This research compares the experiences of financial institutions in two very different financial crises: savings and loan institutions (S&Ls) in the United States during the 1980s and Germany’s state-owned banks, known as Landesbanken, during the global recession of 2007–2008. While much of the research on bank failures centers on the choices made by public and private actors according to their interests, this research focuses on the relationship between the ideas that drive an economic entity and the institutions that hold the economic entity accountable. The article argues that while the crises were very different, there is a causal thread that connects the two. Landesbanken and the S&Ls experienced a similar disruption in the complementarity between their original mission and their regulatory framework. The disruption contributed to increased volatility, weak oversight, and greater dependence on third parties and bank managers for risk information.
This is a preview of subscription content,to check access.
Access this article
Similar content being viewed by others
References and notes
Johnson, S and Kwak, J. (2010) 13 Bankers: The Wall Street Takeover and the Next Financial Meltdown. New York: Pantheon Books, Krugman, P. (2008). The Return of Depression Economics: And the Crisis of 2008. London: Penguin; Morris, C.R. (2008). The Two Trillion Dollar Meltdown: Easy Money, High Rollers, and the Great Credit Crash. New York: Public Affairs.
Three of the best examples of films include Inside Job (2010) Margin Call (2011), and Too Big To Fail (2012).
Manolopoulos, J. (2011) Greece’s ‘Odious’ Debt: The Looting of the Hellenic Republic by the Euro, the Political Elite and the Investment Community. London; New York: Anthem Press, Lynn, M. (2011). Bust: Greece, the Euro, and the Sovereign Debt Crisis. Hoboken, NJ: Bloomberg Press; Marsh, D. (2013). Europe’s Deadlock: How the Euro Crisis Could Be Solved, and Why It Won’t Happen. New Haven, CT: London: Yale University Press.
March, J.G. and Heath, C. (1994) A Primer on Decision Making: How Decisions Happen. New York: Free Press.
Llewellyn, D.T. (2001) Alternative approaches to regulation and corporate governance in financial firms. In: R.A. Brealey (ed.) Financial Stability and Central Banks: A Global Perspective. London: Routledge, pp. 144–165, p. 145.
Hoffmann, S. (2001) Politics and Banking: Ideas, Public Policy, and the Creation of Financial Institutions. Baltimore, MD: Johns Hopkins University Press, p. 6.
Hoffmann, S. Politics and Banking, p. 6.
Hall, P.A. and Soskice, D.W. (2001) Varieties of Capitalism: The Institutional Foundations of Comparative Advantage. Oxford: Oxford University Press, Streeck, W. and Thelen, K.A. (2005). Beyond Continuity: Institutional Change in Advanced Political Economies. Oxford: Oxford University Press; Deeg, R. (1999). Finance Capitalism Unveiled: Banks and the German Political Economy. Ann Arbor, MI: University of Michigan Press.
Hacker, J.S. (2004) Privatizing risk without privatizing the welfare state: The hidden politics of social policy retrenchment in the United States. The American Political Science Review 98 (2): 243–260, 246.
Hacker, J.S. ‘Privatizing risk’, p. 246; Thelen, K. (2003). How Institutions Evolve: Insights from Comparative-historical Analysis. In: J. Mahoney and Dietrich Rueschemeyer (eds.) Comparative Historical Analysis in the Social Sciences. Cambridge: Cambridge University Press.
Hacker, J.S. ‘Privatizing risk’, p. 248. An example of layering can found in the case of the Federal Home Loan Bank System, a government sponsored enterprise whose initial mission to promote homeownership was layered with two additional mandates including support of community banks and the promotion of affordable housing and community economic development. Hoffmann, S. and Cassell, M.K. (2010). Mission expansion in the Federal Home Loan Bank System. Albany, NY: State University of New York Press.
Colin Crouch refers to different types of institutional complementarity. Crouch’s conception of ‘complementarity in the economist’s sense’ best explains the association between regulatory frameworks and the missions pursued within them. Crouch, C. (2005). Capitalist Diversity and Change: Recombinant Governance and Institutional Entrepreneurs. Oxford, New York: Oxford University Press, 2005, p. 51.
Kingdon, J.W. (1995) Agendas, Alternatives, and Public Policies. Boston, MA: Little, Brown.
Anckar, C. (2008) On the applicability of the most similar systems design and the most different systems design in comparative research. International Journal of Social Research Methodology 11 (5): 389–401.
Hall, P.A. and Soskice, D.W. Varieties of Capitalism; Deeg, R. Finance Capitalism Unveiled.
Hoffmann, S. Politics and Banking, p. 177.
