Theoretical perspectives on mission drift of public sector banks: The German case

Abstract

The debate over how to finance the transition to renewable energy in the face of catastrophic climate change has put the issue of public banks back on the political agenda. In order to avoid the mistakes of the past, the article analyzes one of them, mission drift, the tendency to act outside the original mandate. This can result in the public bank no longer fulfilling its original public purpose. It can also lead to huge financial losses. German public banks are chosen for the case study because Germany has a large public banking sector that is suitable for analyzing the effects of different governance structures. Some of these banks suffer from mission drift. Mission creep is most pronounced among the Landesbanken, which have ventured into high-risk derivatives trading. Mission drift is discussed in the light of principal-agent theory, sociological new institutionalism, and hegemonic discourse theory. Placing mission drift in this larger framework precludes any simple panacea for keeping public banks true to their public purpose.

Introduction

At the height of neoliberal hegemony, public banks had fallen out of favor in the financial policy community. However, after neoliberalism lost its luster in the Great Financial Crisis of 2007–09, interest in public banks was revived among critics of liberalized financial markets (Butzbach and Mettenheim, 2014). While this renewed interest was not enough to strengthen the remnants of public banks that had withstood the neoliberal onslaught on the public sector, the People’s Republic of China’s successful industrial policy financed by public banks (Herr, 2010; Weber, 2021), as well as the debate over how to finance the transition to renewable energy in the face of catastrophic climate change, put the issue of public banks back on the policy agenda in the 2020s (Marois, 2021; Volberding, 2021). The author shares the view that public banks can play a beneficial role in stabilizing volatile financial markets and providing finance for useful public purposes (Scherrer, 2017). And because of this view, the author feels compelled to draw attention to what can go wrong in public banks. This seems necessary to avoid the mistakes of the past. These mistakes include the so-called mission drift, the tendency to act outside the original mandate. This can result in the public bank no longer fulfilling its original public purpose. It can also lead to huge financial losses, as in the case of the German Landesbanken, to which I will return later in this article.

Under the heading of mission drift, microfinance institutions (Serrano-Cinca et al., 2023) and the Bretton Woods institutions, the International Monetary Fund (IMF) and the World Bank (Tan, 2008), have received much critical academic attention. Ordinary public banks have largely escaped this critical scrutiny, probably because they had lost their relevance in most countries. Given the resurgence of interest in public banks at the national level, I think it is appropriate to analyze the past mission drifts of public banks. I have chosen German public banks for this purpose for three reasons. First, Germany stands out among highly developed capitalist countries in having a large public banking sector. This large sector allows for an analysis that goes beyond a case study of a single bank. Second, the German public sector is generally perceived to be only mildly corrupt (9th out of 180 countries in 2023, Transparency International). Therefore, general corruption can be neglected as a factor for mission drift in German public banks. Third, public banks are characterized by a great diversity in corporate governance and are therefore well suited for analyzing the effect of different governance structures.

The article aims to contribute to the theoretical debate on mission drift of public institutions by exploring how mission drift can be explained and mitigated from different theoretical perspectives. Principal-agent theory and sociological neo-institutionalism are the most commonly used theories to explain mission drift and propose policies to limit it (for an overview, see Spicer and Lee-Chuvala, 2021). Since both theories fail to provide a complete account of the confluence of the behavior of the various actors involved, I embed their insights in the theory of hegemonic discourse. Applying this theory, the observed mission drift since the 1990s is interpreted as part of the financialization trend under neoliberal hegemony. Under neoliberalism, the original mission of public banks faces a hostile environment. Placing mission drift in this larger framework precludes any simple panacea for keeping public banks true to their public purpose.

The article is based on fieldwork I supervised, newspaper accounts, bank reports and websites, and academic publications. It begins with a discussion of the definition of mission drift and its theoretical explanations. It continues with an overview of the German public banking system. The two public banking case studies begin with an analysis of the least problematic case of mission drift among Sparkassen, followed by the more problematic German Landesbanken. After describing this drift, I assess the contribution of their various stakeholders and regulators to this abandonment of the original public mission in light of principal-agent theory, sociological new institutionalism, and hegemonic discourse theory. These theories are also applied to the question of how to keep public banks on mission. I conclude with a summary of the answers to the research questions.

Defining and explaining mission drift

The Cambridge dictionary defines mission drift as “the gradual addition of new tasks or activities to a project so that the original purpose or idea begins to be lost.” Therefore, one measure of mission drift could be the original statutory mandate of public banks. While the laws establishing the Sparkassen set certain limits on their business activities, the organizational law of the Landesbanken does not contain any provision limiting their activities (Lampert 2010, 1469). This openness in the formulation of the public mandate gives the management of the Landesbanken a great deal of discretion. The public mandate could be further specified in the bank’s statutes. However, the statutes do not provide much more guidance. In the case of Landesbank Hessen-Thüringen (HELABA), they stipulate that the bank must take into account general economic considerations and promote the interests of the savings banks and municipalities. Furthermore: “In view of the bank’s public mandate, making a profit is not the main purpose of business operations” (Landesbank Hessen-Thüringen Girozentrale, §5 (9); translation by the author).

