Introduction - Genossenschaftsverband Bayern

Stephan Götzl, Jürgen Gros, Steffen Jahn
The Importance
of Cooperative Banks
for Bavaria

Stephan Götzl · Jürgen Gros · Steffen Jahn
The Importance of Cooperative Banks
for Bavaria

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First edition 2008
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Contents
Introduction .......................................................................................... 5
I Foundation motivation .................................................................. 9
1 Market failure in the financial market ................................... 9
2 Self-help of the middle class ................................................. 12
3 Summary ................................................................................. 14
II Development stages .................................................................... 15
1 Cooperative banks until 1945 ............................................... 15
2 Cooperative banks 1945–1960 .............................................. 17
3 Cooperative banks since the 1960s ....................................... 20
4 Summary ................................................................................. 22
III Business principles ....................................................................... 23
1 Promotion of members .......................................................... 23
2 Promotion of small and medium-sized business .................. 24
3 Financial supply across the board ......................................... 25
4 Corporate citizenship ............................................................. 26
5 Summary ................................................................................. 27
IV Economic contribution ................................................................. 29
1 Stabilising the Bavarian economy ......................................... 29
2 State-wide supplier of private and corporate customers .... 31
3 Credit lender .......................................................................... 32
4 Financier of the SME sector ................................................... 34
5 Creator of wealth ................................................................... 37
6 Employer ................................................................................. 38
7 Tax payer ................................................................................ 39
8 Investor ................................................................................... 40
9 Summary ................................................................................. 41
3

V Competitive environment ........................................................... 43
1 Overall situation ..................................................................... 43
2 Savings banks ......................................................................... 44
3 Private full banks ................................................................... 45
4 Direct banks ............................................................................ 47
5 Austrian banks in the Bavarian market ................................ 48
6 Autobanks .............................................................................. 49
7 Consumer loan specialists ...................................................... 50
8 Non-banks .............................................................................. 51
9 Summary ................................................................................. 51
VI Trends ............................................................................................ 53
1 Consolidation of the banking market .................................. 53
2 Market pressure of suppliers from outside the industry ..... 54
3 Change in the demand of financial services ........................ 55
4 Demographic development ................................................... 57
5 Summary ................................................................................. 58
Conclusion ........................................................................................... 59
Bibliography ........................................................................................ 61
Authors ................................................................................................ 65
4

Introduction
In its study of the European retail banking sector, the European Commission
expresses explicit criticism of regionally organised networks.
The criticism basically aims at the business model of savings banks and
cooperative banks.
Specific criticism is aimed at:
– the regional self-restraint of the cooperative banks,
– the possible market dominating position of these banks and
– the alleged policy of savings banks and cooperative banks of
restricting market access.
The above-mentioned study and further inquiries announced by
the EU Commission prompted this paper. The assumptions and allegations
of the EU Commission shall be analysed and examined with special
regard to the Bavarian Volksbanks and Raiffeisenbanks in their
line of business. The subsequent analysis is based on the following
five principal questions:
1. What characterises the business philosophy of the Bavarian Volksbanks
and Raiffeisenbanks?
2. What are the main business segments of the Bavarian Volksbanks
and Raiffeisenbanks?
3. What relevance do the Bavarian Volksbanks and Raiffeisenbanks
have for the Bavarian banking sector?
4. What characterises the competitive environment of the Bavarian
Volksbanks and Raiffeisenbanks?
5. In what way do the Bavarian Volksbanks and Raiffeisenbanks contribute
to the economy of the Free State of Bavaria?
These principal questions form the framework of this paper and
determine the structure of the different chapters. The final chapter
Introduction
5

(conclusion) provides detailed answers based on the findings of this
analysis.
The study consists of six chapters. At the end of each chapter,
there is an explicit summary of the central statements. The first chapter
deals with the motives for founding the cooperative banks. Economic
and social aspects having contributed to the establishment of
cooperative banks shall be analysed and checked for today’s relevance.
In the second chapter, the development of the Bavarian cooperative
banks is described starting at their foundation up to the present
with particular reference to the importance of the cooperative banks
for the development of the Bavarian economy.
The current business philosophy of the Bavarian cooperative
banks is the central point of the third chapter. Specifically, the consistency
and clearness of the cooperative business policy shall be
analysed. It shall be examined what consequences and effects can be
expected for the current and future situation of the Bavarian Volksbanks
and Raiffeisenbanks.
In the fourth chapter, the macroeconomic – and the cross-sector –
aspects of the business activities of the Bavarian Volksbanks and
Raiffeisenbanks shall be examined, in particular the economic impact
of cooperative banks on employment, private demand as well as tax
and investment volume in the Free State of Bavaria.
In the fifth chapter, the current market environment of the Bavarian
cooperative banks shall be examined. Special consideration is
given to market development by traditional competitors and new
market participants and its effects on the financial market. Based on
these findings, insight into market position and relevance of the
respective banking pillars for the Bavarian banking market shall be
gained.
6 Introduction

The sixth chapter deals with future aspects of the Bavarian banking
market. It describes and analyses future development and possible
trends, both concerning the banks and the customers. The results
shall be evaluated with regard to the Bavarian cooperative banks.
Introduction
7

I Foundation motivation
1 Market failure in the financial market
In the 19 th century, a fundamental structural change was induced
through progressive industrialisation. As a result, members of the
middle class, consisting of farmers, tradespeople and merchants, saw
their means of existence jeopardised and risked descending into the
fourth class of workers and paid labour. The middle class lacked
resources and investment capital. In order to prevent social descent,
secure their livelihood as well as to become and stay competitive, the
commercial and agrarian middle class needed to manufacture more
and cheaper goods. In particular, they needed to produce high-quality
goods in order to defend their market position against local and
foreign competitors. To reach this goal, sufficient financing of small
and medium-sized businesses (SMEs or SME sector) was required.
Unfortunately, however, this was not the case in the economy of the
19 th century.
At that time, the existing big banks were not interested in financing
SMEs. The reason: processing the credit applications of these customers
would have required much work but little profit. The commercial
banks of that time were mostly interested in implementing
major projects. Accordingly, big banks financed industries, the construction
of factories, railways, ships and fleets. Furthermore, foreign
trade was the first and foremost foundation motive. The following
quote is found in the Foundation Statute of Deutsche Bank of the
year 1870: “The company’s purpose is to conduct banking activities of
all kinds, especially in order to promote and facilitate trade relations
between Germany and the other European countries and overseas
markets.“ (Deutsche Bank: Meilensteine/Chronik – Kaiserreich, 2007
(Milestones/Chronicle – German Empire)) This orientation was meant
to put an end to the English dominance in financing the German foreign
trade. Commerzbank and Dresdner Bank, too, devoted them-
1 Market failure in the financial market
9

selves to foreign trade on a large scale. These banking institutes did
not feel any responsibility for the finance problems of the middle
class. At that time, they considered labour input and costs as being
much too high in relation to earnings and profits.
Neither were the savings banks of that time able to remedy the
finance dilemma of the middle class. The purpose of the savings
banks at the end of the 19 th and the beginning of the 20 th century
was primarily to accept, pay interest and manage the saving deposits
of the ordinary people earmarked for elementary requirements (sickness,
accidents, old age and retirement). Loans were exclusively
granted against hypothecary security (secured credit). Therefore, savings
banks served to encourage savings and social safeguard as well
as to finance community projects. However, they did not provide the
necessary personal loans for the middle class.
Furthermore, the small and medium-sized, mostly regionally
active private bankers, who usually granted short-term personal
loans, decreased in importance due to the concentration process
within the credit business during the last third of the 19 th century.
They were not able to offer region-wide sufficient business finance to
the middle class.
Hence, the existing banks and savings banks were not or not sufficiently
able to serve the SME sector. Businesspeople looking for loans
often turned to private individuals, e. g. relatives or acquaintances,
tradespeople, innkeepers or private moneylenders. These credit
transactions often had very different lending periods. Interest rates
were at will of the respective moneylender opening the floodgates to
usury and profiteering. Moneylenders had a dominant position in the
market. Due to their one-sided market power, there was no fair competition
in the area of finance for the middle class. As a result, the
market mechanism failed. The strong market position of the moneylenders
had dramatic consequences: after the member states of the
Norddeutscher Bund (Northern German Confederation) in 1867 abolished
all interest restrictions customary since the 17 th century and
10 I Foundation motivation

therefore put the height of the interest rates totally at will, interest
rates rose of up to 80 per cent and sometimes even up to 100 per
cent. Furthermore, private moneylenders were able to terminate
loans or ask for immediate repayment anytime. Thus, debtors were
forced to take new loans at even worse terms to be able to repay
their original loan. If the borrowers could not repay the loan due to
an excessive debt burden, their property was auctioned off. Mostly
tradesmen’s workshops and farms were affected. After the German
Usury Laws of 1890 and 1893, valid for all member states of the German
Empire, these grievances were only partly abolished. The ongoing
problem of market failure, however, was not resolved.
In the 19 th century, the financing problem still was unsolved. For
the middle class, it turned out to be a question of survival since grievances
were no isolated cases but were prevalent. It was never about
financing consumer loans, but it was a matter bare survival to find
loans for tradesmen’s businesses and farms. Workshops, farm buildings
and stables were usually available. But there was a lack of liquid
funds to buy operating resources like seeds, fertiliser, machines for
workshops and farms, as well a funds for refurbishment or for marketing
the harvest.
In view of these adverse conditions, gradually since 1850, in all
German state savings and credit associations (= Volksbanks) modelled
on Hermann Schulze-Delitzsch’s concept and loan associations
(= Raiffeisenbanks) after Friedrich Wilhelm Raiffeisen were founded.
Since the middle of the 19 th century cooperative banks gradually took
over the task of closing the big gap between the required capital
demand and its supply. The founding of cooperative banks resulted
out of economic and social necessity. It not only served to temporarily,
but much more so permanently secure the existence of the middle
class.
Cooperative banks were exclusively founded as a voluntary network
of equal partners based on self-help, self-responsibility and selfmanagement.
Self-responsibility and self-management mean that
1 Market failure in the financial market
11

members headed the cooperatives. Self-help signifies that the members
of a cooperative join forces in order to pursue common economic
goals. In the case of cooperative banks, it means creating a capital
market for small and medium-sized enterprises. The economic
advancement of the members should come out of their own powers
and not through public or other support.
2 Self-help of the middle class
Cooperative banks were founded by the commercial and agrarian
middle class. The founders were members and partners at the same
time. In the 19 th century, members of various professions were
involved. They intended to create a permanent financial system adequate
to their economic interests and needs. It aimed at securing
their existence and promoting their business activities. This process
developed gradually over decades. In other words, cooperative banks
originated as an act of self-help foremost by the tradespeople and
farmers.
The founders of cooperatives were anxious – as Raiffeisen
describes their motivation – to better the economic circumstances of
the agrarian and urban middle class and overcome the class barriers
prevalent at that time. All cooperative members became shareholders
to raise the necessary equity. Their savings deposits created the financial
basis for granting loans. Cooperative banks were, as Raiffeisen
states, able “to bring about a change to the better” for the middle
class. Thus, material wealth was promoted, the purchase of real
estate made possible. The wealth of the members grew and, at the
same time, the trades and small businesses advanced and agricultural
production increased. These achievements were made possible
through short-, middle- and long-term, easily calculable lending periods,
which were cut short only in extreme exceptions. The monetary
demand of the members could be met at adequate terms. The mutually
supportive group of the cooperative partners took the place of
the former, often disadvantageous dependence on private lenders.
12 I Foundation motivation