National Commission on Financial Institution Reform, Recovery and Enforcement (1993) Origins and Causes of the S&L Debacle: A Blueprint for Reform; A Report to the President and Congress of the United States. Washington DC: US Gov. Print. Off, FDIC (1997). History of the Eighties: Lessons for the Future, an Examination of the Banking Crises of the 1980s and Early 1990s. Washington: Federal Deposit Insurance Corporation.
Curry, T. and Shibut, L. (2000) The cost of the savings and loan crisis. FDIC Banking Review 13 (2): 26–35.
For current accounts of Germany’s three-pillar system see Brunner, A. D (2004) Germany’s Three-pillar Banking System: Cross-country Perspectives in Europe. Washington DC: International Monetary Fund.
Bofinger, P., Franz, W., Rürup, B., Weder di Mauro, B. and Wiegand, W. (2008) Das deutsche Finanzsystem Effizienz steigern – Stabilität erhöhen, (Publication) Wiesbaden: Sachverständigenrat zur Begutachtung der gesamtwirtschaftlichen Entwicklung Statistisches Bundesamt.
Müller, L. (2010) Bank-Räuber. Berlin, Germany: Ullstein Buchverlag, p. 36.
Ewing, J. (20100) Landesbanken losses may bring change to German banking. The New York Times, 10 January. Retrieved 15 May 2014.
Bofinger, P. et al Das deutsche Finanzsystem Effizienz steigern, p. 2.
Hüfner, F. (2010) The German Financial System: Lessons from the Financial Crisis. France: OECD. Working paper No. 788.
For a more detailed account of the historic mission of the Landesbanken see Gladen, A. (1986). Öffentlicher Auftrag der Sparkassen und Wettbewerb. In J. Mura (ed.) Sparkassenhistorisches Symposium 1985: Der öffentliche Auftrag der Sparkassen in der historischen Entwicklung. Stuttgart: Gesellschaft zur Förderung der wissenschaftlichen Forschung über das Spar- und Girowesen e. V, pp. 47–61.
Scherrer, C. (2014) Öffentliche Banken im Sog der Finanzialisierung. In: M. Heires and A. Nölke (eds.) Politische Ökonomie der Finanzialisierung. Wiesbaden: Springer Fachmedien, pp. 147–161.
Koester, H. (1978) Der öffentliche Zweck und die Tätigkeit der Landesbanken. Zeitschrift Fuer Das Gesamte Kreditwesen 12 (10): 540–544.
Gladen, A. Öffentlicher Auftrag.
Siekmann, H. (2011) Die rechtliche Regulierung öffentlicher Banken in Deutschland. Frankfurt Am Main: Institute for Monetary and Financial Stability, Goethe-Universität Frankfurt Am Main, p. 3. Working paper No. 48.
The Ressortprinzip is in Article 65, paragraph 2 of Germany Basic Law, which states that ‘within these guidelines, each federal minister runs his department independently and under his own responsibility’.
König, T. and Wruuck, P. (2011) Aufsichtsratskontrolle und strategische Agenda-Setzung in Landesbanken. Perspektiven Der Wirtschaftspolitik 12 (4): 397–412.
(2006) Die Deutsche Bundesbank: Aufgabenfelder, Rechtlicher Rahmen, Geschichte. Frankfurt Am Main: Dt. Bundesbank.
Hüfner, F. The German Financial System, p. 17.
Mueller, P. (1978) Das Handikap der Landesbanken. Zeitschrift Fuer Das Gesamte Kreditwesen 31 (3): 95–96.
Deeg, R. Finance Capitalism Unveiled, p. 136.
Upward Bound: WestLB (1992) The Economist 16 May: 109–110.
Seikel, D. (2013) Der Kampf um öffentlich-rechtliche Banken: Wie die Europäische Kommission Liberalisierung durchsetzt. Frankfurt a.M: Campus Verlag.
Bofinger, P. et al Das deutsche Finanzsystem Effizienz steigern, p. 98.
The most notorious example of a Landesbanken leader seeking to transform his bank into a major private player is Frieder Neuber, chief executive of WestLB, who expanded his company into London financial markets, French banking and insurance, and East European markets. See Sinn, H. (1997). Der Staat im Bankwesen: Zur Rolle der Landesbanken in Deutschland. München: Beck.
Sinn, H. Der Staat im Bankwesen.
Smith, M.P. (2005) States of Liberalization: Redefining the Public Sector in Integrated Europe. Albany, NY: State University of New York Press; Seikel, D.Der Kampf um öffentlich-rechtliche Banken.
Brämer, P., Gischer, H. and Richter, T. (2010) Quo vadis Landesbanken. In: R. Hrbek (ed.) Jahrbuch des Föderalismus 2010 – Föderalismus, Subsidiarität und Regionen in Europa. Baden-Baden, Nomos Verlagsgesellschaft, pp. 200–211.
