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The Dutch Banking sector during the current financial and economic crisis
A theoretical explanation on the absence or presence of state aid.
ABSTRACT
This thesis examines the explanatory value of the “This-time-is-different syndrome” (TTID) and the “too big to fail” (TBTF) framework during the contemporary economic and financial crisis, by applying both at events within four Dutch banks. The banks investigated are ING, ABN AMRO, SNS Reaal and DSB. Why are institutions TBTF and others allowed to fail? As turned out, TBTF can also be applied to institutions that were allowed to fail. Also, while ABN AMRO and ING both received state aid, the theories did not possess the same explanatory value.
Keywords: This-time-is-different syndrome (TTID), Too big to fail (TBTF), state aid, nationalization, ABN AMRO, SNS REAAL, ING, DSB Bank, default.
Thijs de Roo
Master thesis for MA International Relations Studentnumber: S1538454
Phone number: + 31 6 2502 8611 Supervisor: Dr. ir. M.R. Kamminga University of Groningen
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DECLARATION BY CANDIDATEI hereby declare that this thesis, “The Dutch Banking sector during the current financial and economic crisis. A theoretical explanation on the absence or presence of state aid “, is my own work and my own effort and that it has not been accepted anywhere else for the award of any other degree or diploma. Where sources of information have been used, they have been acknowledged.
Thijs de Roo S1538454
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PrologueThis thesis is the final project of my Master of Arts in International Relations, which I started in February 2013. Some courses during this Master have changed my preferences concerning future job opportunities and my preferred internship. I followed the course “Dutch Foreign Policy”, which was a course focusing on the Dutch Ministry of Foreign Affairs and the network of Embassies and Consulates the Dutch state possesses to propagate its foreign policies. This course made me want to acquire an internship abroad at one of the many Dutch embassies.
I first have to thank dr. ir. Menno Kamminga for his support and comments on my thesis as supervisor. Second, I have to thank second supervisor drs. H. Sportel.
During my master, I applied for an internship at the Dutch Embassy in Madrid and was invited to do two job interviews. The first was an introduction, primarily in Dutch. The second interview was needed to show some improvements of my Spanish language skills, which were lacking at that time. After hesitations disappeared, I was granted the opportunity to do an internship in Madrid at the Economic Department. For this opportunity I have to thank mrs. Patricia van Bentum, head of the Economic Department. Not only was Madrid by far my preferred option, I was able to finally do an internship abroad, improve a language that I was not that familiar with, and focus on economics.
I need to give a special thanks to two of my former colleagues who both meant a huge inspiration for this thesis. Mariska Schaap (trade and investment) and Sergio Puerto Pavon (macroeconomics) have guided me through the journey in Madrid. Thank you Sergio for shifting my interests slightly from politics to economics, providing useful insights into banking, and helping me throughout my internship. ¡Eres un crack!
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Table of contents1. Introduction ... 5
1.1 The Dutch crisis ... 5
1.2 Theory I: The This-Time-Is-Different Syndrome ... 7
1.3 Theory II: Too big to fail... 8
1.4 Research question and sub-questions ... 10
1.5 Chapter division ... 12
2. ING ... 13
2.1 State Aid ... 13
2.2 ING and TTID ... 14
2.3 ING and TBTF... 17
3. ABN AMRO ... 20
3.1 State Aid ... 20
3.2 ABN AMRO and TTID ... 21
3.3 ABN AMRO and TBTF ... 23
4. SNS Reaal ... 26
4.1 State Aid ... 26
4.2 SNS Reaal and TTID ... 26
4.3 SNS Reaal and TBTF ... 30 5. DSB ... 35 5.1 DSB and TTID ... 35 5.2 DSB and TBTF ... 38 6. Conclusion ... 41 6.1 This-time-is-different syndrome... 41
6.2 Too big to fail ... 42
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1. IntroductionThe current global financial and economic crisis is considered, at least by some leading scholars, to be the worst financial crisis since the Great Depression of the 1930s.1 Economists disagree on the exact starting
date of the current crisis, but the liquidation of Lehman Brothers in September 2008 is widely regarded a key event.2 Lehman Brothers used to be the fourth-largest investment bank in the US, making its collapse
having a huge impact on domestic and international investors. Former Federal Reserve-chairman Ben Bernanke (2006-2014) gave a speech in Atlanta in 2009 in which he explained his views on the causes of the global crisis.3 At the most basic level, the role of banks and other financial institutions is to take the
savings generated by households and businesses and put them to use by making loans and investments. According to Bernanke, saving inflows from abroad can be beneficial if invested well by the receiving country.4 However, US financial institutions reacted to the surplus of available funds by competing
aggressively for borrowers, thus making credit for both households and businesses relatively easy to obtain. Financial institutions neglected strict lending conditions, which became clear when consumers were no longer able to pay their monthly mortgage-fees. Housing prices were expected to rise during the early 2000s, making it able for households to generate equity.5 Instead, the excessive risks that were taken
by financial institutions led to the collapse of the American housing market, causing a “domino-effect” both domestically and internationally.
1.1 The Dutch crisis
Changing from a global perspective to a Dutch perspective, one key event that marked the early stages of the current crisis was the bankruptcy in October 2008 of online-bank Icesave, part of one of Iceland’s main banks. As a consequence, no funds could be repaid to customers of Icesave, although there were legally required deposit guarantees that were ignored by the Icelandic government. Initially this was done because the State had lost its access to international credit markets.6 In 2009, the Icelandic government
tried to reach agreement on bilateral guarantees, but a negative outcome of a referendum among the Icelandic population blocked this option.7 Many Dutch citizens lost their savings, while the Dutch Central
Bank was unable to intervene because Icesave was part of Iceland.
Because the Dutch banking sector also encountered problems, the Dutch government announced in October 2008 that € 20 billion was available to strengthen their capital. ING was the first Dutch bank to request capital injections from the governmental fund.8 The bank was granted a loan of € 10 billion,
including the condition that interest had to be paid only if ING were to pay dividend to its ordinary
1Three Top Economists Agree 2009 Worst Financial Crisis Since Great Depression [Video], accessed 4 May 2014, www.youtube.com/watch?v=7Hjncd8itwU.
2Rayner, G. , “Credit Crunch timeline: From Northern Rock to Lehman Brothers”, article of 15 September 2008 at www.telegraph.co.uk, accessed 24 May 2014.
3Bernanke, B., “Four questions about the Financial Crisis”, speech at the Morehouse College in Atlanta, 14 April 2009, www.federalreserve.gov, accessed 22 May 2014.
4Ibid. 5Ibid.
6Amber Curtis, K. et. al, “I Save for Icesave: Self-Interest and Sovereign Debt Resettlement” , article of 21 May 2012 available at www.ssrn.com, accessed at 26 May 2014.
7Ibid.