From the beginning, the cooperative banks granted personal loans.
These loans were exclusively granted on the basis of the sound credit
rating of the loan applicant. Different from real-estate loans, the personal
loan was rarely secured through mortgages. This form of loan
also enabled the non-property owner to establish his own business
and prosper. Furthermore, in order to meet the demand of real-estate
loans, the Bayerische Landwirtschaftsbank (Bavarian Agricultural
Bank) was founded in 1896 under the legal form of a registered cooperative.
The cooperative partners themselves, to quote Schulze-Delitzsch,
“always support the institute aiming at meeting the credit demand”.
Thus, they equally shared success and risk. Monetary transactions
were no longer based on goodwill, arbitrariness and happenstance,
but, to quote Schulze-Delitzsch, “regulated on a commercial basis
(quid pro quo)”. The (unlimited or limited) joint liability of all members
opened up the way for cooperative banks to acquire outside capital,
thus “opening up the same money and loan sources for small
transactions as so far were exclusively open for big transactions”.
(Schulze-Delitzsch)
Through the solidary system, independent of governmental or
political influence, the cooperatives and their members weathered
many crises and changes of the 19 th century successfully: beginning
with the after-effects of the revolution of 1848/49, the Bavarian
defeat in the Deutscher Krieg (German War) of 1866 up to the Economic
Crisis of 1873 (Founders’ Crash) in the young German Empire.
The cooperatives remained stable and successful, not at least thanks
to their independent financial system that catered to the well-being
of the members and the SME sector.
This approach was successful as proved by the rapid spread of
cooperative banks in the cities as well as the countryside. The number
of Volksbanks alone increased in the German states between 1859
and 1866 from 80 to 532, the number of members grew from 18,600
to 193,700. Loans granted increased from 4.1 million Thaler to 85 mil-
2 Self-help of the middle class
13

lion Thaler, cooperative shares from 246,000 to 5.7 million Thaler, the
reserve funds from 30,000 to 556,300 Thaler, saving deposits from
512,300 to 8.72 million Thaler. In the same period, the equity ratio
increased from 19.5 per cent to 31.8 per cent.
Also in Bavaria, the number of Raiffeisenbanks grew from 438 in
1891 to 790 in 1895. In the year 1900, loan associations modelled
after Raiffeisen’s concept numbered 1,900 with roughly 160,000
members.
During their development, the Bavarian cooperative banks supplied
financial services across the board to the commercial and agrarian
middle class. Cooperative banks on their part, in their function as
disseminators, have since the second half of the 19 th century offered
financial services to various kinds of commercial and agricultural
cooperatives, e.g. trades, condominium and housing cooperatives as
well as dairy cooperatives. At the beginning of the 1930s, roughly
7,200 cooperatives existed in Bavaria, among them about 4,400 cooperative
banks of different size providing funds for many commercial
and agricultural cooperatives.
3 Summary
The foundation of cooperative banks occurred as a consequence of a
market failure in the banking market of the 19 th century. Big banks
did not consider it their purpose to supply financial services to the
middle class. There was no adequate supply of banks for the credit
demand of the middle class. Self-employed businessmen as tradespeople,
farmers or professionals founded cooperative banks that, in
turn, filled the financial needs of the middle class. By establishing
cooperative banks, the middle class was able to shoulder investments
securing its future.
14 I Foundation motivation

II Development stages
1 Cooperative banks until 1945
At the beginning of the 19 th and 20 th century, cooperative banks were
important because they opened access to banking and financial services
for members of the middle class, who in the course of the industrialisation
of Germany saw their existence jeopardised and feared
social descent. This process happened gradually. At first, cooperative
banks limited themselves to accepting and paying interest on savings
deposits and granting loans. These were not consumer loans but
working capital and investment loans, which served to secure the
existence of the middle class. In addition, the loans covered rationalisation
and expansion investment of SMEs. Cooperative banks established
themselves as developers of SME structures in Germany.
After 1862, Volksbanks established themselves in all regions of
Bavaria. They were mostly located in the cities and surrounding areas
and were based on the principle of self-help of the middle class. They
supplied the financial means for commerce and trade of their members.
In 1902, 122 Volksbanks existed in Bavaria. Their number
increased to a maximum of 150 in 1927. Through mergers and stateenforced
concentration of banks since 1943, the number of Volksbanks
in Bavaria dropped to 122 (plus 60 branch offices) by 1945. In
1932, the 144 Bavarian Volksbanks had a total of 51,616 members.
The balance sheet total amounted to 112.7 million Reichsmark. Loans
amounting to 94 million Reichsmark were granted to roughly 50,000
self-employed Bavarian small and medium-sized entrepreneurs and
enterprises, among them 30,000 cases of personal loans.
Volksbanks were banking institutes of mainly the self-employed
commercial middle class, especially self-employed tradespeople
(35 per cent), self-employed merchants and manufacturers (18 per
cent), self-employed farmers (25 per cent), governmental and com-
1 Cooperative banks until 1945
15

munal civil servants (7 per cent), employees and workers (9 per cent)
and others (6 per cent). Their purpose was to supply the members
with cheap loans, pay interest on savings deposits, promote the savings
propensity of the citizens and conduct money transactions. In
1945, the balance sheet total of the 122 Bavarian Volksbanks amounted
to roughly 840 million Reichsmark.
From 1877 onwards – i. e. later than the Volksbanks – Raiffeisen
cooperative banks were founded in Bavaria. In the year 1900, 1,823
Raiffeisenbanks existed in Bavaria with 122,061 members, mainly
from rural areas. Deposits amounted to 118 million Marks, loans
totalled 112 million Marks.
The years of depression and banking crisis did not affect cooperative
banks. On the contrary, the number of Raiffeisenbanks in Bavaria
grew from 3,495 in 1929 to 3,657 at the end of 1931. So, the Bavarian
Raiffeisenbanks turned out to be a refuge of stability in economically
difficult times. The main reason was their focus on local and regional
markets. They were active in areas where they were well familiar.
Their deposits originated in the vicinity and their loans went to the
vicinity. Due to the cooperative safety net, the deposits of the citizens
were well taken care of by the Bavarian cooperative banks. That distinguishes
them from commercial banks. Different from cooperative
banks, many commercial banks became insolvent during these times
because of their dependence on foreign lenders.
The highest number of Raiffeisenbanks in Bavaria was reached in
1936, namely 4,211 Raiffeisenbanks with 391,486 members. The balance
sheet total amounted to 577 million Reichsmark, deposits
reached 401 million Reichsmark, loans 299 million Reichsmark. The
total loan volume consisted of 338,283 single loans, among them
246,176, or almost 73 per cent, small loans up to 1,000 Reichsmark. At
that time, cooperative banks were the most important financier of
the Bavarian agricultural businesses.
16 II Development stages

The major part of the Raiffeisenbanks (90 per cent) also conducted
commodities transactions besides money transactions. This was characteristic
for their line of business. Commodities sales (machines, fertiliser
and feedstuff, seeds, fuels and other commodities) amounted
to 36 million Reichsmark in 1936.
From 1936 onwards, a slow merger wave started. In 1945, there
only were 3,940 Raiffeisen cooperative banks left. Nevertheless, they
were present across the board. Of the 560,000 members, two thirds
were farmers, 14 per cent tradespeople, 13 per cent, workers and
employees, and 6 per cent had other occupations. Deposits amounted
to 2,000 million Reichsmark (an increase of 55 per cent compared to
1943), a very high level indeed, though during World War II the purchase
of goods was controlled. The total volume of outstanding debits
decreased by roughly 51 per cent between 1943 (126 million
Reichsmark) and 1945 (61 million Reichsmark). This decrease was primarily
due to the general lack of liquidity and the extremely limited
range of consumer goods.
2 Cooperative banks 1945–1960
Cooperative banks contributed greatly to financing the reconstruction
of the destroyed infrastructure, dwellings and flats after World
War II. They either supplied financial means themselves or arranged
loans with the help of special institutes, e. g. Bayerische Landesbank/Münchener
Hypothekenbank (Bavarian State Bank/Munich
Mortgage Bank).
High investment needs of expanding SMEs after the currency
reform of 1948 prompted the cooperative banks to strengthen their
medium and long-term loan commitment and grant such loans in cooperation
with their central bank. From the end of 1948 to the end of
1950, the volume of granted loans by the member cooperatives of
the Bavarian Raiffeisen Association rose from 17.4 million Marks to
85.7 million Marks and increased to as much as 134.2 million Marks in
1 Cooperative banks until 1945
17

the midyear of 1952. Thus, the Bavarian cooperative banks made a
valuable contribution to implementing the so-called Economic Miracle
also in the Free State.
Besides building up the SME sector, the structure of cooperative
banks also helped to strengthen democratisation of the young republic.
For since their foundation, cooperatives have cultivated the democratic
principle of “one man, one vote”. Cooperatives were always
organisations of democratic decision-making structures. This focus
turned cooperatives and their members into true pillars of democracy
in Bavaria.
The political parties recognised early on the importance of the
Bavarian cooperative banks as well as the whole cooperative movement
for the build-up of democratic and SME structures in Bavaria.
This became apparent during the passage of the Bavarian Constitution
in December of 1946. To quote Article 153: “The independent
small and medium-sized businesses in agriculture, trades, trade, commerce
and industry shall be promoted by legislature and administration
and shall be protected against overwork and absorption. They
shall be supported by government in their efforts to ensure their economic
freedom and independence and to secure their development
through cooperative self-help. The promotion of capable workers
from employed work to self-employed living shall be aided.” Cooperative
networks are characterised by a view of humankind that is
based on the concepts of self-responsibility and self-reliance away
from governmental support.
With the continually positive development of the German economy
after 1948 and growing wealth, the image of cooperative banks
began to change. They became full banks catering to a broad clientele
of customers. Growing segments of the population opened bank
accounts because they needed a bank to manage their wage and
salary accounts, their money transfers and cheque transactions. In
addition, they requested consumer loans, house building loans, travel
funds and well-grounded advice on asset management including a
18 II Development stages

