Archive for Banking System

The Social Face of Banking

Posted in Financial Markets with tags , , on March 8, 2009 by evd101

By Paul van Oyen and Erik L. van Dijk


The world has been roughly shaken up by the rather un-social behavior of the Western banking system, especially in the U.S. and in Europe. As a result, the banking world is shaking on its very fundament of trust and stability. It sounds unbelievable that the greater part of the banking system in the USA and in Europe has fallen prey to the entanglements of greed and self-interest. The push for shareholder-value has driven the banking system into products that were so complicated that they could cover up the real risks as long as the markets kept on moving upwards. Banks have engaged in all kinds of complicated financial deals based on property investment, on life insurance policies and option schemes backed up by guarantees issued by other respectable banks in the West. These, and their derivates, are euphemistically called structured loans. On top of this there are many more forms of securitization of debt which have, as yet, not attracted the attention of the public eye.[1] In short, the western banking system is gravely sick and it looks as if the tax payer will have to face the bill if the banking system is to survive. There is no other option in present day circumstances. Here are some causes of our predicament:


·      Over a long period the system has been flushed with liquidity from the Central Banks, notably the Federal Reserve Bank. There was no lack of money for many years. Banks were like a cornucopia.

·      Low interest rates invited lenders and borrowers to increase lending and borrowing, creating an atmosphere of ‘manageable credit’ without looking at the facts. Rising property prices were considered a sound basis for repayment schemes. This turned out to be a major error of judgment.

·      Twenty-five years of being focused on ‘shareholder-value’ rather than on the interests of all involved as would be fitting for prudent leadership. The take-over of Dutch ABN-AMRO Bank for 80 billion Euros marked the limit of this seemingly endless sky.

·      Selling bad loans under the guise of triple A ratings is almost tantamount to telling lies. Supervision of banks failed. Accountants were condoning.

·      The remuneration of the top and its executives by means of a bonus system that had gone completely ‘out of measure’.


When, finally, the world woke up to these facts the global banking community was no longer ready to allow the interbank market to function properly. This attitude of mutual lack of trust only aggravated the situation immensely. Every bank(er) mistrusts the other bank(er) because they know how much ‘junk’ everyone has taken on their books. With taxpayers’ money ‘bad banks’ are now created to harbor all those bad loans. For the time being the interbank market is only partially available for funding the outstanding loans of the banking system. Governments have to step in with taxpayers’ money to fill the gaps left by the banking system. The result is a banking crisis of – as yet – unseen proportions and a number of banks have had to be taken over by various governments by way of a bailout. No wonder that in these circumstances new credit lines are not easily available for business and industry although they are highly needed.


As a further crisis measure banks in the Netherlands are actively closing down on the ‘underside’ of the market and refusing basic banking services to a number of enterprises on the grounds that they may be prone to the white washing of cash payments, even if these enterprises have obtained every form of ‘good conduct’ certificate from the local authorities and from the tax authorities. In short, using a Dutch saying: banks are more Roman than the Pope in Rome himself. For a public function, like banking, this is an unacceptable attitude and a number of businessmen are suing the banks, successfully, in this respect. Even if they are successful the attitude of the banks is fundamentally unsocial and it is important that this arrogance should be redressed. Such a ‘retuning’ of activities may be achieved from the inside and with the help of the government and the central bank, but it could also be achieved by setting up a new banking entity that would be willing to act, once more (as 100 years ago), as a Volksbank (people’s bank). The origin of the now respectable (triple A rating) Rabobank comes from this background.


Paul van Oyen: In my opinion the market is ready for such an initiative. In 1986 I had the unique opportunity of starting a small merchant bank in Amsterdam funded by investors from the Middle East (Bahrain and Kuwait) and from the UK. Unfortunately, the bank was converted into a savings bank. In its short time of existence as a merchant bank the bank was able to prove its useful function as a source of trade finance based on the bill of exchange.


Although the world’s outlook has dramatically changed over the past 30 years, the fundamentals are still the same. It is those fundamentals that are now under threat to remain neglected. This should not happen and it opens, therefore, a good opportunity for a new vision in banking: its public function as a service institute to the community based on the wellbeing of all involved. The function of a bank is to facilitate prosperity for all and not the excessive incomes of its executives. The duty of a bank is to get the facts and state the truth. Only the truth will vouchsafe credit, not lies or manipulated stories and dreams. Nobody has ever been able to actually eat an illusory apple.

[1] Renowned scholars like Noble Prize laureate Dr Harry Markowitz did however warn people for the innate risks of secured products. Already back in 1999 van Dijk and Markowitz gave a lecture at Nyenrode University at a securitization seminar in which they stressed that diversification is an even more important risk management tool for this kind of products than it is for traditional products. Many of the securitized mortgage portfolios that were an important cause of the crisis were not properly diversified: they consisted of mortgages only, to the same class of buyers and from one country.