8 “State aid for ING: the facts and figures”, available at
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shareholders. According to their own data, ING has repaid the State over € 12.5 billion in March 2014: € 9.3 billion of principal repayments, and € 3.189 billion of interest and premium payments.9Another Dutch principal bank that suffered severe problems during the first decade of the 21st
century was ABN AMRO. On 3 October 2008, the Dutch government announced the nationalization of ABN AMRO/Fortis Bank, buying the bank for € 16.8 billion.10 Former Dutch Central Bank (DNB) President Nout
Wellink stated that two banks which are "part of the capillary system of the Dutch economy have been rescued".11 Fortis and ABN AMRO had a 40 percent market share in the small business sector. The three
parts of Fortis employed 45,000 people in the Netherlands. The next step taken was the creation of ABN AMRO Group in 2008 after seizing the Dutch banking and insurance units of Fortis, which had joined a 71.9 billion-euro purchase of ABN with Royal Bank of Scotland (RBS) and Banco Santander in 2007. In Augustus 2013, Minister of Finance Jeroen Dijsselbloem announced that ABN AMRO was starting preparations to be sold. ABN AMRO will probably be sold in three tranches if conditions are met.12
A third Dutch bank that suffered financial problems and received state aid was SNS Reaal. On 1 February 2013, Minister Dijsselbloem informed the Dutch parliament that he had enforced the nationalization of SNS Reaal under the newly established Intervention Act.13 It was the ultimate step to be
taken after SNS Reaal had received € 750 million in November 2008 from the earlier mentioned fund of € 20 billion.14 The insertion of new core tier-1 capital had proven to be insufficient, and thus Dijsselbloem
enforced the nationalization because “otherwise SNS Bank would have gone bankrupt. The activation of the deposit guarantee scheme would have meant an enormous cost burden for the other banks”.15
A fourth Dutch bank also requested governmental help but did not receive state aid. Because of solvency failures, the DSB Bank was declared bankrupt on 19 October 2009. According to the Financial Times, DSB Bank became the first Western-European bank to be allowed to fail since the onset of the current financial crisis.16 Interesting notions were made by analysts at Moody’s, who expected that the
decision to let DSB Bank go bankrupt could be the end of a period with “high government support to the financial sector”.17 The bank did not entirely fall victim to the credit crisis, but got into trouble after a
foundation for DSB customers who felt duped by the bank encouraged all savers to withdraw their money.18 CEO Dirk Scheringa felt left alone by the Dutch government, but former Minister of Finance
Wouter Bos responded stating that “If someone drowns, he doesn't drown because he isn't rescued, but because he cannot swim”.19
9 “State aid for ING: the facts and figures”, factsheet at wwww.ing.com, accessed 23 May 2014
10 “Dutch government nationalises Fortis and ABN Amro”, article of 3 October 2008 at www.nrc.nl, accessed 4 May 2014.
11Ibid.
12 “Dutch Government Seeks $20 Billion in ABN AMRO Share Sale”, article of 23 August 2013 at www.bloomberg.com, accessed 25 May 2014.
13"Decree by the Minister of Finance regarding the expropriation of securities and capital components of SNS REAAL NV and SNS Bank NV”, published 1 February 2013 at www.government.nl, accessed 24 May 2014.
14Press release SNS Reaal “Uitgifte core tier 1 kapitaal”, press release of 13 November 2008 at www.snsreaal.nl, accessed 26 May 2014.
15 “Decree by the Minister of Finance”, published 1 February 2013, accessed 24 May 2014.
16 “State aid rejected as DSB is left to fail”, article of 20 October 2009 at www.ft.com, accessed 2 June 2014. 17Ibid.
18 “Run on DSB bank makes Dutch central bank take control”, article of 12 October 2009 at www.nrc.nl, accessed 2 June 2014.
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The four abovementioned Dutch banks will be the case studies of this research, because they all serve a different situation regarding state aid. ABN AMRO was fully nationalized, ING received a capital injection, SNS Reaal was nationalized after capital injections had proven to be insufficient, and DSB Bank was refused to receive governmental aid and allowed to go bankrupt.The four abovementioned banks all had their own financial problems, stemming from different decisions in the past. Two interesting theories which evaluate financial crises within banks are This-Time-Is-Different Syndrome (TTID) and the concept of “too big to fail” (TBTF). These theories, and their relevance for this thesis, will be explained in the next paragraphs.
1.2 Theory I: The This-Time-Is-Different Syndrome
The idea of the This-Time-Is-Different Syndrome (TTID) is rooted in the firmly held belief that financial crises are things that happen to other people in other countries at other times; crises do not happen to us, here and now.20 The syndrome stems from an influential book by international economics scholars
Carmen Reinhart and Kenneth Rogoff, entitled This Time Is Different: Eight Centuries of Financial Folly. Rogoff claims that much can be learned from the past, especially the trajectory of financial crises that seems to repeat itself in every crisis.21
By using historical data, the authors argue that policymakers tend to think that “this time is really different” because of new information, new solutions and new technologies. Their analysis focuses on two types of crises: banking crises and sovereign debt crises.22 The authors start their book by explaining five
examples of TTID-reasoning in different countries over a different period of time. Among those examples are the debt crises of the 1930s, the 1980s and the run-up to the contemporary crisis. Reinhart and Rogoff explain different assumptions of policymakers why TTID was valid. During the 1930s there was a belief that there would never be a World War again, during the 1980s bank loans were made instead of bond loans, and during the early 2000s it was believed that due to globalization there was a superior and stable financial system. However, partly due to the abovementioned reasoning, another financial crisis, or even World War II occurred. Conditions differed, but the same mindset – a dangerous mix of hubris, euphoria and amnesia – led to each of these collapses.23
Summarizing what we have learned from the history of financial crises, the authors conclude that we may be able to have better early warnings of crises with better data, especially data on house prices and on government debt including contingent liabilities. They also observe that banking crises tend to be protracted, and to have huge effects on government debt, which on average rises 86 percent in real terms in the three years following a crisis. They caution against premature celebration for countries that seem to have recently graduated from debt default; many have soon fallen back into default again.24
20 Reinhart, C & Rogoff, K., This Time Is Different: Eight Centuries of Financial Folly (Princeton: University Press, 2009), p. 15.
21 Kenneth Rogoff - This Time is Different - interview - Goldstein on Gelt - October 2012 [Video], accessed 23 April 2014, www.youtube.com/watch?v=KGK-xHLK_CA.
22 Reinhart & Rogoff, This Time Is Different (Princeton, 2009), p. 8. 23 Ibid, p. 26.
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The following TTID core elements are derived from the book by Reinhart and Rogoff: Superiority - Through advanced technology and new solution, problems will not occur anymore. Optimism – Following the first criterion, feelings of superiority cause optimism which leads to
risky behavior.
Distance – If crises happen, it does happen to other people in other countries.
History – Historical events reoccur and thus may have explanatory value. Lessons can be learned from past positive or negative experiences.