wide range of savings plans as well as investment in securities and
precious metals. Asset management and investment counselling took
the place of the former small savings transactions. Commodity transactions
of the rural cooperative banks included supplying the nonagricultural
customers with goods for house and garden.
The reason for the great importance cooperative banks had for
the Bavarian economy after World War II was that most of them (i. e.
93 per cent in 1969) executed monetary transactions as well as commodities
transactions for their rural members. This was a distinguishing
characteristic of Raiffeisenbanks designed to suit the needs of
their rural clientele. It was not just about granting loans for seeds and
harvesting. But more so, by bundling the resources, they ensured the
purchase of seeds and fertiliser at adequate prices and the successful
marketing of the harvest. This was done directly by the Raiffeisenbanks
themselves. No other type of bank was willing and able to
ensure the orderly purchase and sale in one stop and – usually together
with BayWa AG – by joining money and commodity, create an
instrument for moderating prices in favour of agricultural businesses.
Often, also machinery pools were affiliated with rural cooperative
banks since the 1920s, so that mechanisation of agricultural operations
was aided and facilitated. Without that, some outfits would not
have been able to raise the money for the purchase of required
machines. Here, too, the Raiffeisen motto applied: “One for all – all
for one”. It corresponded to the principle of subsidiary help from the
medium-sized Raiffeisenbanks for their small and medium-sized
agrarian clientele. Insofar, the idea of the cooperative foundation still
worked perfectly well.
The immense importance and merit of the rural cooperative banks
of that time lay in the fact that they supplied the major part of the
funds required for modernisation and mechanisation of agricultural
businesses. Thus, Bavarian cooperative banks contributed greatly to
securing the livelihood of many farmers and making Bavarian agricultural
businesses competitive versus competitors from at home and
abroad. By cooperating, the Raiffeisenbanks and agriculture secured
2 Cooperative banks 1945–1960
19

and improved the food supply after World War II. In a second step,
cooperative banks also supplied the necessary funds and arranged
government subsidies earmarked to strengthen the competitiveness
of Bavarian agriculture in the framework of the European unification
movement. Therefore, also the rural population benefited from economic
progress.
This positive impact of cooperatives on the development of rural
areas was also seen and appreciated by the founding fathers of the
European Community. With the Treaties of Rome of 1957 they not
only created the foundation of today’s European Union, but simultaneously
anchored the cooperative as legal corporate form in the
European treaties. This is still the case today and was consistently continued
by implementing the European cooperative in the EU in 2003
and three years later in Germany.
3 Cooperative banks since the 1960s
Since the 1960s, cooperative banks thought of themselves as banks
for everybody. The number of customers of Volksbanks and Raiffeisenbanks
grew from 2.1 million in 1965 to 7 million in 2006. The
highest level of 7.45 million customers was reached in 1995. This
development was also reflected in the balance sheet. Since 1965, the
balance sheet total has increased from the equivalent of 3,500 million
Euro to 58,200 million Euro in 1990 and finally reached 103,800 million
Euro in 2006. In addition, the volume of loans granted grew continuously.
After 2,300 million Euro in 1965, it increased to 64,600 million
Euro in the year 2000. Then, a small setback followed due to a
few years of weak economic activity before it went up again after
2005. At the end of 2006, the volume of loans granted by the Volksbanks
and Raiffeisenbanks including sureties amounted to 62,700
million Euro. The increase is partly due to fact that since the early
1970s cooperative banks were permitted to grant loans to non-members.
That opened up a new segment of customers since their previous
discrimination as compared to competing institutes was abol-
20 II Development stages

ished through changes in the Cooperative and Corporate Income Tax
Laws.
That Bavarian Volksbanks and Raiffeisenbanks enjoyed full confidence
of the Bavarian population becomes apparent by two other
parameters: the number of members and the deposit volume.
Deposits amounted to 3,000 million Euro in 1965, increased to 48,900
million Euro already in 1990 and reached 82,600 million Euro at the
end of 2006. During the same period, there was a distinct increase in
membership. In 1965, Bavarian cooperative banks had 751,000 members
but in 1990 already 1.9 million. Currently, roughly 2.4 million
Bavarian citizens are members of a cooperative bank.
During the whole development process, Bavarian cooperative
banks benefited from their regional orientation though there was a
clear shift. Originally, the principle “one location, one cooperative”
applied. But from the late 1950s onwards, the system changed. The
number of independent cooperative banks decreased over the
decades and branch networks gained proportionate importance.
That caused many territorial overlappings. Therefore, often branch
offices of several cooperative banks exist in one location. It happens
quite frequently that the keenest competitors of cooperative banks
are the cooperative banks themselves. At the same time, the following
applied and applies: the Bavarian cooperative banks set a high
value on being present all over the Free State. The following data
underline that: in 1936, 4,480 Bavarian cooperative banks existed. In
1965, there were 3,152 cooperative banks with 4,420 branch offices.
In 1990, there were 893 cooperative banks with 4,760 branch offices
present in Bavaria. By the end of the year 2000, the number of Volksbanks
and Raiffeisenbanks amounted to 481 with 3,918 branch
offices. At the end of 2006, 336 Bavarian Volksbanks and Raiffeisenbanks
operated 3,275 branch offices.
Despite many changes over the decades in the 20 th century as well
as today, the Bavarian Volksbanks and Raiffeisenbanks possess the
densest branch network of all bank groups in Bavaria. Supplying the
3 Cooperative banks since the 1960s
21

Bavarian population with banking and financial services across the
board has developed gradually from the founding days until today.
4 Summary
In the 20 th century, too, the Bavarian cooperative banks put the focus
mainly on promoting SME businesses. By supplying the necessary
funds, the Bavarian cooperative banks supported the reconstruction
of Bavaria after World War II. The democratic structures of cooperatives
helped to further the democratisation process of society after
1945. Through their presence in rural areas, Raiffeisenbanks supported
the economic development and the structural change of the
agricultural sector. The Bavarian Volksbanks and Raiffeisenbanks also
benefited from the economic recovery in West Germany through an
increase of membership and customers as well as a growth of balance
sheet totals, deposits and loans granted. The Bavarian cooperative
banks gradually changed into banks for everybody and are today fullservice
banks offering the complete range of financial services. Historically
developed, the Bavaria cooperative banks today own the
densest branch network in the Free State ensuring the state-wide
supply of the population and SME businesses with financial services.
22 II Development stages

III Business principles
1 Promotion of members
The principles of self-help, self-responsibility and self-management
are the foundation of the daily work of the Bavarian Volksbanks and
Raiffeisenbanks. This focus enables the cooperative banks to implement
the economic goals of their members that one member alone
would not be able to achieve. Cooperative banks have the purpose of
promoting the business of their members. Therefore, the cooperative
principle is in the centre of their business activities, not reaching a
high profit margin. Cooperatives are oriented along long-term goals
like continuity, security and reliability. Therefore, they could be called
a synonym for stakeholder value. This constitutes the elementary difference
to purely capital market-oriented and therefore stock
exchange-driven institutes.
The society-oriented approach of the cooperative banks found
ready acceptance in the Bavarian population. At the end of 2006,
over 2.4 million Bavarians were members of a Volksbank or Raiffeisenbank.
Therefore, every fifth inhabitant of Bavaria – 20 per cent
of the population – is co-owner of a cooperative bank. Only about 5
per cent of all citizens hold securities (Deutsches Aktieninstitut (German
Stock Institute): Zahl der Aktionäre in Deutschland (Number of
Shareholders in Germany), 2007).
Registered capital of the Bavarian cooperative banks raised from
their members amounted to just under 1,500 million Euro. During the
last years, it bore an average interest of about 5 per cent. In comparison:
at the end of 2006, the subscribed capital of BMW AG amounted
to 654 million Euro (BMW: Geschäftsbericht 2006 (Annual Report),
p. 55), of Commerzbank (worldwide) 1,700 million Euro (Commerzbank:
Geschäftsbericht 2006 (Annual Report), p. 26).
1 Promotion of members
23

The provision of capital and the resulting participation of the
Bavarian population reveal the trust and the close relationship
between the Bavarian cooperative banks and the people of the Free
State. The Bavarian Volksbanks and Raiffeisenbanks are the banks of
the Bavarians.
Expression of the close relationship between the Bavarian population
and the cooperative banks are the supervisory boards of the
Volksbanks and Raiffeisenbanks. They consist of members from all
strata of the Bavarian society. From the beginning, supervisory board
members were elected from the midst of the membership and supervise
the business policy of the banks. Over 50 per cent are selfemployed
or professionals, the largest groups being farmers, retailers
and tradespeople. Also employed and retired people are strongly
represented with over 40 per cent. On the one hand this shows that
Bavarian Volksbanks and Raiffeisenbanks represent the majority of
society, on the other hand the composition of the supervisory bodies
signifies the close connection to SME businesses that originated in the
founding stages of the cooperatives.
2 Promotion of small and medium-sized business
One third of all SMEs currently name the Southern German Volksbanks
and Raiffeisenbanks as their main bank, among them the
Bavarian Volksbanks and Raiffeisenbanks with currently 600,000 corporate
customers. In contrast, only 13 per cent of the SMEs name one
of the big banks as their main bank. In financing, as many as 55 per
cent and for money transactions 57 per cent of all SMEs work with
cooperative banks in Southern Germany. In the area of foreign transactions
they are market leader ahead of big banks and savings banks.
Concerning government support loans granted by the LfA Förderbank
Bayern (LfA Development Bank), Bavarian Volksbanks and Raiffeisenbanks
also hold a leading position. Bavarian cooperative banks
arranged over 20,500 loan agreements between 2000 and 2006. In
24
III Business principles