However, even if the public mandate were more precisely defined, since a bank’s environment may change over time, neither the law nor the statutes may provide sufficient guidance on how to operate under the new circumstances. This lack of clear guidance is a challenge for the bank’s management as well as for the researcher trying to determine the extent of mission drift. What is considered mission drift is a matter of perspective and is therefore open to debate. In a capitalist market economy, the main justification for the existence of a public bank is to fill the welfare gaps left by the profit-oriented private sector. Again, this is not without controversy. The spectrum of what these gaps include ranges from almost no banking services to macroeconomic countercyclical lending (Mendonça and Deos, 2017). Another way to assess mission drift would be to leave the determination of the public mandate to the public authorities in charge of public banks. However, as the literature critical of public banks is fond of pointing out, these authorities may be tempted to use the public bank for their own benefit, whether for financial gain or more political power (Shleifer and Vishny, 1998).

I like to think of the public nature of a public bank as an indication of its mission: a public bank should enhance the welfare of its target group, as defined by the public. It should therefore pursue public policy objectives that enjoy broad societal support. In general, this includes support for economic growth; in recent decades, it has increasingly included the promotion of socially and environmentally sustainable economic practices. This means, for example, providing access to financial services for individuals or small businesses not served by private banks, or offering long-term financing for infrastructure projects. In addition to supporting social “goods,” public banks should also avoid social “bads,” such as contributing to financial instability, unsustainable household debt levels, or excessive gambling (see De Graaf and Wiertz, 2019). And, of course, a public bank should not burden the public budget with more than is allocated for its normal operations.

With these considerations in mind, our benchmarks for mission drift in public banks are speculative investments unrelated to the economic development of the home country, promotion of risky financial instruments, executive compensation far beyond the public sector, support for tax evasion, and facilitation of tax fraud. These practices can be seen as part of the financialization of capitalism in recent decades. Financialization is understood as the greatly expanded role of financial motives, financial markets, financial actors, and financial institutions in the operation of national and international economies (Epstein, 2005). In addition to the significantly increased share of corporate profits held by financial institutions and the proliferation of trading in derivatives (Krippner, 2005), a striking example of financialization is the so-called securitization of loans taken out to purchase assets such as homes or automobiles. While such loans were traditionally held by banks until they were repaid, they are now sold in bundles to investors around the world. This leads to more risk-taking, which increases systemic risk (Kara et al., 2016). The accompanying liberalization of cross-border financial flows has facilitated tax evasion (Palan et al., 2010).

Mission drift is neither a new nor an unexplained phenomenon. More than 100 years ago, Robert Michels showed that public organizations such as the German Social Democratic Party became more concerned with their own survival than with fulfilling the intentions of their founders (Michels, 1911 [1915]). Subsequent generations of sociologists have refined the argument, pointing to internal organizational dynamics and powerful forces in the environment of organizations (see Barnett and Finnemore, 1999; Selznick, 1949). Further insights have been provided by the sociological new institutionalism. It emphasizes the need for legitimacy of individual and collective behavior. Especially under conditions of uncertainty and competition, actors are expected to orient their behavior strongly towards others. DiMaggio and Powell (1983) identify three types of institutional isomorphism: coercive, mimetic, and normative. Coercive isomorphism occurs through force, persuasion, or invitation to join. Mimetic isomorphism occurs when an organization itself initiates the mimicking of other organizations. Often, organizations model themselves on other organizations that they consider more successful or legitimate. The normative form of isomorphism often results from the phenomenon of professionalization. Members of a “profession” tend to have similar attitudes and approaches to their work.

Principal-agent theory has been a dominant perspective on corporate governance in both academic research and policy development. In general, research within this perspective analyzes the relationship between a principal who delegates work and an agent who works on behalf of a principal. At the heart of this relationship is what Jensen and Meckling (1976) call the “agency problem,” which involves the following concern. The principal and the agent may have different goals, interests, and perceptions of risk. This problem arises because of information asymmetry between the principal and the agent, which makes it difficult for the former to monitor and verify the latter’s behavior. The general idea of agency theory is that all social relations in economic interaction can be reduced to a set of contracts, and thus the key solution to agency problems can be found in optimal contracting (Eisenhardt, 1989).

Both theories make important contributions to the understanding of mission drift. Principal-agent theory emphasizes the misalignment of interests between owners (the public, represented by the government in the case of public banks) and managers. Applying this theory to mission drift in the public sector, the explanation is obvious. Public ownership has lacked a clear accountability structure, which has encouraged abuse by managers or politicians (Shleifer and Vishny, 1998; specifically for Landesbanken: König and Wruuck, 2011). Neo-institutionalism points to forces in the environment of public banks that lead to imitative behavior by these banks. However, both theories have their own limitations.