Hüfner, F. (2010) The German Financial System: Lessons from the Financial Crisis. France: OECD, p. 10. Working paper No. 788.
Hüfner, F. (2010) The German Financial System, p. 11.
Two exceptions to this are the Hessische Landesbank (Helaba) and the Berliner Landesbank. According interviews and scholarly accounts, both institutions maintained the Landesbank’s traditional mission during the Great Recession. The cause cited for their risk-averse behavior is that both institutions suffered a serious financial scandals during earlier periods. Helaba suffered a crisis between 1973and 1976, which required an infusion of 3 billion D-Marks from mainly from the Sparkassen Association (‘Freie Hand,’ 1976). The Berliner Landesbank suffered a major real estate investment scandal in the late 1990s. The crises nearly brought down both institutions. Subsequently, supervisory boards became particularly risk-averse and weary of their institutions investing in products the boards did not understand (Scherrer, 2014; Gubitz, 2013; interviews with former supervisory board members).
Sächsischer Rechungshof (2009) Landesbank Sachsen Girozentral: Sonderbericht nach §99 SäHO, (Rep. No. Az: 120308/64) Leipzig, Germany: Sächsischer Rechungshof, p. 25.
Hau, H. and Thum, M.P. (2009) Subprime Crisis and Board (In-)Competence: Private vs. Public Banks in Germany. 13 March, 2009. CESifo Working Paper Series No. 2640; ECGI - Finance Working Paper No. 247/2009. Available at SSRN: http://ssrn.com/abstract=1360698.
Die BAFin vor dem Start (2002) Börsen-Zeitung, 27 April.
FDIC. History of the eighties. Hoffmann, S., and Cassell, M.K. Mission expansion.
Benston, G.J. and Kaufman, G.G. (1990) Understanding the thrift debacle. The Public Interest 32 (Spring): 79–95, FDIC. (1997). History of the eighties; Strunk, N. and Case, F.E. (1988). Where Deregulation Went Wrong: A Look at the Causes Behind Savings and Loan Failures in the 1980s. Chicago, IL: United States League of Savings Institutions.
Hoffmann, S. Politics and banking, p. 142.
Hoffmann, S. and Cassell, M.K. Mission expansion.
FDIC. History of the eighties, p. 170.
Strunk, N. and Case, F.E. Where Deregulation Went Wrong, p. 22.
Strunk, N. and Case, F.E. Where Deregulation Went Wrong, p. 148.
Black, W. (1993) Examination/Supervision/Enforcement of S&Ls 1979–1992. Staff Reports No. 4. Washington DC: National Commission on Financial Institution Reform, Recovery and Enforcement, p. 2.
Hoffmann, S. Politics and banking, p. 172.
Regulation Q is the authority given to the Federal Reserve to set maximum rates on time deposits given to it by the Banking Act of 1933.
Strunk, N. and Case, F.E. Where Deregulation Went Wrong, p. 110.
Barth, J.R. (1991) The Great Savings and Loan Debacle. Washington DC: AEI Press.
White, L.J. (1991) The S&L Debacle: Public Policy Lessons for Bank and Thrift Regulation. New York: Oxford University Press, p. 73.
Barth, J.R. (1989) Thrift deregulation and federal deposit insurance. Journal of Financial Services Research 2 (3): 231–259.
National Commission on Financial Institution Reform, Recovery and Enforcement. Origins and causes of the S&L debacle, p. 11.
Posner, R.A. (2009) A Failure of Capitalism: The Crisis of ‘08 and the Descent into Depression. Cambridge, MA: Harvard University Press.
Seidman, L.W. as quoted in Thies, C. and Gerlowski, D.A. (1989) Deposit insurance: A history of failure. Cato Journal 8 (3): 677.
Pizzo, S., Fricker, M. and Muolo, P. (1989) Inside Job: The Looting of America’s Savings and Loans. New York: McGraw-Hill, p. 354.
Benston, G.J. and Kaufman, G.G. (1990) Understanding the thrift debacle. The Public Interest 32 (Spring): 79–95, 85.
Pierson, P. (2004) Politics in Time: History, Institutions, and Social Analysis. Princeton, NJ: Princeton University Press.
Noack, H. and Schrooten, M. (2009) Die Zukunft der Landesbanken – Zwischen Konsolidierung und neuem Geschaeftsmodell. Bonn: Friedrich-Ebert-Stiftung.
About this article
Cite this article
Cassell, M. A tale of two crises: Germany’s Landesbanken and the United States’ savings and loans. J Bank Regul 17, 73–89 (2016). https://doi.org/10.1057/jbr.2015.11