comparison: big banks, private and other banks only concluded
roughly 4,800 agreements during the same period. This reveals clearly,
which banks attend intensively to the rather small-scale SME business
and which do not. At any rate, without the Bavarian Volksbanks
and Raiffeisenbanks the allocation of LfA support loans to SMEs
would be massively jeopardised.
The SME-oriented business policy of the Bavarian Volksbanks and
Raiffeisenbanks cannot only be explained with their historical roots.
Until today, Bavarian cooperative banks were able to keep up their
competence and their understanding of SMEs because, as mid-sized
banks, they themselves were part of the SME sector. The number of
employees of a Bavarian Volksbank and Raiffeisenbank averaged
about 100 in 2006. According to the definition of the Institut für Mittelstandsforschung,
Bonn, (Institute of SME Research) enterprises up
to 500 employees belong to the SME sector. As they are SMEs themselves,
the Bavarian cooperative banks are the natural partner of
SMEs.
3 Financial supply across the board
Volksbanks and Raiffeisenbanks attend to a total of 7 million customers
with 12.9 million accounts through 3,275 branch offices in all
regions of Bavaria and with the help of 34,000 employees. The Bavarian
cooperative banks thus count 56 per cent of the Bavarian population
among their customers. According to a representative state-wide
survey of the Genossenschaftsverband Bayern (Association of Cooperatives
in Bavaria) of May 2007, 25 per cent of the Bavarians over 18
years of age have an account with a Volksbank and Raiffeisenbank.
However, the same survey shows that only 15 per cent of the adult
Bavarians have their main bank account with a Volksbank and Raiffeisenbank.
The Bavarian cooperative banks have the densest branch network
of all banks in Bavaria. Statistically, a customer only has to cover 2.5
2 Promotion of small and medium-sized business
25

kilometres to the next branch office of a Bavarian Volksbank and
Raiffeisenbank. For big banks, it is more than six kilometres. The
Bavarian cooperative banks ensure the supply of the population and
SMEs with banking and financial services in cities as well as in rural
areas. Over 70 per cent of the customers appreciate branch office
banking. For them, personal advice and guidance is elementary in
their relationship to their bank.
Different from the branch offices of bank groups, cooperative
banks act locally autonomous as independent enterprises that are not
subject to directives from a central institute. Therefore, they are able
to adapt well to local conditions and requirements of their region.
This is reflected in the business strategy and service range specifically
designed to suit the market. Local and regionally-rooted business
structures ensure the state-wide supply of all parts of the population
with financial services.
4 Corporate citizenship
Through their socio-political orientation as branch offices in the
region for the region, the Bavarian Volksbanks and Raiffeisenbanks
play a central role for the economic development and stability of the
rural areas in Bavaria. Combining the cooperative support mandate
and the membership-oriented business principle, human beings are in
the centre of business activities. The Bavarian cooperative banks
show this also by their engagement for charity, sports and non-profit
purposes. Since the year 2000, the Bavarian Volksbanks and Raiffeisenbanks
have allocated about 21 million Euro for social purposes.
Another 660,000 Euro were allocated by the Raiffeisen/Schulze-
Delitzsch Foundation for the upkeep of Bavarian cultural assets. The
payout of the Gewinnsparverein Bayern e.V. serves non-profit, social
and charitable purposes. The Gewinnsparverein, which is the lottery
of the Bavarian Volksbanks and Raiffeisenbanks, has the ambition to
promote the savings propensity of the people by selling lottery
tickets and simultaneously act for the public interest. Between the
26 III Business principles

year 2000 and 2006, moneys amounting to 23 million Euro were
donated to charity. Altogether, the Bavarian cooperative banks
directly or indirectly spent about 45 million Euro for non-profit, social
and charitable purposes between 2000 and 2006. From 2007
onwards, due to the change of the Lottery Law, at least 10 million
Euro annually will be added out of the payout of the
Gewinnsparverein. The donations of the Bavarian Volksbanks and
Raiffeisenbanks are of elementary importance for the social and
socio-economic landscape in the Free State of Bavaria. Their business
orientation, which goes far beyond the purely profit-making
approach, is the success story of the Bavarian Volksbanks and Raiffeisenbanks.
5 Summary
Cooperative banks pursue a long-term business policy that caters to
the advancement of their 2.4 million members. Short-term high-yield
thinking is foreign to them. SMEs are a central part of the socio-economic
orientation of the cooperative banks. The Bavarian cooperative
banks themselves belong to the SME sector. Proximity to their
customers is important for the Volksbanks and Raiffeisenbanks.
Bavarian cooperative banks have the densest branch network of all
Bavarian banks and therefore ensure the supply of the population
with financial services across the board. Corporate citizenship is a
basic element of the cooperative philosophy. Through their donations,
the Bavarian Volksbanks and Raiffeisenbanks contribute greatly
to the stability of the rural areas.
4 Corporate citizenship
27

IV Economic contribution
1 Stabilising the Bavarian economy
In order to evaluate the economic impact of the Bavarian cooperative
banks, it is necessary to consider the special Bavarian structures: on
the one hand, Bavaria is characterised by its rural areas, which cover
80 per cent of its total area. With 7 million inhabitants, more people
live in rural areas than in the big cities. On the other hand, Bavaria’s
economic structures are particularly small-scale and SME-oriented. In
no other German state with large territory is the self-employed rate
as high as here. More than 99 per cent of all Bavarian enterprises
belong to the SME sector. These enterprises supply more than three
fourth of all jobs and over 80 per cent of all trainee jobs. (Bayerisches
Staatsministerium für Wirtschaft, Infrastruktur, Verkehr und Technologie
(Bavarian State Ministry of Economy, Infrastructure, Transportation
and Technology): Mittelstandsbericht 2005 (SME Report))
Together, rural areas and the SME sector constitute the nucleus of the
Bavarian economy. But different from the big industries, SMEs often
have insufficient equity and a lack of financial power. Therefore, the
SME sector has to rely on a strong and stable banking partner.
The Bavarian Volksbanks and Raiffeisenbanks have operated the
banking business since their foundation with the goal of promoting
their members, the SME sector and rural areas. Different from big
banks, their business orientation shows hardly any fluctuations. Not
at least because of that, customers consider “reliability and
respectability” a strong characteristic of cooperative banks. Continuity
and reliability in business relationships are elementary for cooperative
banks. That has an impact on the trust of the customers in their
bank. Until today, not a single customer has lost deposits because of a
cooperative bank becoming insolvent. This is also ensured by the solidarity
between the German cooperative banks. Every cooperative
bank is a member of the reserve fund system of the German Volks-
1 Stabilising the Bavarian economy
29

anks and Raiffeisenbanks that protects the deposits of the customers
during crises. Moneys paid into a pool serve to secure the survival
of the bank in times of business problems. Insolvency of a bank
cannot happen. Customers can always rely on the existence of their
bank and on the safety of their deposits. Bavarian cooperative banks
offer absolutely reliable partnership to their customers and thereby
stand for continuity. Continuity, reliability and trust are the fundamental
building blocks of a positive macroeconomic development.
The individual bank benefits from this development. Stable customer
relations resulting from a clear market strategy have a positive
influence on the earnings of a bank. This is shown in research paper
of the IMF. (Hesse, H.; Cihak, M.: Cooperative Banks and Financial Stability,
2007) In the medium and long run, the development of cooperative
banks is much more stable than of commercial banks. To quote
the IMF study mentioned above on page 12: “We are (…) observing a
lower variability of returns in cooperative banks than in commercial
banks.” This stability is another effect of the flexible payout policy of
the cooperative banks to their members. It contributes to the solidity
of cooperative banks that members support their cooperative banks
as shareholders in their long-term business orientation. It should be
mentioned in particular that the cooperative shareholders would in
economically difficult times also accept lower interest payments on
their cooperative shares.
The continuity-oriented business strategy of the Volksbanks and
Raiffeisenbanks is also confirmed by Standard & Poor’s rating. The
Bavarian cooperative banks were first rated in December 2006 with
a rating of “A positive” and have a current rating of “A+ stable”.
A total of 7 million Bavarian customers today put their trust in the
Bavarian Volksbanks and Raiffeisenbanks.
30 IV Economic contribution

2 State-wide supplier of private and
corporate customers
Among seven million customers, the roughly 6.4 million private customers
and the SMEs form the central business clientele of the Bavarian
cooperative banks. The supply of these customers is ensured
through a state-wide branch network. The principle of branch office
banking with its consulting and service approach is macro-economically
of eminent importance.
Only about 40 per cent of the population consider themselves
“well informed” about financial investment. The remaining part
requires extensive advice to ensure efficient utilisation of their funds.
With their branch network providing proximity to their customers
and advice, the Bavarian Volksbanks and Raiffeisenbanks contribute
greatly to consumer protection. Since at the same time only every
fifth bank customer could imagine to conduct all bank transactions
with a direct bank, i.e. consultation in their own home is not important
for two thirds of the people; the existence of branch offices is
indispensable especially in sparsely populated areas. Among commercial
banking institutes, only the Bavarian Volksbanks and Raiffeisenbanks
guarantee a dense branch network.
For commercial customers, too, proximity to a branch office is
important. Two thirds of the commercial customers in Southern Germany
named the proximity of the branch office as important criterion
when choosing a Volksbank and Raiffeisenbank as their main bank.
That shows: proximity is an indispensable prerequisite for processing
financial transactions and financial services.
Deliberately, the Bavarian and German Volksbanks and Raiffeisenbanks
have kept the number of branch offices on a very high level. In
2006, the existing 3,275 branch offices constituted 75 per cent of the
branch network of the Bavarian Volksbanks and Raiffeisenbanks of
1995. In all of Germany, the Volksbanks and Raiffeisenbanks operated
2 State-wide supplier of private and corporate customers
31