By abstracting from the complexity of the environment and taking a strictly rational and contractarian approach to business relationships, principal-agent theory cannot provide a complete picture of governance dynamics within a firm (e.g., Aguilera et al., 2008). The strength of the institutional perspective does not necessarily lie in its understanding of change, especially endogenous change (Scott, 1981: p. 187). Both theories have a structural bias. Although agency is implied in the term “principal-agent theory,” agency is reduced to a rational calculus that denies the contingency of interest formation. And the interest formation of agents is determined by institutions from an institutional perspective.

A more fruitful conceptualization of structure and agency can be found in the theory of hegemonic discourse. This theory asserts that structures guide the actions of subjects, but that these structures do not fully determine the possibilities available to subjects (Laclau and Mouffe, 1985). Structure does not achieve complete closure because there is always something that escapes the infinite processes of signification—an irreducible surplus of meaning. Structures are assumed to exist because they are constantly produced, reproduced, and altered by the agents embedded in them. To account for this mutual conditioning of structure and agency, the notion of discourse has been introduced (Glynos and Howarth, 2007).

A discourse can be described as a precarious structuring of a social, political, and economic field. It is the sum of all verbal and non-verbal articulations that shape the perceptions, thoughts, and actions of individuals. Both individual and collective actions are closely linked to meanings (Laclau, 1990). It follows that discourse is a relational structure that has a significant impact on social, economic, and political contexts.

Discourse theory is related to Antonio Gramsci’s concept of hegemony. It includes elements of consensus and what Gramsci called “the armor of coercion.” Hegemony is exercised when it succeeds in universalizing particular interests to a large extent and protecting them with state coercion. This implies an important role for theoretical concepts in guiding and legitimizing practice and those who develop and propagate these concepts. It opens space for discourse as an important part of any explanation of social power relations (Cox, 1983 [1993]). A Gramscian perspective does not stop at the level of analyzing hegemonic world views (see Boin et al., 2009); it also inquires into the other sources of power of the actors in the field, such as their position in the economy and in the institutional framework of a given society (Scherrer, 2023). From this perspective, the study of mission drift requires an analysis of the prevailing hegemony.

In the following, I will apply all three theories to the German case. The empirical basis for the case study is primary sources such as the organizations’ websites and reports, as well as interviews with experts and stakeholders conducted under my supervision. The interviews for the study of German savings banks were conducted by Halyna Semenyshyn (2018), in addition to participatory observation of their lobbying activities at the European level. The analysis of two Landesbanken, Helaba and West LB, was conducted by Xenia Polikhronidi (2012, 2017). Details on their field research strategies can be found in their respective publications. Important secondary sources were three comprehensive studies on mission drift in the German public banking sector (Gubitz, 2013; Kirchhoff, 1987; Seikel, 2017).

The structure of the German public bank sector

Germany’s large sector of public banks operates at four different levels. At the municipal level, there were 353 savings banks (Sparkassen) in 2023. These savings banks are public institutions whose governing bodies are local authorities. They accounted for 17.6% of the total assets of the German banking system, 30.3% of corporate loans, and 35.9% of retail deposits. At the level of the states that make up the Federal Republic of Germany, each of the 16 federal states has a promotional bank (Bavaria has two). According to their statutes, they have the public mandate to support the respective federal state and its municipal corporations in the fulfillment of their public tasks, in particular in the areas of structural, economic, social, and housing policy. They have gained in importance as the former main banks of the respective state governments, the Landesbanken, have lost the institutional liability and guarantor liability of their guarantors, the state governments and, in some cases, the savings bank associations. The promotional banks accounted for 3.9% of total assets. The Landesbanken have undergone some consolidation. Nevertheless, the five surviving banks still accounted for 8.9% of total assets. Two banks operate at the national level: the KfW Group (formerly Kreditanstalt für Wiederaufbau) and the much smaller Landwirtschaftliche Rentenbank. KfW is the third largest German bank in terms of assets (€561 billion; about 40% of the largest bank, the private Deutsche Bank). KfW also has an international presence through KfW Entwicklungsbank (KfW Development Bank) and two subsidiaries, KfW IPEX-Bank for export-related corporate finance (€24.2 billion in new commitments) and DEG for loans to private companies investing in developing countries (€1.9 billion in new commitments). KfW Entwicklungsbank is one of the largest state-owned banks supporting development abroad (€9 billion in new commitments). ¹

Two different German public banking groups were selected for the case studies. The two differ in their degree of mission drift. The least drift is found among the Sparkassen. The clearest case of mission drift is found among the Landesbanken, but also to varying degrees. The differences among the Landesbanken provide insights into the specific factors driving mission drift.