The abovementioned elements are closely interrelated. Feelings of superiority cause optimism and the belief that crises do only happen to other people at other times. These elements are throughout this thesis evaluated together. The history element is a concluding note of the authors in their book, referring to a “red line” throughout history that shows that the same events have reoccurred in more or less the same way.
1.3 Theory II: Too big to fail
The theoretical concept of “too big to fail” (TBTF) means different things to different people.25 According
to economist George Kaufman:
“a firm which is TBTF is generally a large complex firm that is perceived to require either or both special regulation to discourage failure while alive and/or a special resolution regime when dead in which governments can intervene and not have the insolvent firm resolved through the usual resolution (bankruptcy) processes that apply to other firms in the same industry, at least with respect to allocating losses”.26
Kaufman explains that TBTF only applies to the firm’s counterparties, and not the firm itself per se.27 This
reasoning is explained by the fact that TBTF interventions, either nationalization or capital injections, have a positive effect for shareholders whose losses are prevented. Moreover, in a “normal” procedure bankruptcies will have a negative consequence for both the firm and its shareholders, while the “risk allocation” of a TBTF regime is primarily on the side of the shareholders.
According to Kaufman, the direct cost of a TBTF resolution is the difference between the amount paid to a particular counterparty under special TBTF resolution regimes and any lower recovery amount computed under the resolution regime usually applied. This “protection” is paid by third parties, generally by taxpayers and represents a redistribution, not a change in the loss.28
An example of TBTF reasoning was the nationalization of SNS Reaal. Minister of Finance Jeroen Dijsselbloem mentioned the following in his letter to Parliament:
25Hurley, C., “Paying the Price for Too Big to Fail”, Entrepreneurial Business Law Journal, Vol. 4, No. 2, 2010, pp. 351-389.
26Kaufman, G., “Too big to fail in banking: what does it mean?”, Loyola University Chicago (2013), p. 4. 27Ibid, p.5.
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“ Therefore, in order to safeguard financial stability, I had no option but to nationalize, becauseSNS Bank would otherwise have gone bankrupt. The activation of the deposit guarantee scheme would have meant an enormous cost burden for the other banks”.29
The abovementioned phrase shows precisely a key element of TBTF regimes: state aid will be granted because an “all-in” solution would mean an even higher cost than is currently needed. Economics often refer to TBTF-behavior as “moral hazard”, when the borrower has the incentive to invest in risky projects and does well if it succeeds, but the lender bears a substantial loss it the project fails.30 Moral hazard
refers to banks which have done risky investments in pension funds to make substantial profits, while the savings money of consumers were put on a risk. Moral hazard in this case refers to a change in behavior.
Another important aspect of the “all-in” solution costs, is the reference of policymakers to the importance of a financial institution to the entire financial system. Economists De Haan and Oosterloo refer to these institutions as “systemically important financial institutions” or abbreviated as SIFIs.31
These are institutions, whose disorderly failure, because of their size, complexity and systemic interconnectedness, may cause significant disruption to the wider financial system and economic activity. The authors refer to the importance of substitutability: when deciding to accept or reject requests for state aid, policymakers check to what extent the core services of an institution can be taken over by another institution within the system. If there are no substitutes, an allowed failure might cause heavy distortions to the system.32
Some prominent scholars tend to say that the current crisis has shown that publicly funded bailouts of TBTF financial institutions provided indisputable proof that TBTF institutions benefit from large explicit and implicit public subsidies, including the expectation that such institutions will receive comparable public support during future emergencies.33 Another aspect of TBTF is that the bankruptcy of
a single bank can start a contagious failure of banks concluded by a systemic financial failure.34 In this
case, moral hazard thinking at one financial institution can have large consequences for others or even for the public at large.
TBTF has become a major public policy issue. However, numerous attempts to end TBTF have been unsuccessful, in part because definitions of the TBTF differ. TBTF means different things to different users of the term with different winners and losers in the resolution.
A summary from the article of Kaufman leads to the following five TBTF core elements, or characteristics of TBTF institutions: 35
Interconnectedness - A great interconnectedness through interbank deposits, loans, and derivatives, because problems at one large bank may spread quickly to others.
29"Decree by the Minister of Finance regarding the expropriation of securities and capital components of SNS REAAL NV and SNS Bank NV”, published 1 February 2013 at www.government.nl, accessed 24 May 2014.
30Haan, J. de, et al, Financial Markets and Institutions: A European Perspective (Cambridge: University Press, 2012 2nd edition), p. 52-53.
31 Ibid, p. 406-407. 32Ibid, p. 407.
33Wilmarth Jr., A., “The Dodd-Frank Act: A Flawed and Inadequate Response to the Too-Big-To-Fail Problem”, George Washington University (2001) in “Oregan Law Review, Vol. 89, 954”.
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Dependence - Heavy dependency on short-term funding of longer term assets. Banks are fragile because a large percentage of their deposits and other sources of funding are short-term and can be quickly and easily withdrawn. Risk operations - Banks operated at enhanced levels of risk, had provided excessive compensation contracts, or had participated in fraudulent activities.
Negative capital - The bank’s capital is too negative for closure. In theory, closure with zero capital would limit the loss to its shareholders only. Negative capital means every debt, although a € 1 debt might not lead to state aid.
Cost-benefit analysis – A cost-benefit analysis by policymakers leads often to TBTF-reasoning because no help would involve even higher costs, for instance through deposit guarantees. 1.4 Research question and sub-questions
The following question will be the central research question of this thesis:
To what extent can the “This-time-is-different syndrome” (TTID) and “Too-big-to-fail” (TBTF) each explain the absence or presence of state-aid to the Dutch banking sector during the current financial crisis?
In order to answer this question, a total number of eight sub-questions need answering first. These questions are divided in two questions per chapter, thus leading to four main chapters which include the four cases that are discussed earlier: ABN AMRO, ING, SNS Reaal and DSB Bank. These cases are chosen because of the difference in (or absence of) state aid, in this context either capital injections or full nationalization. The abovementioned theories, TTID and TBTF, will function as theoretical basis.
Each chapter will answer two sub-questions:
1) To what extent can TTID explain why capital injections/state aid was present or absent? 2) To what extent can TBTF explain why capital injections/state aid was present or absent? Part of TTID theory is that it is generally reasoning done by policymakers within financial institutions when they believe that all problems can be prevented, while TBTF is reasoning done by politicians to solve problems. The theories can be complementary. If no problems are believed to occur (TTID), then governments do not have to intervene (TBTF), while an occurrence of problems could lead to financial support . The following table shows both theories and its appearance in the “process”, from pre-crisis to problem solving during a crisis.
