Do Savings Banks differ from traditional Commercial Banks? Giovanni Manghetti March 2011 World Savings and Retail Banking Institute - aisbl – European Savings and Retail Banking Group – aisbl Rue Marie-Thérèse, 11 ￭ B-1000 Bruxelles ￭ Tel: + 32 2 211 11 11 ￭ Fax: + 32 2 211 11 99 E-mail: first [email protected] ￭ Website: www.savings-banks.com DO SAVINGS BANKS DIFFER FROM TRADITIONAL COMMERCIAL BANKS? Giovanni Manghetti, Chairman, Cassa di Risparmio di Volterra (Italy) Professor Manghetti has been chairman of Cassa di Risparmio di Volterra SpA, Volterra – Italy (regional bank) since 2003 and is an Association Banking System board member. Previously, he was chairman of the Task Force for the Revision of Insurance Core Principles (ICP), which functioned on a mandate from the Technical Committee of the International Association of Insurance Supervisors (IAIS) whose goals included harmonising the Supervision Principles for all world jurisdictions. Task Force members included representatives of the IMF, the World Bank and 13 leading nations. He has also served in the following posts: 2002- 2008, member of the Scientific Technical Committee, Italian Accounting Standards Setter; 2005-2006, World Bank Advisor in Serbia to the local insurance supervisor; 1988-2002, professor of banking at LUISS “Guido Carli” University, Rome; 1996-2002, President–Managing Director of the Italian Insurance Supervisor Authority (ISVAP); 1983-1996, Economic Advisor of the Labour Minister, Foreign Commerce Minister and Finance Minister; 1990-1996, board member of the Italian investment bank MEDIOCREDITO, Rome. Professor Manghetti has published works on insurance and finance. Nearly two years ago, this article’s title was limited to the question: What are saving bank risks and opportunities for their savers, borrowers, shareholders, and stakeholders, and in the midst of the crisis in general? I concluded savings banks had many opportunities, but only if their banking activity respected supervisory principles. 141 Two years later, now that the financial crisis is over and the nightmare of a systemic default is a simple lesson for the future, I have to answer a second question: Do savings banks now, after their reforms, differ from traditional commercial banks? In my view this question has strategic implications for the future of savings banks. In the first part of this essay I will present a summary of their common historical identity. Then I will show some essential data regarding European savings banks in the period before the crisis. I will insist that their risks had been very high, in some cases higher than those generated by the crisis. By comparing data before and after the financial crisis, I will also insist that some savings banks’ structural limits and mistakes occurred during the pre-crisis period. In the second part, I will present my views about some limits of savings banks exposed during the crisis, and some responses by Spain, a country where savings banks are particularly important and consequently more exposed. In my view, their responses can be considered a paradigm, a lesson to follow. Finally, in light of the reforms that transformed many savings banks, I will ask whether the two souls inside savings banks can live together, thus answering the title question. 1. The historical identity of saving banks It is difficult to summarise the centuries-long history of savings banks in one country, let alone several, but its essence boils down to the nature of savings banks, or what we might call their DNA. Not only in Italy but in every culture and tradition, the first essential component of a savings bank’s DNA happens also to be part of its name: saving. It means the bank is dedicated to safeguarding the poor’s money and to vindicating their sacrifices. Savings banks started out closely linked to poor classes and have continued to be, involving in the banking system people without the necessary collateral but with intelligence and vision. As time went on, a second component of the savings bank’s identity emerged: sustainable development. For savings banks, the word “development” is always strictly tied to the word “sustainable”. 142 But what do they mean together? Their history provides the answer: savings banks have lent to local small companies, entrepreneurs and families – above all, by means of residential mortgages and consumer credit – and provided social services (such as pension payments). Everywhere, savings banks have permitted people to buy homes, cars and the essentials for a decent life. Finally, programmed into savings bank DNA is social responsibility: continuous attention to providing returns to society. All or most dividends and deposits are reinvested in the territory. The business of retail banking differs across countries, and bank strategies are not necessarily the same. Savings banks have different cultures and traditions, but they share the above values and business approach. They are not merely economically essential; they are a concrete, historical expression of our democracy. 