NOVEMBER 2014 / NO. 1
TAGS: BANKS, ARROGANCE, ANAT ADMATI, THE BANKERS NEW CLOTHES, VNO-NCW, NETHERLANDS, EUROPE, EQUITY, ASSETS, EU, DUTCH NATIONAL BANK, ING, ABNAMRO, RABOBANK, TAXPAYERS

Banks: misplaced, misleading, and mistaken false arrogance

“Banks consistently use false arguments to overcome strong regulations: Misplaced, Misleading and Mistaken”, Anat Admati, Professor of Economics at Stanford’s Graduate School of Finance
In November 2013, Professor Admati was in Amsterdam presenting her book “The Bankers’ New Clothes” and speaking about the false lobby of the Dutch National Employer’s Organization VNO-NCW on Dutch banks. The professor sees herself as “a voice in the wilderness” because banks in the Netherlands and Europe want to keep to the 3% requirement of equity on total assets. She listed twelve reasons why politics must force banks to change now:
  1. The current 3% requirement of equity on total assets must increase to 20-30%
  2. It is a fundamental mistake that because of these higher capital requirements banks should no longer be able to give loans, credits and mortgages. On the contrary, it is the shortage of capital that limits the granting of credits
  3. Banks argue that economic growth will suffer. They should ask themselves why Europe in 2013 is still in crisis following 2008
  4. Banks made the wrong decision to prefer to give loans to Greece instead to companies
  5. Governments disturbed the granting of credits because they also wanted banks to give loans to Greece and other countries instead of to companies
  6. Many banks in the EU have a portfolio of huge bad loans/debts. Do politicians have the courage to solve these huge problems at so many weak performing banks in the EU?
  7. Banks must be forced not to continue to pay out dividends, but should instead use profits to strengthen equity
  8. If banks become smaller, it will become easier to get new capital. Banks are too big, not at all efficient, difficult to manage and difficult to regulate
  9. There is no alternative to strengthening capital positions, because banks are still only viable with government support. Take the example of the rescue of two Italian banks by the Italian Central Bank in 2017
  10. Support or subsidies by governments stimulates perverse behavior, perverse growth and inefficient size
  11. The European Commission wants ‘bail-in’, however the thrust of the Commission should be prevention, preventing situations where the tax -payers have again to save the banks
  12. Banks still think that equity should be seen as ‘dead money’, preventing them from giving loans, credits and mortgages. In this way banks like to continue to frighten both politicians and society
Consider the following example: It is amazing that the Dutch National Bank, DNB, does not want to recommend equity above 4%. This is unrealistic, and since 2008 we have seen that the DNB lacks the real courage to act towards banks such as ING, ABNAmro or Rabo Bank. This means that those banks, ‘too big to fail’, still misuse their position in the marketplace. If banks are not forced to increase equity to at least 10%, taxpayers will have to save them again when the next financial crisis occurs.
“It’s insane that banks still pay dividend to shareholders. By doing this, capital is flowing off; it should, however, be used to strengthen their own equity”, Professor Anat Admati
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