TTID Problem prevention Done by policymakers within financial institutions TBTF Problem solving Done by politicians
Table 1.1 TTID and TBTF comparison
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according to the work of philosophers Hollis and Smith.36 TTID is “understanding” which means that asituation has to be understood from within using subjective data, while TBTF is “understanding” which means that a situation will be externally investigated by using facts.37 Understanding refers to the
understanding of social phenomena in terms of relationships, while explaining refers to explaining natural phenomena in terms of cause and effect.38
The elements of both theories, TTID and TTID, will be discussed separately before a general conclusion is drawn. Their explanatory value will be ranked based on the following scale. The number of elements corresponds to the core elements of both theories mentioned previously.
This-time-is-different syndrome Too big to fail
# Elements Explanatory value # Elements Explanatory value
1 Poor 1 Very poor
2 Moderate 2 Poor
3 Good 3 Moderate
4 Fully 4 Good
5 Fully
Table 1.2 TTID and TBTF elements and explanatory value
All elements will be granted the same value, meaning that importance to a certain element will only be granted if explained by important events. Some elements are, like both theories, complementary or even interconnected. For instance, TTID suggest feelings of superiority which often lead to optimistic behavior and the belief that a crisis is distant. This is a combination of the first three elements.
An important note to be made is that all elements will be separately investigated, and each element will receive a final judgment on its explanatory value. One has to read the explanatory value of an element as a contribution of this element to the explanatory value of the entire theory. Thus, the elements itself do not possess explanatory value, but contribute to the explanatory value of the entire theory. For practical purposes, I will refer to the explanatory value of a single core element.
Because the current financial crisis only started seven years ago, not much academic research has been conducted which include a comparison between different institutions. Dutch financial institutions have been assessed separately, but so far not together while financial interdependence is often the case because banks lend to each other on financial markets.
Social justification of this thesis can be found in its relevance for public discussions on the granting of state aid to problematic financial institutions. In the Netherlands, citizens increasingly complain about taxpayers’ money put to use to save institutions which have taken too many risks during the onset of the crisis. It lead to initiatives, such as spreading money over different savings accounts at different banks in order to prevent a loss of all money. This thesis will use the TBTF framework that suggests that the spreading of money among banks will lead to smaller banks, and thus governments will have less incentives to grant financial injections.
36Hollis, M., & Smith, S., Explaining and Understanding International Relations (Cambridge: Clarendon Press, 1990), p. 14-17.
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1.5 Chapter divisionThe second chapter discusses ING, because it was the first bank to request financial support from the total of € 20 billion available funds. The chapter will elaborate on the decisions that led to the granting of state aid and consequently steps taken to strengthen core tier-1 capital.
The third chapter discusses ABN AMRO, the bank that was sold in 2007 to Fortis but nationalized by the Dutch government in 2008 and eventually stripped off its Fortis assets in the newly established ABN AMRO group.
The fourth chapter is dedicated to SNS Reaal, the insurance and banking company that initially received capital injections. When these injections were proven to be insufficient, the Dutch government fully nationalized SNS Reaal in 2013.
The fifth chapter discusses the position of the smaller DSB Bank which, unlike the other banks, did not receive state aid and thus was allowed to go bankrupt. Why did the Dutch government decide to let this happen?
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2. INGThis chapter will discuss the position of ING during the contemporary crisis. Which decisions were taken during the onset of the crisis that can be explained by TTID and which decisions by politicians are examples of TBTF reasoning? This chapter will answer two research questions:
a) To what extent can TTID explain why ING received capital injections? b) To what extent can TBTF explain why ING received capital injections? 2.1 State Aid
ING, with a history dating back to 1927 when it was established as Nederlandse Middenstandsbank (NMB), is one of the largest Dutch banks since its merger with Postbank in 2009. The merger has led to a single bank to serve both consumers and businesses. In October 2008, ING was the first Dutch bank to request and receive financial support from the Dutch government. The total sum was €10 billion, with the condition that interest had to be paid only if dividend was paid to its shareholders.39 ING explained the
consequences of the state aid in a press release on its website.40
The addition of capital led to a growth of tier-1 core capital to 8%, which is buffer capital to counterbalance a loss. According to former CEO Tilman, “ING was in line with previously targeted levels, but the events of the last months led us to reconsider our position”.41 He mainly referred to the liquidation
of Lehman Brothers, as previously mentioned. The € 10 billion was granted in the form of securities, meaning that ING issued 1 billion non-voting core Tier-1 securities at a price of €10 per security. As a consequence, the Dutch State became shareholder of ING and was classified at the same rank as common shareholders.
A second step taken by the Dutch government was done in January 2009 when the State took over the risk of 80% of a large package of so-called US Alt-A mortgage bonds, worth € 27.7 billion in 2009. In 2012 the value of the Alt-A portfolio crept steadily higher thanks to a slightly more favorable economic tide in the US. The ‘break-even price’ fell, which made these bonds easier to sell.42 The back-up by the
government was part of the Illiquid Asset Back-up Facility (IABF) which ended in November 2013.43
Minister Dijsselbloem announced his desire to sell the full package “within a year”. According to a press release on the website of the Dutch government, the possible selling of the bonds might yield a profit of € 400 million for the State.44 Unexpectedly, the actual selling which finished 6 February 2014, yielded the
State a profit of € 1.4 billion.45
39State aid for ING: the facts and figures”, factsheet at wwww.ing.com, accessed 27 May 2014.
40“ING to strengthen core capital by EUR 10 billion”, press release of 19 October 2008 at www.ing.com, accessed 3 June 2014.
41Ibid. 42Ibid.
43“Staat en ING overeenstemming over verkoop Alt-A portefeuille”, press release of 1 November 2014 at www.ing.com, accessed 4 June 2014.
44Ibid.
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2.2 ING and TTIDDuring the previous chapter, TTID was discussed as a framework that looks at the decision-making process within financial institutions, when the utopian belief is visible that all problems can be prevented. The four TTID elements will be discussed using arguments in favor or against, in order to evaluate to what extent those elements can contribute to the explanatory value of TTID within the decision-making process.
To be able to judge if policymakers fell into the trap of the TTID-syndrome, we have to look at the onset of the current financial crisis, and decisions at ING that made the €10 billion-injection necessary. As mentioned earlier, Reinhart and Rogoff described TTID in their book by looking at banking crises and came to the conclusion that during the early 2000s it was believed that “due to globalization there was a superior and stable financial system”.46 This section will evaluate to what extent the core elements of TTID
have explanatory value within the decision-making process of ING until ING received state aid in 2008. During the early stages of the crisis, in October 2008, ING stated in a press release that its financial position was still in line with earlier set targets despite the turmoil of the third quarter of 2008.47
During that period, ING possessed two loss-making assets: losses to financial counterparties and real estate value (€ 1.6 billion before taxes) and negative revaluations on its Alt-A mortgage portfolio (€ 1.5 billion). As we have seen above, in 2014 this mortgage portfolio was sold with a profit of € 1.4 billion.