Savings bank’s and Landesbanken speculative tendencies

Much has been written about the positive impact of German public banks on Germany’s economic development (Griffith-Jones, 2016; Marois, 2021; Mettenheim and Butzbach, 2017; Naqvi et al., 2018; Volberding, 2021). However, many Landesbanken have ventured into proprietary trading or the sale of derivatives and other risky securities, which are generally not considered part of their public mission. The extreme case was Sachsen LB (Landesbank of the State of Saxony), which acquired risky securities through off-balance-sheet special-purpose vehicles amounting to more than 1100% of its equity capital (for comparison, the private Deutsche Bank had 114%; Hüfner, 2010, p. 5). As recently as 2019, Nord LB had to be bailed out by the Association of German Savings Banks and the government of Lower Saxony because of its big bet on shipping loans had gone sour (Storbeck, 2019). A few years earlier, HSH Nordbank, then the world’s largest ship financier, was even forced to be privatized by the EU Commission (Storbeck, 2018). To what extent have savings banks and Landesbanken been involved in the process of financialization?

In Germany, savings banks are public institutions that are governed by local authorities. Their activities are regionally limited, that is, they can carry out all normal banking activities within a certain area. A savings bank is mainly financed by savings deposits and grants loans to the local economy and population. It invests its liquidity reserves with its Landesbank (since the 1970s also with private banks), where they can be used for purposes other than regional economic development. Compared to the Landesbanken, the savings banks as a whole continue to adhere to traditional risk-minimizing behavior. The traditional deposit business with non-banks still accounts for 78% of their total liabilities in 2022 (own calculation based on DSGV, 2023: 93). On the asset side, lending to non-banks dominates.

As a rule, savings banks invest part of their profits in their reserves and distribute the other part to the locally responsible bodies of the savings banks or (depending on the respective statutes) allocate it directly to charitable purposes or to their charitable foundations (Lepper, 2003).

Savings banks survived well during and after the financial crisis. However, they did not fully resist the financialization trend. First, they also sold securities, including Lehman Bros. certificates, without giving proper advice to their clients, as the courts have ruled (LTO, 2011). Second, through their control of DekaBank, the central provider of asset management and capital market solutions for the Sparkassen-Finanzgruppe, they participated in the creation of investment certificates. In 2025, the German Federal Financial Supervisory Authority (BaFin) found that the savings banks had not sufficiently informed their customers about the downside risks of so-called turbo certificates. Three out of four customers lost an average of EUR6358 each over 5 years (BaFin - German Federal Financial Supervisory Authority, 2025). Third, some of them advised their municipalities to engage in active management with the help of speculative financial instruments (Richter, 2012). Fourth, the remuneration of the top management of savings banks is almost twice as high as the next group of well-paid executives in public hospitals, which is not in line with the remuneration of management in state-owned enterprises (Papenfuß et al., 2023). Fifth, they are co-owners of the Landesbank through their associations. However, where they have exercised direct influence, for example, with regard to Helaba (Landesbank of the States of Hesse and Thuringia), risk-minimizing strategies have been implemented (Polikhronidi and Scherrer, 2017). And most recently, the Association of Savings Banks seriously considered offering its customers the opportunity to trade crypto assets. While the association ultimately decided against such trading, it nevertheless recommended the introduction of crypto wallets for savings bank customers (Atzler, 2022). DekaBank, part of the Sparkassen-Finanzgruppe, offers the purchase, sale, custody, and management of cryptocurrencies for its institutional clients (Kahl, 2025).

The Landesbanken show significantly more characteristics of financialization, especially in the run-up to the financial crisis of 2007/08. On the liabilities side of their balance sheets, they relied much more heavily on capital market funding than other public and private banks (Deutsche Bundesbank, 2009: 42). On the assets side, they were also more involved in securities trading and interbank business. Loans to non-banks accounted for only 36% of the balance sheet in 2008 (Noack, 2009), but rose to 47% in the aftermath of the financial crisis (own calculations based on Deutsche Bundesbank, 2024a: 24-25).

In 2007, the Landesbank of North Rhine-Westphalia, WestLB, held 41.7% of its securities for trading purposes. Securities accounted for 32.5% of the bank’s assets. The trading volume of derivatives was nine times the value of assets. At Helaba it was 3.4 times assets, but at Deutsche Bank it was 24.5 times, the extreme among German banks. Another example of the intertwined nature of financialization is the fact that 93.7% of Bayerische Landesbank’s trading was in derivatives, not to hedge its own risks, but solely for trading (Hardie and Howarth, 2009: 1024).

The degree of internationalization was equally advanced, and even more so than for the private big banks. In 2007, 71.3% of WestLB’s assets were claims on other countries. At Helaba, the Landesbank für Hessen und Thüringen, the figure was 52.2%, and at Deutsche Bank it was 44.7% (Hardie and Howarth, 2009: 1027). The risks taken in trading and buying international securities led to substantial losses for the regional state banks when the crisis erupted, causing some of them to lose their independent existence (Polikhronidi and Scherrer, 2017). A large part of these losses had to be covered by taxpayers. The public bailout of the Landesbanken amounted to EUR40.3 billion (Finanzwende, 2019; see also Detzer et al., 2017). Some Landesbanken were accused of engaging in illegal securities transactions, known as cum-ex dividend trades, which cost German taxpayers nearly one billion euros (Iwersen and Votsmeier, 2022). Furthermore, in 2015, HSH Nordbank was fined for aiding and abetting tax evasion by wealthy clients by transferring assets to shell companies in Panama through a subsidiary in Luxembourg (Strozyk, 2015).