13,765 branch offices in 2006, still 70 per cent of their branch offices
of 1995. In comparison, other banking institutes reduced their branch
network much more massively. The number of their branch offices
decreased by over 45 per cent during the period 1995 to 2006. The –
compared to other banks moderate – decrease auf branch offices of
the Bavarian Volksbanks and Raiffeisenbanks shows how important
they deem the state-wide and gapless supply of the rural areas in particular
despite the high infrastructure costs of a branch network.
The branch banking concept of the Bavarian cooperative banks
offers not only quantity but above all quality. A survey of the Bund
der Selbständigen (Federation of the Self-Employed) in Bavaria
among their members in 2007 shows that 45 per cent of the members
mainly co-operate with a Bavarian Volksbank and Raiffeisenbank.
More importantly: 75 per cent of these members are “wholeheartedly”
or “predominantly” satisfied. (Bund der Selbständigen/Deutscher
Gewerbeverband in Bayern: Mittelstand will wieder investieren –
gute Noten für Bayerns Banken (SMEs ready to invest again – good
marks for Bavaria’s banks), 2007) This quality evaluation is noteworthy.
For according to Deutsche Bundesbank (German Central Bank),
the quality of financial services is of high importance for economic
growth. (Deutsche Bundesbank (Ed.): Finance and growth in a bankbased
economy: Is it quantity or quality that matters?, 2006) In other
words: the Bavarian Volksbanks and Raiffeisenbanks as the only
banking group organised under private law offer high-quality financial
services across the board. They thus provide a basis to generate
economic growth in all of Bavaria and secure development opportunities
for the rural areas. Without the service of the Bavarian Volksbanks
and Raiffeisenbanks, the economic development in rural areas
would be worse.
3 Credit lender
Macro-economically eminently important is the supply of the population
with sufficient funds. Here, the banks have a special function
32 IV Economic contribution

granting loans. At the end of 2006, the total volume of loans granted
by the Volksbanks and Raiffeisenbanks amounted to 71,400 million
Euro. With on-balance sheet lendings of 60,000 million Euro, they
reached a market share volume-wise of 13.6 per cent in the Bavarian
banking market. Savings banks attained 21.5 per cent, the roughly
50 credit banks together 35.2 per cent and the around 30 other banks
27.2 per cent. 10.6 per cent of the loans granted by the Bavarian
cooperative banks were short-term, 8.1 per cent medium-term and
81.3 per cent long-term. 11.7 per cent of the loan volume went to
enterprises (7,000 million Euro), 32.1 per cent to self-employed individuals
(19,200 million Euro) and roughly 55 per cent to employed
individuals (33,000 million Euro). Around 1 per cent of all loans was
granted to public budgets (500 million Euro) (Source: Deutsche Bundesbank).
These figures show the importance of the Bavarian Volksbanks
and Raiffeisenbanks as financier of the SME sector and professionals.
Among the loans granted to individuals of over 33,000 million
Euro, housing loans amounting to 24,600 million Euro played a decisive
role. To own real estate is valuated highly by the majority of the
population: two thirds consider real estate their most valuable investment.
And three fourth of the people prefer their private home as
safe retirement provision. The Bavarian cooperative banks are an
important financier of real estate in the Free State: more than one
fourth of all loan applicants contact a Volksbank and Raiffeisenbank
as possible real estate financier. More than one fifth decides on real
estate financing with a Volksbank and Raiffeisenbank.
Especially for small and medium-sized construction companies
obtaining credit is eminently important. Investing 1,000 million Euro
in the building industry will generate a macroeconomic demand of
2,500 million Euro and thereby secure 25,500 jobs for one year.
(Baulinks.de: “Bauen jetzt” (Construction today): Investitionen
beschleunigen und Gelder zielgenau einsetzen (Accelerating investment
and placing funds precisely), 2001) Granting loans amounting
to 24,600 million Euro, the Bavarian Volksbanks and Raiffeisenbanks
3 Credit lender
33

provided for a macroeconomic demand of almost 62,000 million Euro
in Bavaria. Dividing this sum over ten years and adding the building
loans of 6,500 million Euro, annually paid out by their associated
partner Schwäbisch Hall, 80,000 jobs annually were secured for
10 years in Bavaria. Loans granted to commercial customers for building
measures amounting to 6,500 million Euro have to be taken into
account. Beside the 88,000 job resulting from private building loans,
another 17,000 jobs are annually secured in Bavaria. Thus, the building
loans of the Bavarian Volksbanks and Raiffeisenbanks and their
associate partner alone secure some 105,000 jobs annually, almost
2.5 per cent of all employment liable for social insurance in Bavaria.
That shows: the loan policy of the Bavarian Volksbanks and Raiffeisenbanks
has an important labour market and therefore social
dimension. Incidentally, this can be observed in a very different policy
field. The Bavarian cooperative banks recognize the importance of
education – especially in our knowledge-based society. Sometime
ago, the Bavarian cooperative banks started granting loans to college
students. The volume of these student loans almost doubled to
2.3 million Euro between September 2006 and the end of January
2007.
4 Financier of the SME sector
As clear as in the case of private loans the business policy of the cooperative
banks is concerning loans to commercial customers. At the
end of 2006, the Bavarian Volksbanks and Raiffeisenbanks had granted
commercial loans amounting to 26,200 million Euro corresponding
to a market share of 11.9 per cent. Therefore, compared to 2000, they
were able to maintain their market position. Savings banks increased
their market share by almost 2 per cent to 20 per cent in the same
period. With a market share of almost 38 per cent, credit banks were
three percentage points below the value of the year 2000. Other
banks held their share at 30 per cent.
34 IV Economic contribution

It is interesting to note that more than half of all SMEs cooperate
with a Volksbank and Raiffeisenbank as far as financing is concerned.
Compared to the volume-wise market share of 11.9 per cent, it shows
that the Bavarian cooperative banks mostly grant smaller loans typical
of SMEs. The average commercial loan of the Volksbanks and
Raiffeisenbanks currently amounts to some 40,000 Euro. This is a clear
indication of an SME customer structure. Bavarian Volksbanks and
Raiffeisenbanks attend to a customer segment, which is evidently not
of interest to commercial banks, but is elementary for the functioning
of the Bavarian economy.
This customer structure is also promoted by the business model of
local proximity. For it bears advantages in the business relationship
for both the SME customers and the bank. This is underlined by a
publication of the Deutsches Institut für Wirtschaftsforschung (German
Institute of Economic Research) Baas, T.; Schrooten, M.: Theoretische
Analyse der Gewinnsituation im deutschen Bankensektor,
2005 (Theoretical Analysis of the Profit Situation in the German Banking
Sector)). The SME sector benefits from the proximity to local
cooperative banks for several reasons. Firstly, Bavarian Volksbanks
and Raiffeisenbanks know their customers because of the mostly
long-term business relationship. Secondly, the bank officer knows the
regional environment and is able to evaluate success and perspectives
of local enterprises. Therefore, the Bavarian Volksbanks and Raiffeisenbanks
do not have to depend on getting information from a
third, more expensive source. Especially in the case of limited companies
and small enterprises, this would be particularly expensive
because they have to follow fewer disclosure and accounting requirements
than e. g. stock corporations do. Therefore, it is of advantage
that there is usually no asymmetry of information between the cooperative
banks and their customers. The unspent costs of obtaining
information may – thanks to the locally oriented business model of
the cooperative banks – be utilised to offer better credit terms to the
customers.
4 Financier of the SME sector
35

Decentral and regionally rooted business structures ensure the
favourable credit supply of SMEs and the economic development of
the rural areas. This orientation on the SME sector is underlined by
additional figures. The market share of the Bavarian Volksbanks and
Raiffeisenbanks as to the loan volume granted to the agriculture and
forestry sector amounts to roughly 57 per cent. Credit banks achieve
values of 10 per cent. Concerning the trades, the Bavarian Volksbanks
and Raiffeisenbanks and the credit banks are almost equal with
21 and 24 per cent respectively. Compared to the total market share
of 11.9 per cent of the Volksbanks and Raiffeisenbanks in Bavaria it is
evident that they still play a major role in their traditional and SME
structured business fields. One reason is that commercial banks simply
were not interested in this business segment. Still considered symptomatic
today is the quote of the former CEO of Deutsche Bank, Rolf
Breuer: “Deutsche Bank has never been a bank for the trades as are
the savings banks and the cooperative banks.” (Der Tagesspiegel:
Deutsche Bank: “Die Deutsche Bank ist nicht national”, May 8 th , 2002
(Daily Mirror: Deutsche Bank is not national))
The SME oriented business policy of the Bavarian Volksbanks and
Raiffeisenbanks finds approval in politics. This is underlined exemplarily
by the appreciation of the Bavarian State Government: “Especially
in economically underdeveloped areas do SMEs need a better
supply of investment funds, e. g. through equity capital and through
the constructive credit policy of the savings banks and cooperative
banks.” (Bayerisches Staatsministerium für Wirtschaft, Infrastruktur,
Verkehr und Technologie: Bayerns ländlicher Raum, 2007 (Bavaria’s
Rural Areas), p. 28)
In addition to granting loans, the Bavarian Volksbanks and Raiffeisenbanks
are particularly active in the support of government loan
programmes. This is demonstrated by the data of LfA support loans
of the past years. Since the year 2000, Bavarian Volksbanks and Raiffeisenbanks
have arranged loan commitments amounting to 2,000
million Euro via the LfA support loan programme. The individual loan
averaged just under 100,000 Euro. That has direct effects on employ-
36 IV Economic contribution

ment. For, according to calculations of KfW concerning the employment
effect of KfW support loan programmes, enterprises on average
hired seven employees for every million Euro of investment. (KfW
Bankengruppe (KfW Banking Group): KfW-Research, Wirtschaftsobserver
Nr. 3, 2002). So, only through the LfA support loans arranged
by the Bavarian Volksbanks and Raiffeisenbanks since the year 2000,
14,000 new jobs were created in Bavaria.
5 Creator of wealth
The Bavarian Volksbanks and Raiffeisenbanks are among the most
important banks as far as deposit banking in the Free State of Bavaria
is concerned. At the end of 2006, the volume of managed customer
deposits amounted to 131,000 million Euro. Thereof, 82,600 million
Euro were on-balance sheet deposits. That means that every fifth
Euro deposited in Bavaria went to a Volksbank and Raiffeisenbank.
Among them, money deposits of 77.7 million Euro had the largest
share. Accordingly, 18 per cent of all deposits amounting to 433,000
million Euro in Bavaria were placed with a Volksbank and Raiffeisenbank.
In comparison: in deposit banking, savings banks had a market
share of just under 26 per cent, credit banks over 34 per cent and
other banks 19 per cent.
Compared to the 18 per cent market share in deposit banking, the
Bavaria Volksbanks and Raiffeisenbanks have a market share of
32 per cent concerning market penetration of savings products.
Accordingly, their market penetration lies far above their market
share volume-wise. That shows: Bavarian Volksbank and Raiffeisenbank
are active along the whole spectrum of banking services for private
customers. They focus not just on the wealthy segment of society,
but through their policy, they contribute to making formation of
wealth possible across all social strata. They thus promote a basic concept
of Erhard’s Social Market Economy and take over an important
supportive function for private retirement accounts.
4 Financier of the SME sector
37