But what decisions were taken during the early 2000s that led to these losses? The problems in the US can be easily linked to ING, because ING possessed a portfolio of Alt-A mortgages. However, in September 2008 ING announced that the impact of Lehman Brothers’ liquidation was limited to € 100 million on its profits and loss account.48
TTID describes that feelings of superiority usually lead to optimism within the decision-making process. These are the first two core elements of TTID. The decision of ING to expand internationally shows a link with the optimism-element of TTID. During the late 1990s, ING established an online-savings bank to conquer international markets. ING Direct started affiliates in Canada, Australia, Austria, Italy, Spain, the US, United Kingdom, France and Germany. After a hesitating start, ING Direct became a cash-cow for the whole Dutch ING Group.49 The concept was simple: by cutting out expensive office network
and related personnel costs, ING was able to offer competitive saving rates. Did ING feel superior? One might argue that ING sought a way to expand and could have made the decision to go for a smaller number of countries to evaluate if ING Direct would yield returns. However, the concept of ING Direct with its low-cost offices and low personnel low-costs made it easy to open offices in different countries. Superiority is not the case here, because Reinhart and Rogoff explain the element of superiority by mentioning the belief of policymakers that problems will not occur anymore. One might even argue that the decision to spread offices among different countries was risk averse instead of risky. A failure in one country could easily be offset by profits of another country. But ING was clearly optimistic by opening offices in different
46Reinhart, C. & Rogoff, K., This Time Is Different: Eight Centuries of Financial Folly (Princeton: University Press, 2009), p. 15.
47 “ING's capital position in line with targets despite market turmoil in third quarter”, press release of 17 October 2008 at www.ing.com, accessed 9 June 2014.
48 “ING expects limited impact from Lehman Brothers exposure”, press release of 16 September 2008 at www.ing.com, accessed 9 June 2014.
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countries, because of all the differences between countries, for instance concerning national regulations which became an issue for ING Direct in the US. ING may have felt superior enough to open affiliates in many different countries, but it thereby neglected differences between countries.A strong argument in favor of the optimism element, is that ING Direct exposed itself extremely high to problem mortgages and accepted the risky possible consequences. According to NRC, the amount of savings invested in US mortgages rose to an excessive 86 percent50. The collapse of the US housing
market in 2007 caused direct problems to the ING Group because of the high exposure of ING Direct in the US. This led to the decision to request state aid in October 2008, especially after ING stocks had lost 27 percent of their value on 17 October 2008.51
An argument against the explanatory value of the element of optimism, is that ING itself is not able to change international legislation. If it decides to enter a specific country, it has to adhere to their domestic rules. The ING Direct affiliate in the US started to possess Alt-A mortgages, and thus the cash-cow would eventually become problematic. The investment in the portfolio of problem-mortgages was the result of American regulations. A minimum of 50 percent of savings accumulated in the US had to be invested into housing market related products in the US. ING was aware of this requirement when the company started its ING Direct adventure.52 Problems arose because ING Direct had no offices in the US
and thus was not able to convert the rapidly growing saving amounts into mortgages. Instead it bought mortgage obligations, initially in the relatively safe and therefore low return obligations of semi public Fannie Mae and Freddie Mac, but progressively also in less conservative and higher return commercial alternatives like the Alt-As.53 It became clear during the early 2000s that a booming housing market led to
more requests for mortgages thereby generating more demand for ING direct. It can be said that ING had the clear belief that buying mortgage obligations was a safe option. On the other hand, one might argue that ING could have decided to establish its own US offices to convert savings money into mortgages, which would have been less risky than buying mortgage obligations.
Weighing all arguments in favor and against the optimism and superiority element, a conclusion is that these elements can explain why ING decided to establish ING Direct and enter a high number of countries. ING Direct could not change existing legislation, for instance concerning the required investment 50 percent rule, but it was aware of the legislation. Exposing itself for 86 percent to Alt-A mortgages instead of the minimum of 50 percent was risky and too optimistic. The main reason for ING Direct to invest in Alt-A’s was the higher return compared with Fannie Mae and Freddie Mac obligations, thus meaning a positive contribution to the explanatory value of TTID.
The third element, distance, tends policymakers to believe that crises do not happen to them but only to other people in other countries. Because the financial problems of ING seem directly linked to the US subprime mortgage crisis, we also have to examine decisions taken in the US. The hereafter discussed inflow of money into the US may have played a crucial role. If money keeps on flowing in, it is valid to believe that a crisis is not likely to happen on the short run, which is an argument in favor of the explanatory value of the distance element. Reinhart and Rogoff focus on global events that led to an inflow
50Ibid.
51
“
ING in rode cijfers door crisis, koers stort verder in”, article of 17 October 2008 at www.nrc.nl, accessed 9 June 2014.16
of money into the US. Profiting from its status as “safe savings country”, Middle-Eastern countries spent their earned oil money in the US. Boosting economies in Asia wanted to insure themselves against future crises after Asian financial turmoil during the 1970s and 1980s and also invested in the US.54 The authorsstate that these tendencies made the US possess two-third of all dollars saved worldwide between 2004 and 2006.55
An argument against the explanatory value of the distance element is that the global order became smaller and international financial systems more interlinked, creating less distance. Because TTID is called a “syndrome”, it refers to a way of thought. The idea that the world became smaller due to globalization is incorporated into the way ING conducts its policies.56 The interconnectedness is visible
through ING’s worldwide expansion. TTID suggests that a crisis is only likely to happen to order people in other countries, but ING accepted the financial risks of other people in other countries by buying foreign mortgage obligations. Especially this argument, the disappearance of borders between financial systems and the increasing interconnectedness, shows that the distance element of TTID is not able to explain the situation of ING.
The fourth core element of TTID, history, suggests that historical events can have explanatory value because they reoccur. ING does not have examples from its own past that could have made policymakers decide not to enter foreign markets. The history element of TTID offers mostly general explanations and comparisons between banking crises. Stepping away from this general vision, a comparison between events within a single financial institution is possible, but ING simply does not possess examples from its past. Thus, in this specific case, the history element of TTID does not offer an explanation and has no explanatory value.
Concluding, concerning decisions taken at ING Group, the following has become clear with regards to the TTID syndrome and the earlier mentioned core elements. Driven by financial successes during the 1990s, ING expanded internationally with its online savings bank ING Direct. Instead of focusing on a few countries first, the expansion drift led ING to operate its savings bank in many countries across the globe. As became clear, it was particularly the US ING Direct affiliate which caused problems. Especially the fact that ING decided to invest 86% of savings money into US housing market related products gives explanatory value to the TTID-criteria superiority and optimism. Higher profits were made with ING Direct as cash-cow and the more countries were conquered, the faster profits could be made. Therefore, to question the number of countries that ING Direct choose to invest in, is no longer relevant. It is shown that ING made losses on its Alt-A mortgage portfolios but nevertheless possessed a sufficient core tier-1 capital ratio.57
Both the distance and history element cannot provide an explanation for the occurrence of financial problems within ING. The main reasons were that the distance element suggests a difference between the domestic and international order, while due to globalization the international financial systems have become interconnected. The history element could not provide an explanation, because ING does not possess examples of its own past which show a similar mindset.