2. Before and after the crisis Essential data regarding the period from 1997 to 2007 allow us to explore what happened to savings banks during the positive, pre-crisis cycle. In my view it is during periods of boom and easy money that savings banks can risk more. Traditionally, and generally speaking, some economists have charged that savings banks are less efficient, less profitable and less stable than commercial banks. It is difficult, given the difference in size per region and specialisation, to come to general, consistent and unambiguous conclusions, but some studies1 recently showed no significant difference in savings bank performance compared to that of other banks. Studies2 at the end of the financial crisis, regarding the period 2007-2009, partially confirm this conclusion (Table 1), or at the least, in my view, do not contradict it. 1 Rym Ayadi, Reinhard H. Schmidt, Santiago Carbò Valverde with Emrah Arbak and Francisco Rodriguez Fernandez, Investigating Diversity in the Banking Sector in Europe, Tables 3.3, 3.4, 3.5, Centre for European Policy Studies, Brussels, 2009. 2 SNL, Financial Banking (Europe), quoted in ESTABILIDAD FINANCIERA 05/11 N.20, BANCO DE ESPANA. The quoted research presents many limits (references to medians, limited time horizon 2007-2009, absence of any specialisation and, above all, size). 143 Table 1 Stakeholder-based banks* Commercial banks Profitability (%) 2007 2009 2007 2009 ROAA 0.36 0.19 0.69 0.31 ROAE 8.41 3.88 15.95 7.84 Net interest margin 1.55 1.54 1.26 1.38 Cost to income 60.67 59.04 55.08 58.48 Asset quality (%) Impaired & delinquent loans/loans 2.32 4.49 3.85 6.05 Credit costs/Pre-impairment operating profit 20.43 39.67 17.92 49.59 Source: SNL Financial in Estabilidad Financiaera n. 20, Banco de España * The group of stakeholders-based banks includes those entities that are not controlled by shareholders, including entities like the Landesbanken and the French cooperative banks and excluding pure public financing institutes (Istituto de Crèdito Oficial) or national entities (Databank). Note: Includes data for France, Germany, Norway, Spain and United Kingdom. For each variable those entities for which data is available are included, thus the number of entities between each variable may vary. According to these studies, commercial bank profitability is greater than that of savings banks, but the decreasing tendency is more accentuated in commercial banks than in savings banks; the same can be said for income ratio and its tendency. Ratios regarding asset quality, which is a measurement of stability, are more reassuring in savings banks, as is savings bank behaviour regarding management fees and benefits, while many investment and financial institutions, as we discovered in the middle of financial crisis, behaved shockingly. Reassurance in this case comes from savings banks refusing a short-term approach to profitability; instead, they are committed to a long-term perspective, especially when it comes to manager remuneration. However, some savings banks suffered substantial problems and risks during this positive cycle. Savings banks in Germany, Spain and Sweden confirmed their relative dominance in the growing market, while those in Italy, Belgium and Austria suffered dramatically (Table 2). 144 Table 2: ESBG market shares (total assets) 1997 2007 France 194,486 = 6.4% 601,454 = 9% 3,026,370 6,682,335 Italy 271,522 = 16.9% 1,717,487 = 5.1% 602,929 3,331,830 Germany 1,702,815 = 35.7% 2,632,000 = 34.8% 4,774,748 7,562,431 UK 236,093 = 6.1% 494,397 = 4.9% 3,151,807 1,093,134 Spain 278,542 = 33% 9,155,001 = 39% 844,807 2,945,262 Netherlands 23,051 = 3% 70,584 = 3.2 % 769,034 2,195,020 Sweden 76,977 = 19.8% 186,468 = 22% 389,130 845,958 Belgium 76,603 = 11.6% 67,080 = 5.2% 661,487 1,297,788 Austria* 191,751 = 39.4%** 150,351 = 16.9% 486,709 890,747 Source: ESBG, Retail Banking in Europe, The Way Forward, my own calculations. * 1999 **According to the Centre for European Policy Studies (Brussels) publication “Investigating Diversity in the Banking Sector in Europe”, Austria’s 1995 market share was 30.7%. Now let us examine the role of non-bank deposits (Table 3) in financing savings bank total assets. Most savings banks registered a constant relative decline of direct deposits. Only in Italy, the country whose savings banks suffered the greatest general decline, was the trend positive. For all other countries cited in Table 3, deposits fell. How do we interpret this change in the traditional support of their assets? In many countries the share is far below 50%. I suppose savings banks became more involved with financial and capital markets to support their increasing assets. If so, it would have been an opportunity for the region.