The Bavarian cooperative banks offer extensive opportunities for
the build-up of retirement accounts and the formation of wealth.
Here, selling life insurance is a major aspect. In this area, the Bavarian
Volksbanks and Raiffeisenbanks acquired special expertise. They
belong to the strongest sales organisations in Bavaria. In 2005 and
2006, they sold just under 90,000 life insurance policies a year. With
their total portfolio of 1.8 million policies, they insure the life of every
seventh inhabitant of Bavaria. At the end of 2006, the cash value of
all life insurance policies arranged by the Bavarian Volksbanks and
Raiffeisenbanks reached almost 10,000 million Euro.
6 Employer
With over 34,000 employees in the banking business alone, the Bavarian
Volksbanks and Raiffeisenbanks are among the biggest private
employers in the Free State. Because of their regional presence, they
offer jobs where people live. They contribute to maintaining traditional
family and social structures. They create and secure jobs in the
rural areas and thereby add to their stability.
The jobs of the Bavarian Volksbanks and Raiffeisenbanks belong
to the most secure ones of the sector. In the year 2000, 36,102
employees worked in the banking business of the Bavarian Volksbanks
and Raiffeisenbanks. In 2006, there still were 34,100 employees.
That shows that almost 95 per cent of the employees were maintained.
Additionally, about 2,000 employees work in the commodity
business. In comparison: in the total financial business the number of
employees decreased by over 10 per cent between 2000 and 2005, in
private banks even by more than 20 per cent. The Bavarian Volksbanks
and Raiffeisenbanks give trust and security to their employees
and their families as well as the Bavarian regions. This is a prerequisite
for individual plans, for active private consumer demand and
therefore for a positive development of the regional and local economy.
38 IV Economic contribution

Responsibility for their home country is in the centre of cooperative
activities. Therefore, each year, cooperative banks train young
people and offer them a future-oriented job. In 2006, the Bavarian
Volksbanks and Raiffeisenbanks employed over 2,200 trainees. This
equals a training rate of 6.7 per cent, 0.3 percentage points more
than the federal average of 6.4 per cent. (Bundesministerium für Bildung
und Forschung (Federal Ministry of Education and Research):
Berufsbildungsbericht 2006 (Vocational Training Report), p. 25)
Also the remuneration of the employees was above-average. Their
gross annual salary averaged 35,000 Euro or almost 25,000 Euro net
(assumption: tax class III, one child). Accordingly, the 36,000 employees
of the Bavarian Volksbanks and Raiffeisenbanks (including commodity
business) had a disposable income of about 900 million Euro.
Calculations of the Federal Statistics Office (Statistisches Bundesamt:
Einkommens- und Verbraucherstichprobe (Income and Consumer
Sample) 2003, Ü3) show that around 10.3 per cent of the disposable
income plus income from the sale of assets go into savings
and 55 per cent into consumption. On this assumption, it is calculated
that the employees of the Bavarian Volksbanks and Raiffeisenbanks
each year spend roughly 495 million Euro of their disposable income
on consumption, among others 65 million Euro on food, 150 million
Euro on housing and utilities and 58 million Euro on leisure, cultural
events and entertainment. The major part of consumption expenditures
flows back into the local Bavarian economic cycles. The Bavarian
Volksbanks and Raiffeisenbanks therefore contribute noticeably to
the demand behaviour of the population in their home markets and
thus secure jobs in the regional economy.
7 Tax payer
Not only by offering secure jobs, the Bavarian Volksbanks and Raiffeisenbank
provide stability to the Bavarian economy. They are among
the biggest local tax payers. In the years 2000 to 2006 alone, they
6 Employer
39

paid local and federal corporate taxes amounting to 1,400 million
Euro, among them over 565 million Euro of community trade tax. On
average, a Bavarian Volksbank and Raiffeisenbank paid a trade tax
amount of roughly 305,000 Euro in 2005. All Bavarian Volksbanks and
Raiffeisenbanks together paid 108 million Euro. This is almost equal
to the combined trade tax revenue of the cities of Würzburg and
Schweinfurt totalling 115 million Euro in 2005 (IHK Würzburg-
Schweinfurt (Chamber of Commerce of: Würzburg-Schweinfurt):
Gewerbesteuereinnahmen nochmals gestiegen (Trade tax revenue up
again), Oct. 18 th , 2006). That makes the Bavarian Volksbanks and
Raiffeisenbanks some of the biggest tax payers in the Free State. For
the communities in particular, they are a reliable and sound tax
payers without major fluctuations in tax revenue. This, however, cannot
be said of large German corporations. For instance in 2002, seven
DAX corporations located in Munich did not pay trade tax at all. But
especially communal treasurers require reliable and steady revenues
to be able to execute the needed regular investments into infrastructure,
as roads, kindergartens or schools. They can however rely
on the Bavarian Volksbanks and Raiffeisenbanks.
8 Investor
Between 2000 and 2006, the Bavarian Volksbanks and Raiffeisenbanks
invested a total of 1,200 million Euro into their business locations.
That makes them a potent investor. With their investment into
buildings and real estate amounting to 625 million Euro, they secure
annually about 2,000 jobs in Bavaria. Especially local SMEs benefit
from it. For they are usually the ones receiving the orders of the cooperative
banks.
40 IV Economic contribution

9 Summary
The Bavarian Volksbanks and Raiffeisenbanks stabilise the SME sector.
By granting private and commercial loans as well as arranging government
support loans the Bavarian Volksbanks and Raiffeisenbanks
support investment and therefore create demand and jobs in rural
areas. With over 34,000 employees in the banking business alone,
they are among the biggest private employers in the Free State. They
not only offer secure jobs but also provide an important private
demand impetus within the regional business cycles. With their
above-average training rate of 6.7 per cent, they offer future perspectives
for young people even in economically less developed areas.
With a yearly triple-digit million Euro sum the Bavarian Volksbanks
and Raiffeisenbanks are among the big tax payers in the Free State.
Their stable business development provides planning reliability to the
communities for their investment into business, infrastructure and
education. Each year, the Bavarian Volksbanks and Raiffeisenbanks
invest a mid-sized triple-digit million Euro sum, thus providing orders
to local enterprises and contributing to secure jobs in the regional
economy. All in all, the Bavarian Volksbanks and Raiffeisenbanks
secure annually 105,000 jobs in the Free State with their building
loans. They help create new jobs in the SME sector by arranging LfA
support loans. Between 2000 and 2006 alone, 14,000 new jobs were
created this way. The business activities of the Bavarian cooperative
banks constitute a vital part of the regional business cycles.
9 Summary
41

V Competitive environment
1 Overall situation
Competition in the German banking market has clearly intensified
during the past years. New players entered the market and sped up
the fight for customers. Furthermore, due to the increase in competition,
efficiency gains of several years had mostly to be passed on to
the customers. They, in turn, benefited through lower fees and
charges. This is reflected in a study of KfW. (KfW: Das deutsche
Kreditgewerbe im internationalen Vergleich: Betriebswirtschaftlich
wenig rentabel, volkswirtschaftlich hoch produktiv, 2005 (The German
credit sector in international comparison: micro economically
low profitability, macro economically highly productive)
In Germany, more than three million people annually open, close
or move their account. In Bavaria alone, more than 150 banks together
with the Bavarian Volksbanks and Raiffeisenbanks fight for
customers. Especially in Bavaria, bank customers tend to move
accounts more often than the German average. Whereas the change
ratio is 27 per cent nation-wide, the ratio of people having moved
their accounts at least once or more often is 35 per cent in Bavaria.
This is reflected in a representative survey of GVB of May 2007. To
state it clearly: the Bavarian banking market is highly mobile. Customers
are open to competition.
This is also revealed by the development of customer relations in
retail banking between 1995 and 2005. During this period, the number
of accounts in Germany grew by 2 per cent from 150 million to
176 million. At the same time, the market share of savings banks in
this segment decreased from 33 per cent to 28 per cent. Cooperative
banks, too, lost three percentage points and currently stand at 17 per
cent. The big banks remained relatively constant at 13 per cent, building
societies at 16 per cent. The big winners are the direct banks that
1 Overall situation
43

increased their market share from zero to 17 per cent. That underlines:
the market is mobile. Competition is severe, as can be seen from
the competitive environment of the Volksbanks and Raiffeisenbanks,
their business policies and their marketing techniques.
2 Savings banks
At the end of 2006, there were 77 savings banks in Bavaria with 2,600
branch offices. Their balance sheet total amounted to 156,000 million
Euro. They employed 47,000 people in Bavaria. Their customer
deposits amounted to 119,000 million Euro. Loans granted totalled
95,000 million Euro. They supplied roughly 40 per cent of SMEs and
two thirds of the trades with financial services. They managed around
18.7 million customer accounts. In the private customer segment,
they have a market penetration of around 56 per cent and therefore
are market leader.
Despite being rooted in all regions, the savings banks, too, have
come under pressure through increased competition. Their reactions
aim at the private customer segment. In the area of financial provisions
for college students, the savings banks created a special educational
loan in addition to savings products. Furthermore, they offer
special terms for specifically selected products (beacon projects) in
order to keep up with offers of the competition (e. g. instalment savings
or building loans). Moreover, the savings banks push forward
into the business with wealthy private customers. In Bavaria,
BayernLB (Bavarian State Bank) supplies the savings banks with private
banking products “Asset Management made in Bavaria” within
the framework of the concept “Cooperative Market Cultivation”.
These may be offered under their own or under the logo of BayernLB.
However, customers may keep their portfolio and their account with
the respective savings bank. Furthermore, savings banks utilise their
relations to communal institutions: for instance, the Stadtsparkasse
München (Munich Municipal Savings Bank) cooperates with
44 V Competitive environment

Stadtwerke München (Munich Municipal Utility) and the municipal
hospitals in order to offer provision products through them.
Savings banks recognise their own weakness in marketing. Therefore,
they look for better sales personnel. Existing customer contacts
are not utilised sufficiently to sell additional products. Marketing
staff shall be trained gradually to become full-blooded salespersons.
Savings banks consider their holistic approach an advantage in comparison
to e. g. direct banks. They offer products for all customer
groups for all circumstances and situations. This encompasses both
private and commercial customers. With this approach, they hope to
increase sales of all products distinctly during the coming years.
3 Private full banks
The following big German banks are counted among the most important
full banks: Deutsche Bank, HypoVereinsbank, Dresdner Bank,
Commerzbank and Postbank. As in the past, their business focus
(except Postbank) is set on the high-margin clientele as can be shown
from the following statistics.
About 28 per cent of all higher-income households (net income
per household around 85,000 Euro) in Southern Germany keep their
main account with one of the big German banks. Volksbanks and
Raiffeisenbanks reach a lower level of only one fourth. The same is
reflected by market penetration. In the higher-income customer segment,
big banks have a market penetration of 70 per cent. Cooperative
banks reach about 40 per cent. When looking at market penetration
of the whole private customer segment, the tendency is
reversed. Here, big banks only have about 22 per cent whereas cooperative
banks reach a value of one third. That shows: big banks put
special attention on wealthier customers. Another indication is their
over proportional market share of more than 34 per cent of the customer
deposit volume in Bavaria, which is higher than of savings
banks and cooperative banks.
2 Savings banks
45