54Ibid, p. 209.
55Obstfeld, M. & Rogoff, K., Perspectives on OECD Capital Market Integration (Cambridge: Mass Press, 2001) p. 169. 56ING Groep jaarverslag 2011, p. 24.
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To what extent can TTID explain why ING needed capital injections? TTID offers only a moderate explanation because only two out of four core elements possess explanatory value.2.3 ING and TBTF
The previous paragraphs described events during the run-up of the crisis. Consequently, we have looked at decisions taken by policymakers within ING. This section will evaluate events since September 2008, when ING stocks started to move negatively and eventually was decided to request state aid to restore confidence and strengthen core tier-1 capital. Furthermore, this section will link the five core elements of the TBTF framework to events after the granting of state aid.
State aid was granted in October 2008 during one of the earliest months of the contemporary crisis. As mentioned earlier, former CEO Tilmant stated that ING’s capital position “was in line with previously targeted levels and regulatory requirements. However, market conditions have changed dramatically in recent weeks and have led to an internationally recognized belief that going forward, in this market environment, capital requirements for financial institutions should be higher”.58 One can
argue if state aid was really necessary, if ING was meeting its obligations. Were previously targeted levels too low? Why was decided to grant ING this additional buffer capital? We have seen that the US mortgage crisis had a direct influence on ING’s financial situation. This direct link between US mortgages and a Dutch bank shows the explanatory value of the first TBTF criterion: interconnectedness, which suggests that problems at one bank can easily spread to another.
The second element of TBTF mentions a dependency between short-term funding and long-term assets. This dependency is a standard issue for policymakers, as banks always only have a small percentage of their assets available in cash. However, it is up to policymakers to decide which buffer is required, the so called core tier-1 capital ratio. Former Minister of Finance Wouter Bos explained the decision to grant aid in a press conference on 19 October 2008.59 According to Bos:
“the aid was granted to provide an extra buffer to a healthy institution that is led by good management. Although ING is on target concerning its solvability ratios, we concluded that the situation on the international financial markets is insecure and thus, we need to strengthen the core capital of ING to protect both our business and consumers”. 60
Former DNB President Nout Wellink added that “it is not about saving bad companies, but about the future of healthy companies during times of uncertainty”.61 A comparison was made with ABN AMRO,
the bank Dutch that will be discussed in the next chapter. According to Bos, the situation at ING was completely different because ING was healthy. One might ask questions about the ease with which ING was granted state aid.
58 “ING to strengthen core capital by EUR 10 billion”, press release of 19 October 2008 at www.ing.com, accessed 3 June 2014.
59“Persconferentie kapitaalinjectie ING”, press conference of 19 October 2008 at http://nos.nl/audio/10953-persconferentie-kapitaalinjectie-ing.html, accessed 9 June 2014.
60 Ibid.
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An argument against the explanatory value of the dependence element is that both Bos and Wellink argue that ING was a healthy institution, and thus it was likely that ING would have survived the crisis without the addition of core capital.If one follows the reasoning of Bos, ING may have been granted aid too easily. The European Commission (EC) did have the same opinion, leading to an investigation expecting that ING was given an unfair competitive advantage. Former European Commissioner Neelie Kroes, ironically Dutch, was not suspicious about the granting of € 10 billion core tier-1 capital, but primarily about the ease with which the state took over 80% of Alt-A mortgage portfolio in January 2009. She believed that Bos had been “too generous”.62 Bos was given the opportunity to convince the European Commission that the sum paid for
the Alt-A portfolio was justified, otherwise ING would have to pay a higher interest rate for its capital injection.
Furthermore, in October 2009, the Dutch State changed the repayment conditions of ING's state aid, thereby giving ING the option to repay early at more favorable terms, which also contains State aid. The European Court of Justice ruled in favor of ING in March 2012, stating that “the EC has not established (…) that the amendment to the repayment terms for a capital injection constitutes an advantage which a private investor in the same situation would not have granted”.63 The ruling was a relief for ING meaning
the new divestments were not necessary.
Weighing all evidence above, the dependency argument does not provide an explanation why ING received aid. Firstly because banks in general have a certain dependency on short term funding. Secondly because ING was a healthy institution. And thirdly because the EC did not ask questions about the loan of € 10 billion, but about the valuation by the Dutch state of the Alt-A mortgage portfolio.
The third element, risk operations¸ argues that TBTF institutions have generally operated at enhanced levels of risk or even participated in fraudulent activities. The latter is not the case for ING, but the former became clear in the previous section. The main argument in favor of this TBTF element, is that ING accepted the high risk of exposing itself for 86% to US mortgages, and not sticking to the minimum requirement of 50%. Another argument in favor was the decision to expand internationally in several countries, although this can also be seen as risk elimination as mentioned earlier.
An argument against the explanatory value of the risk element, is that financial institutions always expose themselves to a certain risk to become a bigger player on the market. What exactly entails “too much risk”, is always easy to conclude after problems have occurred. A scenario could have been, for instance, that sufficient due diligence research in the US did not lead to problems with Alt-A’s and thus would have generated high profits for ING Direct in the US. But weighing all the arguments above, ING exposed itself too much to US mortgages, while it knew that it depended on third parties for due diligence research and the actual provision of mortgages, giving explanatory value to the argument of risk operations.
The fourth element, negative capital, argues that TBTF institutions generally have negative capital which makes a closure too expensive and does not limit problems to shareholders only. There are no arguments in favor of this core element, giving no explanatory value to it concerning this case. The main
62“Kroes: Bos arrogant in conflict ING-staatssteun”, article of 15 September 2009 at www.elsevier.nl, accessed 9 June 2014.
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argument against the explanatory value of this element, is that both Wellink and Bos have explained that ING is a safe and healthy financially institution, led by good management. The addition of capital provided an extra buffer meaning that there already was a buffer.The final element, a cost benefit-analysis, shows that policymakers tend to argue that rejecting aid to a financial institution would involve even higher costs than actually granting aid. In the case of ING, one might argue that both Bos and Wellink have decided to grant aid for a multitude of reasons. Especially the fact that 50% of the total available funds was granted to one single Dutch entity shows a necessity. However, both policymakers did not argue explicitly that not giving financial support would eventually lead to higher costs, unlike SNS Reaal as will be seen in a next chapter.
A strong argument in favor of the cost-benefit analysis argument is that Minister Bos expected that ING would yield a profit for the Dutch state. An analysis by former ING CEO Hommen shows that after repayment of the total loan, the Dutch state would earn at least € 3.5 billion of interest payments.64
Another argument in favor this core element is that the Dutch state not only provided a loan, but also took over the risk of the Alt-A mortgage portfolio. The actual selling of this portfolio might also yield another profit for the Dutch state. Both argument arguments above leads to the conclusion that the cost-benefit analysis element has explanatory value why ING was granted state aid.
