Wouter Bos, the Minister of Finance, is saving the odd Dutch bank. Fortis Bank Nederland and ABN AMRO Nederland have been joined by ING. The quartet is nearly complete. Is this a waste of tax payers’ money or investment in a good cause? A number of traditional Dutch proverbs will help us to decide.
Trust comes on foot and leaves by horse (It takes a long time to gain trust but you can lose it quickly.)
It is a much better idea to prevent the horse leaving at all than to have to catch it on foot. ‘More haste, less speed’, but in this case it looks as if the government support is the proverbial exception to the rule.
Prevention is better than cure
Preventing doubt being cast on a bank’s solvency and liquidity will stop the decline of confidence in that bank. Considering what happened to Lehman Brothers, it is not even certain whether or not a cure, via a reorganization after first going into liquidation, is an option. Prevention is certainly preferable.
Cost goes ahead of gain (You must lose a fly to catch a trout.)
An investment now means that Minister Bos can prevent many national and international ING savers (with an estimated €320 billion altogether) from making an appeal to the government’s guarantee. That would be a disaster. It is worth noting that by strengthening ING’s capital the government has increased its chances of getting its investment back with interest.
Gentle surgeons create stinking wounds (Desperate diseases require desperate measures.)
Special conditions are attached to the government’s injection. Not all of them will appeal to the banks’ boards of governors. However, will they be tough enough not to leave any stinking wounds? Will they solve the problem of bankers acting opportunistically? Capping bonus payouts or banning them altogether is part of the package, but salaries could also be pruned and boards could be fired. Paradoxically these tough measures could also lead to a board of governors not wanting to go to the government for help. Unfortunately, that would mean that if the government had to intervene at a later stage the cost would be disproportionately higher for the reasons mentioned above. Wouter Bos was quite gentle with the ING board: they only had to relinquish their bonuses. The German Minister of Finance, Peer Steinbrück, chose a much tougher approach. I hope that, for the sake of the finances of the German government, this doesn’t mean that the interventions will come too late rather than on time. Only time will tell whether the gentle approach of Wouter Bos or the tough one of Peer Steinbrück was right.
Riches alone make no man happy
True, but bonuses certainly help. Considering the perverse effects of bonuses on the banking world – especially in those US investment banks that are now gone, or are no longer independent – and the lack of monitoring by the shareholders, supervisors will have a very difficult task added to their workload: supervising bonuses in the banking world. In the future, bonuses will boost bankers considerably less than they used to.
Don’t sell the skin till you’ve caught the bear
All these measures might make a difference but the problems are far from over. The bear has not yet been caught and the skin is hopefully not sold yet. By the way, don’t forget that selling the skin will be affected by a moratorium on short selling issued by the Netherlands Authority for the Financial Markets (AFM).
Oscar CouwenbergProfessor of Law and Economy
|Last modified:||08 April 2016 09.37 a.m.|