It can also be deduced from the structure of commercial loans that
big banks are not interested in the SME sector. While their share of
the total volume of commercial loans lies just under 38 per cent, their
market share in the segment of transportation and communication
reaches 47 per cent. This is a market segment where mostly higher
loans are granted. Commercial banks tend to engage themselves
more in the high-volume credit business. This tendency is confirmed
by contracts concluded in the LfA business. The average LfA support
loan arranged by the big banks amounted to roughly 250,000 Euro
between 2004 and 2006. That was more than double the amount of
the average support loan arranged by the Bavarian cooperative
banks in the same period. No wonder that only 13 per cent of all
SMEs name a big bank as their main bank, but as many as 34 per cent
name a Volksbank and Raiffeisenbank. The situation is reversed looking
at enterprises with sales of more than 25 million Euro. There, big
banks have a market share of 42 per cent whereas the Volksbanks
and Raiffeisenbanks only reach 24 per cent.
The low shares of commercial banks in the segment of households
and SMEs are homemade. From the beginning, big banks set their
attention on big corporations and wealthier customer segments that
primarily can be found in big cities and urban environments. Symptomatic
of it is the sparse branch network of commercial banks. On
average, a customer has to cover 6 kilometres in order to find a
branch office of a big bank. Since these are mainly located in the
proximity of cities, it signifies a low density of branch offices of big
banks in rural areas. Furthermore, the frequent change of strategies
of these banks during the past years led to a loss of trust and credibility
by the customers. This is also reflected in a survey among the
members of the Bund der Selbständigen (Federation of the Self-
Employed) in Bavaria. For instance, since 1995 market penetration of
HypoVereinsbank has decreased in Bavaria by one third to just under
10 per cent. Furthermore, more customers closed their accounts with
the big banks between 2004 and 2005 than opened a new one.
46 V Competitive environment

Big banks intend to reverse this trend by way of marketing campaigns
in the segment of private customers and SMEs by starting new
product lines, among them free cheque accounts as well as special
terms for consumer and student loans. Also the marketing system will
be changed. More and more, products will be sold through third parties:
automobile clubs, retail or internet platforms. These measures
are supported by higher marketing capacities meaning more employees,
new branch offices, longer business hours or mobile banking
through agents. Big banks have set high objectives for themselves.
Postbank for instance wants to gain one million new customers in
2007. This serves to put pressure on the current regional market
leaders – savings banks and cooperative banks. But private customers
and SMEs are a “sideline” at the most for the majority of the big
banks. If one looks at Deutsche Bank, around 50 per cent of its bank
earnings stem from the segment Global Markets, i. e. investment
banking, in London. (Student, D.; von Papendick, U.: Deutsche Bank:
Goldfinger, 2006)
Aside from the big German banks, more and more foreign big
banks are active in the German banking market. Among them are
e. g. the subsidiaries of Citibank, GE Money Bank or the Swedish SEB.
From the beginning, these banks focussed on the private customer
segment and tried to enter the market offering favourable terms.
This includes a free cheque account as well as favourable consumer
loan terms. Usually these institutes limit their branch network to
urban areas. The financial power of the parent company enables
them to work the markets extensively and pursue a long-term strategy.
This also makes them interesting for German customers. For this
reason, these banks add to competitive pressure in the German market.
4 Direct banks
Among the banks with new distribution channels are internet banks,
mostly offering a limited product range without much explanatory
3 Private full banks
47

needs. Examples are DiBa or ComDirect. Both achieved high increases
in the number of customers and deposit volume in the past years.
Their importance in certain areas, e. g. capital investments, has clearly
grown at the expense of the established market participants. This is
also felt by the Bavarian Volksbanks and Raiffeisenbanks. Market statistics
of deposits show that the products offered by direct banks are
effective. Since the year 2000, the Bavarian Volksbanks and Raiffeisenbanks
have lost a market share in deposit banking of around 1.5
percentage points. These decreases are most apparent concerning
savings deposits and savings certificates. Credit banks (direct banks
are counted among them) gained almost three percentage points in
deposit banking during the same period – proof that competition in
the banking market functions well with new products and new distribution
channels.
Direct banks primarily address customers in the traditional private
customer segment of savings banks and cooperative banks. Especially
young, higher-income earners as well as higher qualified customers
feel attracted to direct banks. Almost one quarter of these customers
is willing to have all their banking transactions executed by a direct
bank. That proves that in the banking market there is a high potential
for customer mobility.
5 Austrian banks in the Bavarian market
Besides the German private banks, mostly Austrian banks are among
the group of banks specialising in the segment of wealthy private customers.
They try to attract German customers with country-specific
competitive advantages. Examples are the Bank für Tirol and Vorarlberg,
Oberbank or Raiffeisenlandesbank Oberösterreich that actively
work the Southern Bavarian market. These banks do not keep their
intentions hidden and make aggressive use of the Austrian location
advantages (constitutionally guaranteed banking secret, inheritance
tax regulation, final withholding tax) for their marketing. In its Annual
Report 2006, Oberbank documents its success in Bavaria. Bavaria is
48 V Competitive environment

explicitly called a “growth market”. This is also shown by the branch
network development since Oberbank entered the market in 1990.
At the end of 2006, after opening another two branches in 2006,
Oberbank had over ten branch offices in Bavaria. With the planned
opening of two more branch offices, Oberbank will be present in all
Bavarian administrative districts. The Bank für Tirol und Vorarlberg
also explicitly calls Bavaria a growth market in its Quarterly Report
(2 nd quarter, 2006). Raiffeisenlandesbank Oberösterreich has been
active in Germany since 1991. It exclusively attends to customers “in
need of special discretion” and works this market segment aggressively
offering certain exclusiveness to its customers by decidedly
relinquishing the classic retail banking. Between the end of 2004 and
January of 2006, at least 434 million Euro were moved from accounts
kept at Bavarian cooperative banks mainly to Austrian.
6 Autobanks
More and more banks can be found in the Bavarian market, which
were founded as subsidiaries of industrial corporations. In first place
autobanks should be mentioned, which were able to attain a strong
market position in the traditional automotive financing business.
Gradually, their activities have extended to other bank products, too.
Autobanks penetrate the market of regular banks systematically.
Besides auto financing and leasing, they now offer a number of traditional
bank products as savings plans, cheque accounts, call money
accounts, investment funds and insurance. Daimler-Chrysler-Bank has
acquired over one million customers and holds deposits of more than
3,000 million Euro. Volkswagenbank administrated customer deposits
amounting to 8,800 million Euro at the end of 2006 and had a
balance sheet total of just under 44,000 million Euro. Autobanks
often benefit from their parent company that subsidises financial
products in order to push automobiles into the market. Furthermore,
the internal rate of refinancing is often lower than in the banking
market. These advantages can be passed to the customers. With their
reasonable terms, autobanks steadily achieve higher shares of the
5 Austrian banks in the Bavarian market
49

auto financing market. Daimler-Chrysler-Bank nowadays finances or
leases every second Mercedes. In total, 60 per cent of all new auto
loans are granted by autobanks. Also to the benefit of auto manufacturers:
according to BMW, new cars financed with loans are usually
ordered with more extras than those paid for with cash.
Typical autobanks look for distribution channels other than their
own dealers. So, Daimler-Chrysler and BMW Banks also finance
brands other than their own. As does VW Bank offering financing
through the autoclub ADAC (market potential 15.5 million members).
Furthermore, autobanks offer new models of their own brand at
favourable financing terms to customers who drive cars of another
brand. Thus, there is no need for the expensive acquisition of customer
data. In the coming years – as can be observed already now –
autobanks will try to extend their holistic approach i.e. on top of
financing also sell liability, collision and residual debt insurance.
7 Consumer loan specialists
More and more banks enter the market specialising on one or few
products and selling them in their own shops or branch offices. That
applies to consumer loan specialists like Fortis. This specialisation of
some institutes on consumer loans is also reflected in the changed
market share of the Bavarian Volksbanks and Raiffeisenbanks. In the
year 2000, they held over 36 per cent of the volume market share in
the instalment credit business, in 2006 it was only 9 per cent. During
the same period, the volume of loans granted in Bavaria increased
from just under 14,000 million Euro to 18,400 million Euro whereas
the loans granted by the Bavarian Volksbanks and Raiffeisenbanks
amounting to 5,000 million Euro decreased by 3,400 million Euro. This
is a direct effect of the new market and competition structures.
50 V Competitive environment

8 Non-banks
Increasingly, cooperations with non-banks, i. e. enterprises not
belonging to the banking sector, are utilised to sell products, among
them auto clubs and retailers. Examples are Tchibo, ADAC, drugstore
chains or Ebay, which currently cooperates with Commerzbank.
They use their high profile and busy customer traffic in the retail
business to sell their products. The coffee roaster’s name recognition
rate of 99 per cent and the many non-food products in their product
range also provide a high marketing potential for finance products.
The retail group C&A has such a potential, too. With one million customers
a day, there are excellent sales opportunities for finance products
as well, especially since these products are advertised in their
department stores. This new distribution channel of the non-banks
further heightens competitive pressure for branch banks.
9 Summary
Consolidation and entrance of new competitors into the banking
market have massively intensified competition and the fight for customers.
The big German banks have rediscovered SME financing and
the business with the average private customer in Bavaria. With their
marketing campaigns aimed at this customer segment, they try to put
pressure on the regional banks. Foreign full banks directly approach
private customers and increasingly commercial customers. Therefore,
they directly compete with big German banks, savings banks and
cooperative banks. New distribution channels, as the internet and the
sale of finance products via retailers, heighten pressure for the traditional
branch banks. Niche suppliers as consumer loan specialists or
autobanks use their exceptional position to be successful in the market.
That forces the hand of the traditional market participants. With
the help of tax and constitutional advantages, Austrian banks aim for
V Competitive environment
51

the wealthy and profitable private customer segment thus siphoning
off deposits from Bavarian banks.
52 V Competitive environment