Concluding, to what extent can TBTF explain why ING was allowed a financial injection? Aid to ING was granted to strengthen core tier-1 capital, primarily to absorb negative shocks such as devaluations of the Alt-A mortgage portfolio. This direct link between US mortgages and a Dutch bank shows the explanatory value of the first TBTF criterion: interconnectedness. Secondly, the strengthening of core tier-1 capital means more buffer capital to absorb losses but also to pay customers. The lowering of ING’s capital ratios shows a dependence on short-term funding, which is the case for most banks. However, because ING already had a sufficient capital ratio, the dependency element does not have explanatory value in this case. Thirdly, the criterion of risk operations is valid for ING. The establishment of ING Direct offices in various countries and the high exposure to Alt-A mortgages in the US are clear examples of risky decisions. The fourth criterion, the existence of negative capital, does not play a role in this case. ING was granted aid to strengthen the existing buffer. The final criterion, a cost-benefit analysis, was made and aid was granted by the Dutch State, knowing that they could make a profit out of the loan. The interest rates that were paid, are a clear example of this. Thus, with three out of five elements TBTF offers only a moderate explanation why state aid was granted. Weighing all elements to each other, leads to the conclusion that all elements are of even importance for ING. The non-existence of negative capital and a partial presence of the dependency element, gives only moderate explanatory value to TBTF in this case.
To conclude this chapter, both TTID and TBTF offer a moderate explanation why ING received state aid.
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3. ABN AMROThis chapter will discuss the position of ABN AMRO in the contemporary crisis. Which decisions were taken during the onset of the crisis that can be explained by TTID and which decisions by politicians are clear examples of TBTF-reasoning? This chapter will answer two research questions:
a) To what extent can TTID explain why ABN AMRO was nationalized? b) To what extent can TBTF explain why ABN AMRO was nationalized? 3.1 State Aid
On 1 July 2010 the legal merger between ABN AMRO Bank and Fortis Bank Nederland was completed, creating a combined entity called ABN AMRO Bank N.V. But ABN AMRO, to which attention is paid in this chapter, has a long history which dates back to the Nederlandsche Handel-Maatschappij in 1824. The most recent and important merger was finished in 1991 when the ABN Bank and the AMRO Bank were combined to ABN AMRO.
During 2007, it became clear that ABN AMRO no longer had the opportunity to expand while making high profits. During the onset of the crisis, the bank had grown to be one of Europe’s largest banks, ranked 8th in 2006.65 Instead of staying “hunter”, the bank tried to take over competitors in 2006, it
became a “prey”.66 In 2007 the first rumors showed up in newspapers that ABN AMRO was about to be
taken over if the right price was paid and conditions were met. Two options became viable. The first was a take-over by Barclays, whose plans were to convert ABN AMRO and Barclays into one of Europe’s biggest banks.67 This option was preferred by former CEO Rijkman Groenink, because the second option would
mean that ABN would possibly be split.68 This second option was a take-over prepared by three banks:
Banco Santander, Royal Bank of Scotland (RBS), and Fortis. The bids were different. According to Groenink, the bid of Barclays was worth approximately € 65 billion while the consortium wanted to pay € 72 billion. The consortium “won” the battle over ABN AMRO, after the Dutch government granted its permission.69 Former Minister of Finance Bos explained the situation, after he received an advice from
DNB. However, he pointed towards the fact that the permission did not show a preference from the State, because shareholders of ABN AMRO were to give the decisive vote.
Because shareholders of ABN AMRO granted permission, the consortium led by RBS announced the takeover on 9 October 2007.70 According to RBS, 86% of the shareholders had given their support to
the takeover by RBS, Banco Santander and Fortis.71 It became clear that not only Groenink, but the whole
board of ABN had initially given their support to Barclays, but withdrew their support after the consortium made a higher bid. The “victory” of the consortium meant the end of ABN AMRO, once a jewel in the crown of the Dutch economy. It was estimated that more than 19,000 jobs were lost.
65Smits, R., ABN AMRO: A takeover battle with far-reaching implications, (Amsterdam: University of Amsterdam, 2007), p. 1.
66Smit, J., DeProoi, Blinde trots breekt ABN AMRO, (Amsterdam: Promotheus Bert Bakker, 2010), p. 1 67“Bankentrio mag ABN overnemen”, article of 18 September 2007 at www.elsevier.nl, accessed 9 June 2014. 68“Groenink houdt voorkeur voor Barclays”, article of 30 July 2007 at www.nu.nl, accessed 9 June 2014. 69“Geen bezwaar tegen overname ABN AMRO door consortium”, press release of 17 September 2007 at www.government.nl, accessed 9 June 2014.
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3.2 ABN AMRO and TTIDTo compare the situation of ABN AMRO to TTID, we have to investigate decisions taken by policymakers of ABN AMRO during the onset of the crisis. What led to the change that made ABN AMRO become “prey instead of hunter”.
The first element of TTID, superiority, usually leads to the second element, optimism. To recall, the superiority leads policymakers to believe that problems will not occur anymore, causing optimism which leads to risky behavior. The banking sector in general survives through mergers and acquisitions, commonly abbreviated as M&A. This strategy has been useful for ABN AMRO during the 1990s and the early 2000s.72 After the appointment of Rijkman Groenink as CEO in May 2000, the bank had roughly two
missions: make more profit out of current activities, and make profit by gaining new activities (acquisitions).73 During the turn of the century, ABN AMRO failed to take over the Belgian bank Generale
Bank. In 2005, initally there was another failure. ABN AMRO failed to take over the Italian bank Banca Antonveneta, regarded a smaller bank than previous take-overs. After long negations, ABN AMRO eventually succeeded to take-over Antonveneta.74 The attempts to take-over other institutions show a
certain sense of superiority, although several attempts failed giving less explanatory value to the element of superiority.
A well-known book which describes the history and downfall of ABN AMRO is De Prooi (Eng: The Prey) by Dutch journalist Jeroen Smit.75 During 2007, Smit conducted 130 interviews with current and
former bankers and policymakers, in order to reveal “the truth” behind the fall of ABN AMRO and the eventual take-over by the consortium. He launched the book in October 2008 and explained some highlights of his work in the Dutch television program NOVA.76 According to Smit, because acquisitions had proven to be no long possible, a merger was a viable option in 2006. An option was to combine the two biggest Dutch banks ABN AMRO and ING. Talks in 1999 and 2002 led to nothing. ING and ABN AMRO started negotiations in 2006. Because ABN AMRO suffered increasingly financial problems, equity ran down quickly, ING felt superior during conversations which hit the pride of ABN AMRO.77 A growing crisis
of confidence between the different parties and a lack of vigorousness, led to a failure. Smit argued that “a quick deal was needed, before financial markets and stocks were able to respond to possible rumors”.78
The fact that this deal failed due to the pride of ABN AMRO pleads in favor of the explain value of superiority. Although no longer superior over ING, ABN AMRO pretended to be.