The actors driving financialization

How did public banks come to engage in risky securities markets to such an extent beyond their public mission? Answering this question requires an analysis of the many actors involved. These include the top management of public banks; regional, national, and European public officials; regulators; and private competitors. I discuss their behavior in the light of principal-agent theory and sociological new institutionalism. Hegemonic discourse theory will draw attention to the non-stakeholder actors and discourses that create an enabling environment for mission drift.

Top management

The charismatic first head of WestLB, Ludwig Poullain, pushed the Landesbanken into areas previously occupied by private banks in the early 1970s (Polikhronidi and Scherrer, 2017). As the management literature tells us, managers are mostly driven by concerns for their own compensation, autonomy, and prestige, which can best be satisfied by expanding the business into supposedly profitable areas (Kirchhoff, 1987: 49; Chen and Bozeman, 2013). As principal-agent theory has pointed out, the agent, in this case management, can pursue these objectives even without the explicit approval of the principal, the owners, because of information asymmetry (Shleifer and Vishny, 1998). From the sociological new institutionalism, we learn that management can be exposed to isomorphism through hierarchy, rivalry, or professionalization (DiMaggio and Powell, 1983). For all three channels, empirical evidence can be found in the case of the Landesbanken management with regard to a convergence towards the behavior of the private financial sector. Poullain imitated the goals and behavior of private banks, which was reinforced by the significant coercive and normative influence of the government of North Rhine-Westphalia, which was interested in a strong and competitive Landesbank (Polikhronidi and Scherrer, 2017). Professionalization was furthered by attracting top managers from private banks (Gubitz, 2013: 151, 165, 254).The most recent example was in 2021, when KfW hired as its new CEO Stefan Wintels, the long-time head of Citigroup Germany, who specialized in mergers, acquisitions, and IPOs and had advised the city of Hamburg on the privatization of the then HSH Nordbank (Dohmen, 2021).

The owners: Governments and savings banks associations

In the longer run, especially after management failures, it is less likely that mission drift would have occurred without support from the political level. Indeed, the state governments supported the expansionary course of the Landesbanken at an early stage. In some cases, they were even the driving force behind the removal of the public mission from the statutes and charters of the Landesbanken. According to testimony in parliamentary hearings and interviews conducted by Benjamin Gubitz with board members and managers of the Landesbanken, the public mission played no role in the business models or self-image of most of these regional Landesbanken, with the exception of the two institutions that did not incur losses during the crisis: Helaba and Nord/LB. None of the Landesbanken linked bonuses for top management to the fulfillment of a specific public mandate; bonuses were linked only to standard management objectives. There is no further evidence that representatives of the respective governments criticized management for their expansionary business models (Gubitz, 2013: 230–35, 238, 263). In the case of SachsenLB, Saxony’s prime minister, Georg Milbradt, who holds a doctorate in finance, was even enthusiastic about the entrepreneurial spirit of his bankers: “If the Saxon market is too small, it only makes sense for a state bank to become active on the international capital market. We can be proud that we have an internationally competitive bank.” (mdr, 2022; translation by the author). Milbradt was forced to resign after it was revealed that he himself had invested in investment funds of the now bankrupt Sachsen LB with a personal loan from the bank (Amann, 2008).

The principal-agent problem also appears in public choice theory (Buchanan, 1967). From this perspective, the behavior of politicians is easily explained by the fact that the agent (the politician) is poorly supervised by the principal (the electorate) and has ample incentives to expand the mission of a Landesbank: to obtain a shadow budget for political pet projects, to promote employment, to be able to offer lucrative positions to friends (or foes), or for the prestige that comes with having an internationally recognized bank in the fold (Kirchhoff, 1987).

At the level of national politics, politicians such as Finance Minister Karl Schiller (1966–72) and State Secretary for Finance (and later longtime head of the Bundesbank) Karl Otto Pöhl advocated expanding the mandate of public banks to include increased competition in investment banking, that is, to break up the oligopoly of the three major private banks of the time (Blohm, 1988; Poullain, 2007). According to their Keynesian macroeconomic reasoning, more competition would lead to a faster transmission of interest rate changes to the economy (Kirchhoff, 1987: p. 53). In doing so, they seem to have responded to the demands of the industrial corporations (see below) and the requirements for the functioning of Keynesian economic policy. At that level and at that time, supporting the entry of public banks into investment banking was a case of adjusting the public mandate to what was perceived to be in the general public interest.

