The nationalisation of the Dutch Fortis assets has led to euphoric reporting in some Dutch newspapers, as if Holland beat Belgium in soccer. Minister of Finance Bos is lauded for negotiating a bargain price and president Wellink of the Dutch central bank (DNB) for his foresight and his unfaltering protection of ABN-AMRO.
In truth the Dutch authorities have communicated inconsistently and at times irresponsibly. In the process they have reduced their credibility. It remains to be seen whether the nationalisation is a good deal for the Dutch taxpayer. DNB’s performance in the crisis has been overrated. Above all, the failure of the Benelux authorities to save a cross-border financial institution is a setback for European integration. Let me elaborate on each of these points.
After the first deal was announced on September 28, Bos claimed that Fortis was a solid bank. He also argued that the joint capital injections by the Benelux authorities would restore confidence. It remained unclear, however, why a solid, well-capitalized bank would have to divest ABN-AMRO (at a huge loss), as was required under the terms of the first deal. Later that week, Bos suggested in Dutch parliament that certain off-balance sheet liabilities of the Fortis Group had been unknown to Dutch authorities at the time of the ABN-AMRO takeover, implying either incompetence by DNB or lack of disclosure by Fortis. Bos had to retract this statement quickly. The low point in Dutch communication was the press conference on October 3, in which the second deal was announced. Bos explained that he had to spend 16.8 billion of taxpayers’ money to prevent the sound Dutch Fortis assets from being contaminated by problems in Belgium. This was an irresponsible statement. A Minister of Finance ought not to undermine the confidence of a bank in a befriended nation.
Compared to the 24 billion euro that Fortis paid in 2007 for the Dutch assets of ABN-AMRO, 16.8 billion for the combined banking and insurance activities of ABN-AMRO/Fortis in the Netherlands seems a low price. But compared to Fortis’ market value at the time of the deal, the price was very high. No one knows the future value of these assets and whether or not the taxpayer will get a decent return on his investment. Yet there are reasons to be sceptical. The current crisis will probably have severe implications for the way in which banks do their business. One may expect less leverage and more regulation and supervision. In the Netherlands, Bos has argued that financial products should become more understandable to consumers, supervisors and banks themselves. A return to plain vanilla banking is welcome, but will undoubtedly have repercussions for profits margins and shareholder value. Add to this the lower incentives for efficiency and cost control under state ownership and it remains to be seen whether the taxpayer will benefit.
DNB: competent or lucky?
From the outset, it was clear that DNB was not in favour of the takeover of ABN-AMRO by the consortium of RBS, Fortis and Banco Santander. DNB’s preferred solution was to create a Dutch champion through a merger of ABN-AMRO and ING, or, failing that, the Barclays deal. DNB now prides herself on her early assessment that the consortium deal could lead to financial instability. Be that as it may, DNB approved the takeover. Unlike academics, supervisors are not in a position to say “I told you so”, but need to align words and deeds. It is also worth recalling that at the time of the takeover DNB’s main worry was the complexity of the carve-up of ABN-AMRO among the three members of the consortium. But that hasn’t been the issue recently. Fortis’ collapse was mostly related to a failure to find sufficient capital and the need to divest Fortis assets at a decent price within a fixed time schedule.
Instead of objecting to the takeover, DNB built a number of safeguards in the integration process which were designed to protect the Dutch ABN-AMRO retail bank but may have made it more difficult for Fortis to operate in an increasingly hostile environment. While DNB could focus on securing a careful integration of ABN-AMRO in the Fortis Group, it was left to the Belgian lead supervisor to manage to complex Fortis case during the deepening of the credit crisis. The stain from the Fortis collapse will be on the Belgian supervisor, not on DNB.
DNB and the ABN-AMRO shareholders were also very fortunate that LaSalle Bank, the sizable US subsidiary of ABN-AMRO, was sold just in time to Bank of America. Recently the Wall Street Journal reported that a disproportionate share of BoA’s problem loans originate from LaSalle. Without the carve-up, the losses and anxieties from ABN-AMRO’s US activities would now have dominated the news in the Netherlands. In recent weeks the share price of Aegon, a large Dutch insurer with sizable US activities, has collapsed due to the credit crisis. Fortunately Aegon is not a bank and doesn’t have to deal with the confidence issue that might have affected ABN-AMRO in a more nasty way. A thank-you note to BoA would be appropriate.
No problem ownership
No matter how one rates the performances of Bos and Wellink, the big loser in the past few weeks is the process of European integration. The Benelux authorities have not been able to jointly save a large cross-border financial institution which, according to Wellink, was fundamentally sound.
It will take some time before the dust settles and the background of the Fortis debacle becomes clear. With the benefit of hindsight we know that the deal, although strategically sound, was too expensive and badly timed. Fortis management also didn’t impress, especially with regard to communication and investor relations. But we do not know what went on behind the scenes, between Fortis and the national supervisors. There are many questions to be answered. On the cooperation between national supervisors; on the ability of small-country supervisors to oversee such a complex deal; on the impact of the DNB safeguards on Fortis’ ability to attract capital; on the effect of shielding ABN-AMRO on the groups’ liquidity management etc. etc.. Would events have unfolded differently if DNB would have publicly expressed unconditional confidence in and immediate support for the integration of ABN-AMRO in Fortis from the outset? We don’t know.
But we do know the end result. Lacking an adequate European supervisory framework and safety net, the national authorities fell back on the old national structures and carved up the business along geographical lines. Fortis collapsed because the Fortis problem lacked European ownership. When push came to shove, the “Benelux bancassurance” vision of the Fortis management was not shared and supported by politicians and supervisors. After the deluge, Wellink told on Dutch TV that “we have the opportunity to build a beautiful bank in the Netherlands”. So much for the European dream.
Maybe the lesson from the Fortis failure is that cross-border banking in Europe doesn’t work in the absence of European supervision and a European safety net, and that banks should withdraw behind national borders. One can make a case for a return to parochial banking in parochial markets, supervised by parochial supervisors, as the societal benefits of haute-finance may not outweigh the risks.
For the Netherlands, such a policy would entail a break with the past. In the past two decades, the Dutch government has allowed huge concentration in the Dutch banking sector. The idea was that Dutch banks should prepare for the European competition (Europe 1992, EMU and all that). In the meantime, consumers had to live with the market power of the big banks. Now that the European vision has broken down, the sensible thing to do would be to cut the big banks down to their original size, in the interest of consumers. Bos can start this process in a very easy way by not integrating ABN-AMRO with the Dutch Fortis Bank. The two parts can be taken to the stock exchange separately when the financial turmoil is over.