and regional levels (federal states), as well as by subregional 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 addition, all regions - even the prosperous ones - have, at the sub-regional level (cities or ‘Kreise’), their own individual economic development policies to promote local economy and to supply the region with workplaces, taxes etc. (bottom-up-policy). Fig. 1: Levels of regional policy EU, National state, Federal state…. Regional Policy / Regional Cohesion and Structural Policy (top-down) Redistribution of Resources Common aims Divergent aims Improvement of own location conditions Location Policies, e.g. Communal Business Development (bottom up) Cities and ‘Kreise’ ‘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. 4 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 federal and regional levels. The European cohesion policy, which traditionally follows the aim of reducing regional disparities, is starting to shift from helping the poorest regions 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 regional structural or cohesion policy to the ‘strengthen the strength’ approach modified the requirements. It is more and more common that these programs enhance endogenous 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 illustrated in the following textbox. 5 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 competences and potentials: everyone knows about the local concentration of businesses or small workshops in the old parts of European or Middle Eastern cities. The spice markets in Istanbul, the textile 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 businesses 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 requirements 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 fulfilled 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 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 withdraw from these regions further (Klagge/Martin 2005, Dybe 2003, Dow 1999, Chick/ Dow 1988, Myrdal 1959). In such cumulative process the banking system may reinforce a core-periphery structure. In the case of Germany the savings banks are of special 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 developed 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 authority or specific-purpose committee. They fulfil a variety of tasks which can be summarized 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, 7 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 idealism. 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 institutions 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 criticized by the EU Competition Commission as well as the German private banks (Sommerfeld 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 8 what benefit do savings banks provide for the general public and in particular for regional 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 regions. 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 literature (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 payment of foundation dividends. The distribution of profits to local authorities and councils 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 justified with respect to market failure in the financial sectors, e.g. because of asynchronously distributed information, the focus will be on banking markets and their theoretical function (chapter 3.1) as well as the significance of local banks for the development of regions (chapter 3.2). 9