However, Schiller’s and Pöhl’s exclusion as Social Democrats from the networks of private banks may also have contributed to their enthusiasm for a larger role for the Landesbanken, some of which were controlled by their party members. In the 1990s and 2000s, the federal government’s ignorance of the risky expansion activities of the Landesbanken may be better explained by the prevailing discourses at the European and international levels.

The European level also began to play a role with the decision to create a single market by 1992. The vision for such a single market was to remove all regional or national barriers to free competition between private companies. Therefore, the European Commission’s Directorate General for Competition was readily available to follow up on complaints from private banks about the alleged unfair advantage that public banks gained from state liability guarantees (Seikel, 2017). It also forced WestLB to adopt the legal status of a joint-stock company, which removed the possibility of binding the management to a specific public mandate (Kirchhoff, 1987: 149).

At the international level, both the IMF and the World Bank called for the privatization of public banks, with some success (Hanson, 2004). More important for the German public banks was the new regulatory framework, the 1988 Basel Accord (also called Basel I), in response to the Latin American debt crisis (to which the savings banks had not contributed). This accord bore the stamp of Anglo-Saxon “arm’s length” banking rather than continental relationship banking (Oatley and Nabors, 1998). Basel I required a higher capital base and a classification of credit risk. The higher capital requirements forced public banks to become more profitable because their owners were reluctant to provide additional capital. The new capital had to come from retained earnings. In cases where owners did provide additional capital, they were accused by the European Commission of providing state aid that distorted competition (Seikel, 2017). The classification of credit risk had an impact on the relationship banking style of the savings banks. This became even more pronounced with the regulatory response to the Asian crisis, Basel II, in 2004. Since the creditworthiness of many small- and medium-sized enterprises was not assessed by independent rating agencies, they had to be classified as riskier, which meant that savings banks had to hold more capital when lending to their traditional customers. The alternative left to them was to develop expensive internal risk assessment models (Gubitz, 2013: 78–81).

These regulatory changes at the international level increased the importance of rating agencies. When the state guarantee for the Landesbanken was withdrawn in 2005, they lost their AAA ratings. This loss significantly increased their funding costs. In order to maintain at least an investment grade rating, the Landesbanken were under pressure to increase their return on equity, that is, to engage in riskier business. Later, the ratings of their financial assets played a crucial role in the downfall of some of the Landesbanken, because they relied too much on the ratings and invested far too little in their own ability to assess risk (Gubitz, 2013: 268–70).

Since the more prudent savings banks are to varying degrees co-owners of the Landesbanken, one might have expected them to exert a moderating influence. The record is mixed. Where the regional associations of savings banks have long been dominant co-owners, they have indeed kept the Landesbank closer to its original mandate (Helaba, LBB, and NordLB). Where these associations held only a minority stake, no limiting influence was found (Gubitz, 2013: 193). The comparison between Helaba and WestLB reveals a difference in governance. Helaba’s decision-making process for large loans included more checks and balances involving the bank’s owners (Polikhronidi, 2012). The better alignment of management activities with the interests of the owners provided by the governance mechanism fits the principal-agent perspective, but also the coercive channel mentioned by institutionalists. The role of discourse is underscored by a 1987 evaluation report on the savings banks, which called for greater involvement of the Landesbanken in international and securities business, which was seen as particularly promising and profitable (Blohm, 1988).

In the case of the catastrophic losses of the German public bank IKB, in which KfW held a majority stake, the government must also share the blame. With the aim of establishing a synthetic securitization market in Germany, the Ministry of Finance, together with KfW, had encouraged IKB to set up large asset-backed commercial paper programs (Moslener et al., 2018: 79).

The Federal Financial Supervisory Authority (BaFin) saw securitization as a way to spread risk and thus reduce the risk of loan default for individual banks (Gubitz, 2013: 212). The agency was not necessarily captured by those it was supposed to supervise, but it was beholden to the hegemonic financial discourse of the time (see below). It took a criminal investigation into BaFin’s supervision of the fraudulent payment processor Wirecard for the government to grant BaFin more supervisory powers in 2022 (Frühauf, 2022).

The private competitors and business customers

As long as public banks were limited to serving low-income people or taking long-term risks for infrastructure work, private banks did not lobby against them. As soon as the public banks moved into their lucrative investment banking activities in the late 1980s, the private bankers’ association began to mobilize against the state’s presence in banking. Since the German savings banks are municipal organizations and therefore enjoy strong support from local governments, the private sector has not yet succeeded in opening this sector to private investment. It took the scandals of the Landesbanken and then, most decisively, the support of the European Commission to remove state support for public banks (Seikel, 2017). The effects of competitors’ actions are usually outside the scope of principal-agent theory.

