How savings bank bosses are increasing their equity capital

 

Savings bank bosses in saarland withhold millions from the districts and cities by unnecessarily accumulating equity capital and thus driving up their salaries. A frankfurt economics professor has found out about them. Saarlandinside series part 2 about questionable business practices.

For years, savings bank executives have been whining to their board controllers about a difficult business situation. The low-interest phase is squeezing earnings. And – the banking crisis is still in people's minds – many millions of euros would have to be added to equity capital. Despite these problems, however, he said, it was still possible to distribute a few million for the county treasury. It all sounds great. The board of directors is impressed and nods the annual report mostly without criticism.

Savings banks expert and professor of financial services at frankfurt university for applied sciences, ralf jasny, has analyzed the savings banks' working methods and strategies. It sets the record straight for savings bank bosses.

Low interest rates no reason to complain

If savings banks get less interest on loans, they also pay less interest, example savings contracts. However, the difference ("interest margin") has hardly changed in recent years at the municipal credit institutions, in contrast to the commercial banks. The bundesbank even reports higher overall operating income for savings banks, especially from lucrative commissions (z.B. Account management fees, insurance, stock trading). So there is no reason to lament.

Has been analyzing the undesirable developments at the german savings banks for years: prof. Ralf jasny of the frankfurt university of applied sciences. "Savings banks are moving further and further away from their statutory mission," he says. For saarlandinside, he took a close look at saarland savings banks.

Higher equity: higher board salaries

In principle, providing for the future is an honorable goal, says jasny. But: most savings banks have long more than met all the stricter legal requirements of 8 percent. The equity ratio of the saar savings banks is between 15 and 17 percent. It is the assessment basis for the salaries, so to speak, for the personal equity of the board members. So these people would have a vested interest in a permanent increase in equity capital. More distribution = less equity = less salary.

Board members make recommendations for their own salaries

What's more, management board contracts are based on recommendations from the savings banks and giro associations, on whose committees, in turn, the savings bank bosses sit. Jasny: "when someone de facto decides on his own income, it is difficult to keep a sense of proportion." This favors the greed for money.

Greed for money is masculine: among savings bank board members in germany, 5 percent are women, and among managers, 26 percent are women. Here, representatives of the saar savings banks finance group with their association president.

Bosses benefit from union deals

If board members like to present their top salaries as normal for bank bosses, on the other hand, they are lining up as municipal employees when it comes to salary increases. This is based on the verdi agreement for the savings banks, negotiations are currently underway. If the deal for the public sector were adopted, 7.8 percent for the next three years, would get a board with 400.000 euro salary more than 30.000 euros on top, almost as much as the average salary of a saarland resident.

A quarter of profits for board pensions

The result: pension provisions automatically increase as well. At sparkasse saarlouis, 3.6 million euros go into the board of directors' pension (2017), with a pre-tax profit of 15.7 million euros. Jasny: "if almost a quarter of the profit is used for the retirement pensions of the board members, then the system is not in order."

Excessive pension provision prevents payouts

Saarlandinside has prof. Jasny presented the 2017 balance sheet of sparkasse saarlouis. He immediately noticed other inconsistencies: the red bankers put 56 million euros into the fund for general banking risks to increase equity capital. The boards of directors should have better reported this actually unnecessary addition to the risk fund as profit and distributed it to the destitute district of saarlouis.

Millions missing for education and social affairs

In fact, the district could have used the additional millions to spruce up schools or finance social tasks. In 2017, all saar savings banks paid a total of 76 million euros into the banking fund. As an aside: in the recently presented financial and social report on the saarland districts, the experts determined that the six savings banks could pay out a total of € 1.2 million more. More did not want to concede the land councils obviously.

Municipal banks act like hedge funds

Jasny sees a worrying development: the savings banks are moving further and further away from their legal mandate. Their job is to provide loans to the people and businesses of the region. In the fight for higher returns, however, they are increasingly appearing on the capital market and taking risks in the process, acting like hedge funds. In 2017, the saarlouis invested approx. 770 million euros in equities and non-fixed-income securities, just under 20 percent of total assets. "With a 2.3 percent return, there must be considerable speculative risk involved," jasny warns. For comparison: safe federal bonds yield 0.05 percent.

Millions lost in interest rate speculation

A former investment banker from the saarland, who does not want to be named, sees further risks in the speculation of savings banks with interest rate swap transactions (with this, banks hedge fixed-interest loans with variable-interest loans in the hope that the variable interest rate will be higher and they will thus make a profit on the bottom line). The savings bank saarlouis has speculated in the last few years. It had to prematurely terminate risky interest rate swap contracts, because of which it lost 22 million euros over three years. Other saar-sparkassen also report such speculative losses. The boards of directors of the savings banks, which are staffed with politicians, don't seem to be bothered by that.

The auditors from the own house

At the saarland savings banks, even the auditors come from within the company. The in-house auditing unit of the saarland savings banks and giro association audits the balance sheets and certifies that the management boards are managing the company properly. In this association – see topic compensation recommendation – the board members of the savings banks have the say. The inspection authority says however that it "is not subject to instructions of the federation organs."

And how do the controllers of the savings banks, especially the state parliamentarians and local politicians on the boards of the savings banks, do their job? This examines saarlandinside in the next consequence.

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