A next step, after mergers and acquisitions by ABN AMRO had proven to be impossible, was that ABN AMRO itself would be taken-over. A take-over of ABN AMRO itself can be regarded an argument against the explanatory value of the superiority argument. Superiority may have led to arrogance, but ABN was not able do to takeovers itself anymore. As described during the introduction of this chapter, a consortium led by RBS would take-over ABN AMRO. Former CEO Groenink and Former DNB President
72“ABN AMRO heeft partner nodig”, article of 26 June 2013 at www.trouw.nl, accessed 13 June 2014. 73Ibid.
74“ABN AMRO wins Antonveneta control”, article of 15 September 2005 at www.marketwatch.com, accessed 14 June 2014.
75Smit, J., De Prooi, Blinde trots breekt ABN AMRO, (Amsterdam: Promotheus Bert Bakker, 2010).
76“ABN AMRO, de opkomst en ondergang”, broadcast of NOVA of 29 October 2008 at www.novatv.nl, accessed 14 June 2014.
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Wellink expressed their doubts about the financial strength of Fortis, one of the three parties of the consortium.79 Explanatory value is given to the elements of superiority and optimism considering allarguments above.
The third core element, distance, has a literal meaning concerning this case. ABN AMRO had existing activities in Latin-America that did not yield the expected profits. However, the activities were not sold, showing the TTID belief that “crises do not happen to us, but to other people at other times”. ABN AMRO tried to sell its activities, but was not able to find a buyer willing to pay the price. Groenink kept on having the belief that the activities in Latin-America could still be made more profitable.80 Former CEO
Groenink was an optimist, making the argument above having a connection with the earlier mentioned core elements of optimism and superiority. The argument that activities in Latin-America were not sold, because profits were expected to be still possible, gives explanatory value to distance element.
The final element of TTID is history, which argues that historical events can have explanatory value. An argument in favor of this element refers to the history of ABN AMRO with several mergers and acquisitions. The merger between ABN and AMRO in 1990 was the expression of the belief that “together we can be stronger”, the same reasoning Groenink had with the merger that never happened: ABN AMRO and Barclays. History repeated itself, but led this time not to a takeover by ABN AMRO, but of ABN AMRO. An argument against the explanatory value of the history element deals with the way the element was put into practice by Reinhart & Rogoff. Because their work focused on comparisons between different crises in different periods of time, and this thesis focus on single period in time, parameters differ. Financial institutions evolve over time, for instance through acquisitions. Looking for events within the history of an institution might lead to a comparison between two events within the same, but inherently different institution. However, weighing the arguments above means that explanatory value should be given to the history core element for the simple reason that ABN AMRO could have known that acquisitions are not always possible and it might be taken over by a competitor one day.
To what extent can TTID explain why ABN AMRO needed state aid? All four criteria of TTID, superiority, optimism, distance and history can explain why ABN AMRO became a prey instead of remaining hunter. Feelings of superiority led to takeovers when creating more profits out of existing activities was insufficient. Optimism, and even arrogance, led former CEO Groenink believe that a take-over by Barclays could turn ABN AMRO in an even bigger bank in Europe. Optimism was also visible when negotiations with ING about a merger were cut off, primarily because ABN AMRO saw itself as a superior over ING while its position was clearly in decline. ABN AMRO repeated history by continuing to do mergers and acquisitions, hoping to make more profits. Eventually, they were taken over themselves. Weighing all arguments, TTID can fully explain why ABN AMRO got into trouble during the 2000s. Feelings of superiority led to a failure of a merger with ING. Optimism made ABN AMRO decide to continue to do acquisitions when existing foreign activities no longer yielded sufficient profits. The distance element, which often follows from feelings of superiority, was clearly visible when Groenink decided to keep the activities in Latin-America although profits were no longer sufficient. ABN AMRO could have learned lessons from its past full of acquisitions.
79Ibid.
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3.3 ABN AMRO and TBTFThe assessment will continue with the state aid granted by the Dutch state and a possible explanation by the TBTF framework, following the five core elements of TBTF mentioned in the first chapter.
The first element describes an interconnectedness, meaning that problems at one financial institution can have negative spill-over effects to other institutions in other countries. Interconnectedness refers in this case to activities conducted by Fortis which had become the owner of ABN AMRO after the takeover in 2007. The combined activities of Fortis and ABN AMRO led to problems for both banks when Fortis clients withdrew money from their accounts, a argument in favor of interconnectedness. In 2007, Fortis had paid its share of € 24 billion to acquire ABN AMRO. The highest judicial court in the Netherlands ruled in December 2013 (12/03302) that Fortis executed mismanagement during 2006 and 2007. According to the court, the sum paid by Fortis to acquire ABN AMRO represented on average 50% of its own value which caused a substantial risk. Furthermore, Fortis had not found a successful way to finance the acquisition. The nationalization of ABN AMRO and Fortis in 2008 led to a direct equity loss of € 24 million. The court argued that “Fortis, as an important bank to the financial system, had taken an unacceptable risk”. The institution should have adapted more sufficiently to the changing financial environments, and lacked a well-founded principle of entrepreneurship. Explanatory value is given to the first element of TBTF because it became evident withdrawal of Fortis assets had a direct consequence for ABN AMRO.
The second element, dependency, focuses on institutions that have a strong dependency on short term funding for their long-term assets. We have seen that in general all financial institutions have this certain dilemma: finding the balance between short-term funding and so-called whole-sale funding, which is lending from third parties.81
On 3 October 2008 ABN AMRO and Fortis were nationalized by the Dutch State. This was only a year after the consortium, including Fortis, had taken over ABN AMRO on 9 October 2007. At the end of September 2008, the governments of Belgium, Luxemburg and the Netherlands gave a capital injection of € 11,2 billion which seemed to have saved Fortis from bankruptcy.82 However, only a few days later
former Minister of Finance Wouter Bos revealed that the Dutch State had taken over ABN AMRO and the Fortis parts in the Netherlands by paying € 16,2 billion. According to a news item of Dutch broadcasting company RTL of 4 October 2008, Fortis started to face massive liquidity problems after larger corporations withdrew their money from their accounts.83 The fact that the Dutch State bought ABN
AMRO meant that core tier-1 capital ratios were restored to normal levels. The withdrawal of money from Fortis clients led to liquidity problems, thus showing a heavy dependence on short term funding, which is strong evidence in favor of the explanatory value of the dependency core element.
In addition, a lack of trust between financial institutions caused by increased liquidity problems throughout the entire European financial sector, made it for banks hardly impossible to borrow money from financial markets. This is another argument in favor of the dependency element.
81Haan, J. de, et al, Financial Markets and Institutions: A European Perspective (Cambridge: University Press, 2012 2nd edition), p. 52-53.
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