Private banks also influenced the mission drift of public banks in a more indirect way. As workers became wealthier and wages were no longer paid in cash, private banks began to compete with savings banks for working-class customers. This reduced the profit margins of the savings banks and made them more likely to support the profit-raising strategies of the Landesbanken, of which they were part owners. Better pay for managers in private banks, as well as the traditional social prestige of private bankers, left their mark on public bank managers, as explained by institutionalism (see “Top Management” above).

In contrast to the private banks, the large corporations favored a more active role for the Landesbanken. They were interested in more competition with the three big private banks. This interest waned over time as these corporations were able to tap international financial markets themselves or use foreign banks with subsidiaries in Germany. However, the original customers of the savings banks and Landesbanken, smaller companies, had grown in the dynamic 1960s and began to internationalize in the 1970s. If the public banks did not want to lose these customers, they had to offer them a broader range of financial services (Kirchhoff, 1987: 114, 118). This demand from the customer side certainly contributed to the expansion of the Landesbanken’s activities, but it cannot explain the immense scale of international and financial product trading in the 1990s and 2000s (Gubitz, 2013: 187–188).

The actors’ embeddedness in the discourse of financialization

While it is possible to point the finger at certain individuals or groups of actors as being particularly active in promoting the mission drift, an assessment of the motives of the various actors shows that no particular group of actors can be blamed for the overall drift towards financialization. The theory of hegemonic discourse provides an explanation for this phenomenon.

The mission drift of the Landesbanken took place under the influence of Keynesianism in the late 1960s and 1970s. It was a time when public intervention to strengthen the industrial base and macroeconomic management were welcomed by the ascendant Social Democrats in West Germany. The losses of HELABA and WestLB, however, had nothing to do with these goals. They occurred because of real estate (Landtag, 1978) and currency speculation (Neßhöver, 2012), an example of mission drift. The protagonists in politics, especially Schiller and Pöhl, and some leaders of the Landesbanken, especially Prof. Wilhelm Hankel at HELABA, subscribed to a moderate version of Keynesianism. Nevertheless, the general political-economic climate in West Germany was still characterized by so-called ordo-liberalism (Roufos-Kanakaris, 2023). Thus, Keynesianism was important in legitimizing the growth of the Landesbanken, but it was not hegemonic.

While WestLB continued to be plagued by scandals into the 1990s, the general mission drift of the Landesbanken, that is, their participation in the processes of financialization, occurred with the onset of neoliberal hegemony in the 1990s. Financialization is embedded in neoliberal hegemony. It has a class-based origin and is reinforced by the dominant state in the global economy, the United States of America. The main goal of neoliberalism is to defend the rights of private property owners, especially money owners. It includes a “belief in competitive markets” and a “market-friendly, limited state” (Schmidt and Thatcher, 2013). Neoliberalism gained traction in the 1970s when U.S. big business grew weary of the environmental movement and powerful unions in the construction and transportation industries, which were protected by law from competition, and when the U.S. foreign policy establishment, along with U.S. transnational corporations, lost patience with Third World insurgencies. In other words, it is an ideology of revolution from above, designed to roll back the demands of other social forces (Scherrer, 2014).

The ideas of neoliberalism resonate not only with the financial asset-holding class, but were also present in the European competition policies mentioned above, as well as in the worldviews of ordinary people. The acquiescence of many ordinary people is also the result of the pervasiveness of neoliberalism in everyday life. In the financial sphere, a growing proportion of the population in many countries (though not yet in Germany) is now dependent on the capital markets for their retirement. Moreover, many are tied to the financial system as debtors (Langley, 2008). The “split identity of workers” (Boyer, 2010) as wage earners, consumers, pension fund holders and real estate speculators has also contributed to this acquiescence.

The theory of hegemonic discourse draws attention to the role that ideas play in practice. Financial theories, such as the Efficient Market Hypothesis, justified the new market orientation and provided guidance to financial actors. The EMH became dominant in the field of financial economics. This hypothesis states that the prices of financial products, such as currencies, stocks or derivatives, will reflect their “true” price the more freedom financial actors have. In these markets, buyers and sellers act rationally based on the information available to them. The outcome of their exchanges is efficient because markets lead to the efficient allocation of resources, that is, capital, labor, and land (Fama, 1970). The popularity of the efficient market hypothesis, despite its not very plausible assumptions, was well explained by MacKenzie’s performativity thesis (MacKenzie, 2006). The EMH was used to scientifically justify the liberalization of financial markets and the use of derivatives (Blyth, 2003). Not only did it provide academic support for derivatives trading at the Landesbanken but it also seemed plausible to regulators (see above). EMH’s emphasis on market efficiency challenges the traditional relationship banking model of public banks. During the 2007/08 crisis, the adoption of the EMH was identified by a rapidly growing group of critics as one of the main causes of the crisis (e.g., Taleb, 2008). In the eyes of EMH proponents, however, a crisis would not disprove the EMH; a crisis would reveal that high pre-crisis profits were due to high risks (MacKenzie, 2006: 67).