VI Trends
1 Consolidation of the banking market
During the last decade, the German banking market was marked by
different developments. Firstly, the number of banks in Germany
(here: suppliers of capital transaction services for non-banks)
decreased distinctly. Between 2001 and 2005, the number of domestic
credit banks was reduced by 445 to 2,000. Secondly, the number of
foreign suppliers in Germany grew continuously. During the same
period, the number of banks from countries of the Euro zone went
up 20 per cent to 52 institutes whereas the number of banks originating
from the European Economic Area (without the Euro zone)
increased by around 12 per cent to 18 institutes. This is an indication
that ever more foreign credit institutes push into the German market
and put pressure on the domestic suppliers. Competition increases.
That offers the following future prospects: the present consolidation
of domestic institutes in the German and Bavarian banking market
will continue further. This trend is supported by rumours of a
take-over of Postbank and the sale of Landesbank Berlin (Berlin State
Bank) in June of 2007, as well as the acquisitions of Norisbank branches
and Berliner Bank by Deutsche Bank. So far, small and medium
regional suppliers have been particularly affected by the consolidation
wave. The number of German Volksbanks and Raiffeisenbanks
dropped by around 62 per cent between 1990 and 2006, as was the
case in Bavaria.
According to some forecasts, only half of the currently 1,200 German
cooperative banks will remain in 25 years from now. Also in
Bavaria, the number will decrease. There are conservative forecasts
that in the year 2003 only about 200 cooperative banks will do business
in Bavaria. In the public banking sector, too, consolidation pressure
will increase. More savings banks and state banks will merge
1 Consolidation of the banking market
53

educing their total number. Over the coming years and decades, in
all likelihood private banks and financial service suppliers will take
over savings banks or merge with them. Against this background, the
legal form of the savings banks might become obsolete in the medium
term. Developments in other European countries as Italy and
France seem to supply serious evidence. To state it clearly: banks that
do not get a grip on their cost structures that have a narrow market
environment and a weak distribution system will get under acquisition
and merger pressure.
2 Market pressure of suppliers from outside the
industry
The tendency of market displacement does not solely originate within
the banks themselves. Even today, non- and near-banks (enterprises
that do not directly belong to the banking sector but execute
quasi-banking business, e. g. finance institutes of the auto manufacturers)
are active in the financial service market. This tendency will
continue. Especially products with little explanatory requirements can
be sold easily through the distribution channels of non- or nearbanks.
One reason is that in retail there is higher customer traffic
compared to traditional banks and longer, consumer-friendly opening
hours. In the future, more non- and near-banks will enter the
financial service market using their special customer contacts and
package deals (e. g. automobile purchase and favourable financing
terms).
The distribution side presents just one dimension of the change of
the traditional banking business. The other dimension is number and
quality of the players. Especially industrial corporations will become
increasingly interested in the banking market. GE Money Bank and
the autobanks are just the first protagonists. They will be followed by
enterprises with high capital reserves and excellent customer data –
the ideal preconditions to build up a financial service organisation.
54 VI Trends

Such potential financial service suppliers could well be recruited from
the utilities or telecommunication sectors.
New suppliers will probably utilise their existing distribution channels
and their well-established brand image to compete with the traditional
bank branch. Banks will be forced to optimise costs and customer
proximity of their branch services. The result will be the growing
importance of the group-wide standardisation of products and
services. The power of groups and networks will depend on their ability
to bundle their internal services, e. g. in the area of IT or risk management.
Furthermore, branch locations and business hours have to
become better adapted to the requirements of the market. It will be
crucial to attract customers into the branch office in order to cancel
out the point-of-sale disadvantages as compared to retailing. The Saturday
openings of several banks are early indications that they have
started to adapt to changed customer behaviour. The same goes for
the plans of the savings banks to integrate post offices into their
branches. The currently practised concept of an isolated branch office
with strictly limited opening hours can hardly be maintained in the
future.
3 Change in the demand of financial services
Demand for banking products is also undergoing a steady process of
change. This applies especially to the customer business. On the one
hand, the internationalisation of the economy will continue affecting
not only big industries and commercial banks. The SMEs, too, look for
business opportunities in foreign countries. In the meantime, SMEs in
the manufacturing sector earn just under 30 per cent of their earnings
in foreign countries – with growing tendency. That indicates that
the increasing economic interdependence affects more and more
SMEs and in its wake their main banks in the region. Regional banks
that are not competent in foreign business or do not make this competence
visible rob themselves of their market potential.
2 Market pressure of suppliers from outside the industry
55

Besides the internationalisation of the traditional SME sector,
there is another trend affecting enterprises. Not at least due to the
gradual loss of importance of the permanent employment relationship
customary until now, more and more SMEs will be founded. They
are active in their local and regional markets and mostly have insufficient
financial means. They constitute the counterpart of internationally
active enterprises and require special attention in their
regions. A new customer segment grows for local financial service
providers with branches across the board and know-how of the SME
business.
In addition to changes on the side of commercial customers, also
changes concerning private customers can be observed: the mainstream
centre of society common in Germany will thin out. This is
mainly caused by more competition in the economic system. In an
open, knowledge-based economy wage differentials, at present
guaranteed by labour agreements, will level out. The society will be
divided into less skilled people with low incomes and highly qualified
people with higher incomes. This can be seen already now. According
to a new study of the Institut zur Zukunft der Arbeit/Institute for the
Study of Labor (Dustmann, C.; Ludsteck, J.; Schönber, U.: Revisiting
the German Wage Structure, 2007) wage differentials have accelerated
massively over the past years. For example, the real income of
the top 15 per cent of the high-income group grew by more than
15 per cent between 1991 and 2001. The bottom 5 per cent of lowincome
group in Germany had to accept a real wage loss of up to
12 per cent. This is also going to affect suppliers of financial services
because demands and requirements of the customers will differ more
in future. Like in the manufacturing sector, more and more low-cost
suppliers and service-oriented premium suppliers will appear in the
banking market. Banking business across all social strata will thin out.
56 VI Trends

4 Demographic development
The shifts in demographics will affect the banking market dramatically.
The 2007 population forecast for Bavaria indicates that. (Bayerisches
Landesamt für Statistik und Datenerhebung (Bavarian State
Office of Statistics and Data Ascertainment): Bevölkerungsentwicklung
in Bayern (Population development in Bavaria), 2007) In the
coming ten to twenty years, the population of Bavaria will increase
slightly by up to 300,000 people. That will mostly be felt in economically
strong and urban areas. The percentage of aged people will rise
especially in rural areas that are not located in affluent suburbs.
Therefore, banks in rural areas will be greatly affected and forced to
change their distribution and products early on. An ageing society
has different requirements than a growing society. The areas of private
provisions, the building and melt-off of wealth will gain importance.
The ageing of society will also bring changes in the distribution
that go far beyond the technical content. Customers will no longer be
able to reach the branch offices by themselves. Therefore, a mobile
distribution system will become more important. On the other hand,
this age group is available for contacts all day, different from working
people. Banks that adapt their whole distribution system – from
product to sale – to the changing environment in customer business
will be successful in future.
Because of the dwindling number of young people, it will be of
growing importance to tie in this group. After they finish school, they
tend to move into urban areas to study or to work. Therefore, the
sustainability of this customer segment is at risk. This is also a new
challenge for the suppliers. The consumer market power of the
young people is high. They demand higher efforts. Only those who
satisfy young customers as to products, distribution and image can
maintain them as customers.
4 Demographic development
57

5 Summary
The consolidation pressure among the traditional bank institutes in
the Bavarian financial market will not lessen in the future. The number
of regionally active bank institutes will further decrease. At the
same time, the distribution channels outside of the traditional branch
business will gain importance. Enterprises from outside the industry
will enter the banking market to do business. The internationalisation
of the economy results in changes of what is required from the
banks. Customers will be more price-conscious and therefore more
motivated to change to another bank. The continuity of customer
relationships will decrease. Furthermore, inequalities and desires to
be different will increase in society and so will the individual needs
and requirements of the customers versus their bank. The demographic
development especially in rural areas calls for changes of
products and customer contacts on the part of the banks. Young people
will move into the centre of attention of financial service
providers. That will result in a growing number of suppliers fighting
for a dwindling group of customers.
58 VI Trends

Conclusion
Based on the catalogue of questions in the introduction, the economic,
societal and cultural importance of the cooperative banks in
Bavaria is documented in ten central points.
1. The first cooperative banks were founded as a reaction to a malfunctioning
financial market. This characteristic still applies today.
In the 21 st century, too, they are present in regions where other
banking groups withdrew. The Volksbanks and Raiffeisenbanks in
Bavaria thus provide financial services across the board.
2. Cooperative banks originated in the SME sector. Until the present,
they are the most important financier of agricultural, commercial
and trades SMEs.
3. Cooperative banks are not committed to anonymous stock
exchange powers but are only responsible to their members. They
are the banks of the Bavarian population. 20 per cent of all Bavarians
hold cooperative shares.
4. Cooperative banks are open to all customer groups. They offer all
financial services to all customers. Volksbanks and Raiffeisenbanks
provide access to monetary transactions as well as investment and
credit products for broad customer segments. Cooperative banks
thus enable the Bavarian population to participate in social life.
5. Cooperative banks with their deposit policies contribute to the
building of wealth and private old-age provisions in rural areas.
They thus ensure the people’s future independence.
6. Cooperative banks contribute to the future prospects of rural
areas as employers, trainers, investors and tax payers. People find
Conclusion
59

employment close to their homes, SMEs receive orders, and communities
are able to invest.
7. Cooperative banks and their business, their social and charitable
activities contribute to the vitality of the rural areas of Bavaria.
They create regional demand with their credit policy and secure
employment. They provide new jobs in many sectors. Through corporate
citizenship, they cement social ties in the Bavarian society.
8. Cooperative banks stand for stability. Through their regional and
local orientation, they do not face unforeseeable risks: They know
their markets. They stand as financial rocks in the regions, especially
in times of economic change.
9. Cooperative banks have always had democratic structures. In their
governing bodies, each vote counts equally regardless of social
origin. Cooperative banks therefore are trailblazers, supporters
and guarantors for a Bavaria that is bound by democratic principles.
10.Cooperative banks in Bavaria move in a highly competitive environment
with over 150 competitors. Irrespectively, also in the
future they will follow a business policy following the key philosophy
“Closer to the people”.
60 Conclusion

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Authors
Stephan Götzl is President and CEO of the Genossenschaftsverband Bayern e.V.
(Association of Cooperatives in Bavaria)
Dr. Jürgen Gros is Head of the Board of Director’s Staff and Communication
Department of the Genossenschaftsverband Bayern e.V.
Steffen Jahn is Section Head of Political Contacts and Economic Analysis of the
Genossenschaftsverband Bayern e.V.
Authors 65

This detailed analysis of the importance of coope-
rative banks for the economic, sociopolitical and
cultural development of Bavaria provides answers
to the following questions:
• What characterises the business philosophy of
the Bavarian Volksbanks and Raiffeisenbanks?
• What are the main business segments of the
Bavarian Volksbanks and Raiffeisenbanks?
• What relevance do the Bavarian Volksbanks and
Raiffeisenbanks have for the Bavarian banking
sector?
• What characterises the competitive environment
of the Bavarian Volksbanks and Raifeisenbanks?
• In what way do the Bavarian Volksbanks and
Raiffeisenbanks contribute to the economy of the
Free State of Bavaria?
www.gv-bayern.de
EUR 3.00