The biggest risks are hidden among the smaller banks, according to the Bundesbank’s stability report. There are already massive value adjustments at savings banks and Volksbanks. In the meantime, the reserves set up for this have been used up. Red numbers at the savings banks are bad for those communities that live off their profits.
The Bundesbank warns of significant losses that savings banks and Volksbanks could make in the coming months. The reason is the rise in interest rates, which makes long-term, cheaply issued loans uneconomical, as well as valuation losses in the banks’ securities portfolios. “The interest rate risks are therefore in the financial system and make the banks more vulnerable to a rise in interest rates,” said Bundesbank Vice President Claudia Buch.
In their recently published financial stability report, the authors of the Bundesbank, which is also responsible for banking supervision, write that depreciation is now causing the core capital of the Volksbanken and savings banks to melt. “Hidden valuation reserves prevented significantly higher losses.” In the meantime, however, these reserves have been used up. “Further losses in value would lead directly to corresponding write-downs and losses,” warns the Bundesbank. If that happens, municipalities for which savings bank profits are a reliable factor in the municipal budget will have a problem. There is less money available for public spending, which is felt by citizens.
A situation is approaching that the Frankfurt finance scientist Professor Ralf Jasny had warned about in the summer. Jasny had published a study at the time: “What do the savings banks do with their customer funds?” In it he examined the balance sheets of the German savings banks. His finding was alarming: market turbulence can not only lead to the complete destruction of the hidden reserves in the balance sheet for some savings banks, but also to the need to report losses up to and including insolvency.
More: “The risk at the savings banks does not disappear if you close your eyes”
At the time, the study had provoked considerable criticism from the savings banks, who accused the author of “false facts”. Jasny now sees himself confirmed by the Bundesbank report. “The risks continue to be underestimated by savings bank associations – with a major impact on municipal budgets.”
Jasny and his team delved deep into the goings-on of the local savings banks and unearthed disturbing details: they discovered savings banks in which the share of listed securities and bonds made up well over half of the balance sheet total. They are accordingly susceptible to stock market fluctuations.
The economist warned that falling prices on the stock markets can very quickly and seriously endanger these savings banks.
A scenario like the one in the 2007/2008 financial crisis, with stock market slumps of 50 percent or more, would cost the savings bank several hundred million euros. That, however, is money that the municipal operator of a savings bank could certainly use well in community work for the residents in its administrative area, especially in the current economic crisis. “But not only that: declines in capital market transactions can lead to reduced profits, which means reduced trade tax revenue for the owners,” wrote Jasny.
Due to the joint liability among the savings banks and state banks, however, there is no risk of trouble for customers so quickly. In case of doubt, a single institution is taken care of by others and customer deposits are not at risk. Nevertheless, the economist considers the one-sided trend towards equities, which is emerging at some savings banks, to be a blatant undesirable development.
Why – he makes that clear in two points in his study: Firstly, those savings banks that were primarily involved in the securities business did not fulfill the public mandate laid down in the Savings Banks Act, which obliges them to act as a credit institution in a region and make them available to the people there to stand. And secondly, Jasny wonders what kind of management performance is actually behind it when a savings bank and its board of directors, who usually receive an annual salary of more than 300,000 euros, pack the customers’ money into funds managed by others.
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The original of this article “Savings Banks and Volksbanks are facing major losses” comes from WirtschaftsKurier.
