Face2Face

Against – Prof. Harrie Verbon

The Netherlands Should Nationalize the Utility Function of Banks

Nationalization of banks is currently, as Van Wijnbergen also mentions, seen as a last resort. Moreover, this remedy only applies to systematic banks, banks of such an importance that they will bring the financial system and real economy in danger whenever they go bankrupt. That leads to a problem: an institution that is not allowed to go bankrupt takes more risks in order to achieve higher profits. Profits end up with the bank, but whenever the risks taken turn out the other way, taxpayers have to pay the bill. Wijnbergen suggests that if ‘other remedies’ are used, taxpayers can be saved from the risky behaviour of the bankers. He refers to the measures taken at the European summit in Ireland last summer. In case of problems first the shareholders, bondholders and big savers must be called into account before the government and thus the taxpayer have to help out. Whether this will lead to less risky behaviour is highly questionable and even when mentioned groups are held responsible (so that they lost their deposited money), they will have no interest in revitalizing the bank afterwards. This requires the government to guarantee again.

Recently, the Euribor and Libor scandal (at which for example bankers of Rabobank manipulated their return rates for their own benefit) proved how difficult it is to eliminate risky and even fraudulent behaviour of bankers. This scandal resulted in a new crack in the confidence of the banking industry. Banks and bankers put at risk such a basic thing as money transferring by dangerous or immoral behaviour. We may even get to a point where people no longer receive their income or will not be able to pay their bills because the systematic banks destroyed the financial system. This should be avoided in any case. One possibility is to nationalize all (major) banks. I would support the idea, but there is not any political support for it. The dominant idea is that the market (despite everything) functions better then the government. However, there are less drastic solutions with the same effect. Nationalization of banks could be limited to nationalization of the so-called utility function of banks. This can be achieved by establishing a state bank which is only concerned with payment transactions. The latter is an idea of Harry Grosveld (1936) who recently submitted this clear and simple proposal. Such a bank does not even have to be established, because they already exist, in fact there are two: ABN Amro and SNS REAAL. The parliament more or less decided to sell ABN AMRO though, so SNS REAAL remains as a candidate. That has to become the “StaatsNutsSpaarbank”. This bank will be rescued at any time by the government, but may also not take great risks. Large speculative profits stay out, as well as devastating losses.

What happens to the other, not nationalized banks? They may continue to exist, but they will never be rescued by the government. Anyone who holds an account with such a bank knows that he or she is taking a gamble. These ‘betting exchanges’ will naturally shrink and no longer account for systematic banks.

In Favour – Prof. Sweder van Wijnbergen

When should the Netherlands nationalize their banks?

The nationalization of banks is the last resort. You only apply it at the time a bank has a structurally negative equity (obligations exceeds assets without the prospect of recovery) while the bank is still too important to fail. “Too important” means the bank is so intertwined with other companies, both on the credit and the debit side, that failure would cause unacceptable social costs. The downside to this is that big banks know that they are too big to really fail, what makes them less cautious: it is as if they get a put option on themselves as a gift from the taxpayer. Therefore minister Dijsselbloem is right in claiming that all other remedies must be considered before the taxpayers turn comes. I think it is a dramatically bad and dangerous argument if you nationalize banks in order to force them to boost lending. That will bring a bankruptcy closer. Currently there are objective reasons to be careful with the granting of credits, which also applies to government-owned banks. If a government does not acknowledge that she is preparing for a much bigger blow in the banking sector, creating a Poland-1992 scenario. That is where the Polish state banks (moreover, all banks in Poland were state banks at that time) failed, just because of politically motivated credits.

At this time, no bank evidently meets the conditions to proceed to nationalization. That seemed much less clear after the fall of the Lehman Brothers in 2008. After the initial capital injections into ING and other banks, there was uncertainty in the market about this. Wouter Bos might had to explain (in an early stage) when nationalization would play a role and why that was not on the agenda here. That would hand over a bench-mark and enables the bank to compare the situation of the bank with those conditions continuously. This way much less uncertainty would remain. Moreover the asset swap in January 2009 covered the uncertainty at that time as well. Now, four years later, the big banks are in a much healthier positions. Still undercapitalized, but on the way to a better capital structure with more equity and less debt.  At the time, Minister of Finance Wouter Bos claimed that nationalized banks in the end would be privatized in a profitable way. That is and was, of course, a completely implausible and illogical story. After all, you only nationalize a bank if it is irretrievably under water. That means it will cost you more then you receive to get the bank viable again. You should weigh out those costs against the social benefits associated with the survival of the bank: the profit of the stability of the system.

I think, however, that against these criteria (first exploit private options and then consider whether the costs are really lower than the systematic damage that will be prevented with a rescue) SNS should not have been nationalized. Private funding options remained unexploited, mainly because of the inexperience of the Ministry of Finance, and it was not so clear that SNS fulfilled the conditions of being a systematic bank.

This article is translated from Dutch to English by the Editorial Board of Asset | Accounting & Finance.