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Wednesday, 11 April 2012

Chairman of the Dutch Association of Banks (NVB), Boele Staal states more or less: “Companies, please don’t come to us. We don’t have money anymore. Go away!”

Boele Staal, chairman of the Dutch Association of Banks and glorious winner of a Golden Doughnut for Ill-conceived Ideas has found other windmills to fight. The same man that stated that ‘the housing prices in The Netherlands were not too high in reality, but people were only erroneously thinking that housing prices were too high’, is now trying to persuade companies in finding private means of financing, instead of always running to the bank for money.

In a polite and indirect manner he tries to say the following: ‘Companies, please don’t visit your local bank. The bank is struggling to collect enough cash and funding to meet the liquidity and solvability demands, as laid down in the Basel III agreement. Please help your bank and go somewhere else. Go away!’

Gee, I always thought that banks had a bridge function between people that have money, but don’t have a purpose for it and people that have a purpose, but don’t have all the money for it. When the rules for due dilligence, estimating the viability of an investment, risk management and good judgment are followed, it should be possible for a bank to invest in a company.

The Dutch financial newspaper Het Financieele Dagblad had an interview with Boele Staal yesterday. Here are the pertinent snips of this interviews:

According to Boele Staal, chairman of the Dutch Association of Banks (NVB), ‘companies have become too dependent on bank loans and credit.

Dutch companies have to ‘detox’ from their addiction on bank loans. Staal states that companies should start looking for alternative ways of financing their company. That is necessary as the banks have less leeway than before, due to the strict capital and liquidity demands of Basel III.

Also the banking tax that The Netherlands is going to levy, is playing a role. ‘Money becomes more expensive and banks should run less risk. Especially at innovative companies, where the stakes are high, the banking industry is very reluctant to invest.’

In comparison with the rest of Europe, Dutch banks play a very dominant role in the economy. ‘Even majority shareholders that want to invest in their own company, go to the bank first. This behavior has apparently become part of the Dutch mindset. Abroad, people are looking at their own money first and subsequently to partnerships or investment capital.’

It is not true that banks are pinching of the capital tap. Staal: ‘The credit growth in The Netherlands was 3.7% annually in February 2012. Before the credit crisis, this was 13 – 14%. There is no contraction, unless for loans south of €250,000. No bank will let a viable company go away. 

Arnoud Boot, professor at Corporate Finance at the University of Amsterdam, states that the large financial industry in The Netherlands enlarged the dependency of companies towards bank credit. ‘Banks hand out loans to companies in order to sell them other, more lucrative services too’.

Large corporations can straightly enter the capital markets and deploy corporate bonds. This is no alternative for smaller companies. These are dependent from bank loans. Boot: For Small and Medium Enterprise (SME) a more diverse banking industry is important. There is less chance then that all the banks pull the brakes at the same time’.

In itself, I agree with some of the statements that Boele Staal made in this interview. Yes, Dutch companies are indeed too dependent on the banks. And yes, there should indeed be more ways for company financing, instead of having the banks as only counterparty.

What I don’t like about his statement, is that he doesn’t mention one syllable on the role of the banks itself in getting this position.

The banks earnt good money on these investments in the past and especially on the various kinds of consultancy services that the banks could sell to the borrowing company too, via a package deal.

Companies that wanted a loan from a bank, were in most cases obliged to execute all their payment services through the bank that lended the money. And banks offered other services, like investment services, treasury services, fixed income services, payroll credit lines. All these services yielded extra income and often extra collateral for the banks on the outstanding loans.

The banks had it all, but became too greedy and too much risk-seeking in their past financial adventures, spurred by impatient active shareholders that wanted more return on equity and less cash in hand from the banks.  Yields of 15% on equity were disappointing and yields of 10% were a reason to stalk the board of directors of the bank with threats to split it up.

Now the banks have learned the hard way that ‘very high yields’ and ‘too much risk’ are brother and sister. Under pressure of the Basel III agreement, banks try to say goodbye to their overly risky investments, by slowly but surely pulling back their loans and credit lines. They have the right and perhaps even the duty to do so.

I don’t blame the banks for that. And as Boele Staal states in the truthful red/bold statement: No bank will let a viable company go away.

But please, don’t cry that the companies are too dependent from the banks and that they should detox from bank loans and credit lines. That is just too pathetic, Boele. You can do better!

Concerning the second red/bold statement that has been made by professor Arnoud Boot: he is totally right. A more diverse banking industry, consisting of both smaller, business-oriented banks and larger savings and loans banks would be very good. Unfortunately, in The Netherlands we are stuck with the four (soon to be three?) sisters: Rabobank, ABN Amro,  ING Groep and SNS Bank. This kind of oligopoly just isn’t good for business.

Then the million dollar question is: will alternative sources of funding, like crowdfunding, corporate bonds or direct loans from pension funds and insurance companies be able to fill in the void for SME-companies that is left by the banks?

Perhaps not; all these parties will demand more risk premiums than the banks already do, as one savvy analyst explained on BNR Radio today ( In this case, borrowing money for your company will be very expensive and will put too much pressure on your Return on Investment. And that is killing for business.

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