Given this neoliberal environment, it is not surprising that most stakeholders in the Landesbanken accepted or even encouraged the adoption of the goals and behaviors of private banks.

How to keep public banks on mission

When the mission drift of public banks is seen in the light of neoliberal hegemony, there are no easy answers for stopping or reversing this trend. Advice based on principal-agent theory easily reaches its limits, not least because the theory itself is part of the neoliberal hegemony (Christiaens, 2020). In the case of public banks, recommendations based on principal-agent theory for more professional staff, less direct political influence, and strict market orientation have not prevented colossal failures (Hartwich, 2010).

The sociological new institutionalism is less a normative and prescriptive theory than the principal-agent theory. Therefore, no concrete advice can be derived from it. Hypothetically, one would have to look at what brought about the current state of norms, that is, the channels of isomorphism, and try to close them. But there would be no theoretical guidance as to why, how, and by whom these channels should be closed.

Discourse theory is not so well known for its prescriptions. It does, however, start from the premise of a contested social space (struggles for hegemony) and therefore takes counter-hegemonic forces into account. Since the material promises of neoliberalism neither trickle down to large sections of the working class nor lead to economic stability, there are potential actors and counter-discourses. The question is how to strengthen them, and what needs to be done concretely to ensure that public banks continue to fulfill their public mission.

As shown above, the savings banks have remained closer to their public mission than the Landesbanken. So, what can we learn from the savings banks? The main obstacle to the drift towards financialization of the savings banks was the regional principle, that is, their restriction to a specific region. However, some of the larger savings banks, such as the one in the city of Cologne, reached a size that tempted them to venture into international finance and derivatives (Kreisparkasse Köln website). The lack of opposition to WestLB’s expansion by the German Savings Banks Association should also caution against too much optimism about the prudence of the savings banks. The example of Helaba shows that, in addition to the regional principle, another important principle is needed to curb excessive risk-taking: the willingness to install a governance structure with many checks and balances. But even such a governance structure will not work if the key players do not share a common awareness of the risks involved. At Helaba, the institutional memory of the near bankruptcy in the 1970s underpinned this awareness (Polikhronidi and Scherrer, 2017).

From the perspective of discourse analysis, this awareness seems to be of paramount importance. If the key actors of public banks are not aware of the public mission and do not identify with it, it is unlikely that they will remain within the public mission. Therefore, a strategy to keep public banks in the public service must start with a general debate about the content of the public mission and how public banks can contribute to it. As a place where systematic knowledge is produced and where future practitioners are trained, academia could play an important role in this debate. However, this would require that the neoclassical hegemony in economics be dissolved in favor of a plurality of paradigms.

As long as private banks (or hedge funds or private equity firms) are seen as models, little change can be expected. Therefore, a strategy to preserve public banks without limiting the speculative behavior of private financial actors will not be sufficient to keep public banks on track. It also requires a change in European policy as well as in the policies of the major international organizations dealing with finance, such as the IMF, the World Bank, and the Basel Committee. Given the overall hegemonic capitalist structure, the US Treasury should not be left out. This will require a broad international coalition of “friends of a publicly controlled, sound financial system.” Since this is quite an ambitious task, the first steps are to defend the existing public banks, to discuss the content of a public mandate in banking, and to raise awareness, especially among the key actors in public banking, of how a public bank true to a public mandate can be beneficial to society.

Conclusion

Explanations for the mission drift of some German public banks can be found in all three applied theories. Principal-agent theory emphasizes the limited control of principals over agents. Bank managers may not adhere to the mandate they receive from public officials, and public officials may interpret the laws establishing public banks differently from the original intent and/or the public’s expectations of how a public bank should behave. Mission drift was most pronounced when bank management, under a mandate from public officials to increase returns, received little supervision and the public was kept in the dark about the bank’s risky activities. Sociological neo-institutionalism draws attention to the channels that lead public banks to imitate the behavior of private banks: the expectations of state officials, the perceived sophistication of private banks, and professional standards in finance. The theory of hegemonic discourse places the mission drift of recent decades in the context of the financialization trend under neoliberal hegemony, which denies a positive role for public banks in society.

These theories also provide answers to the question of how mission drift can be mitigated. Where the more prudent municipal savings banks, rather than state governments, controlled the Landesbanken and institutionalized due diligence processes for large financial transactions, mission drift, and financial losses were avoided. From the perspective of institutionalism, the prevailing norms would have to change. The perspective of the hegemonic discourse would agree, raising the question of what counter-hegemonic forces are emerging that would bring about a renewed awareness of the special role of a public bank in society among bank managers, public officials, financial discipline, and the general public. The immense challenges of the transition to a sustainable way of production and consumption could be a starting point to give public banks a clear mandate to support this transition and not to imitate financialization. The positive role played by public banks in responding to the COVID-19 pandemic and the renewed interest in industrial policy may be signs that public banks are returning to their public mission, but it is too early to tell. The interest of German public banks in crypto assets dampens my optimism.