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Thursday, 12 September 2013

“Nout Wellink speaks” with FDBNR_Newsroom: Paul van Liempt and Ernst Labruyère in discussion with the former chairman of De Nederlandsche Bank!

Last Monday, BNR Newsroom – BNR News Radio’s weekly discussion show, taped for a live studio audience – had a very special guest: former president of De NederlandscheBank and former chairman of the Basel Committee, Nout Wellink, who would look back at Lehman Brothers, five years after the bank collapsed.

As I have critized Nout Wellink heavily in the past, I was extremely curious about his views on past ‘incidents’, like the global credit crisis and the bankruptcy of DSB. Therefore this was an opportunity that I didn’t want to miss for the world…

Besides Nout Wellink, another guest of this episode of BNR Newsroom was Cees Maas, the former CFO of ING Groep NV (INGA). His interview will be published in one of the next episodes of this blog.

Nout Wellink (left) and Cees Maas of ING
Picture copyright of Ernst Labruyère
Click to enlarge
However, this episode I will print the (almost) integral interview that BNR anchorman Paul van Liempt and I had with Nout Wellink. Tomorrow, I will print my views and comments upon Wellink’s remarks during the interview, but today it’s just the interview.

I must confess that I now better understand the dilemma’s that Nout Wellink has been in, during the last 15 years and especially during his last four, extremely difficult years as president of the DNB. Perhaps I even have been too harsh on him in 2011, as a freshman blogger. History will judge on Nout Wellinks presidency in the future, but now I feel that I should perhaps give him a little bit more slack…

One thing I can conclude from the interview: Wellink has been very frank and outspoken during the interview and some answers that he didn’t give, have been as telling as when he would have straightaway answered the question.

Paul van Liempt of BNR News Radio
Picture copyright of Ernst Labruyère
Click to enlarge

From here I want to thank the giant BNR anchorman Paul van Liempt for the opportunity that he gave me to ask my questions to Nout Wellink. It almost felt like we did the interview together. I hope that you enjoy it…

Nout Wellink

Nout Wellink is former president of Dutch national bank DNB  (De Nederlandsche Bank), former chairman of the international Basel Committee and currently member of the Board of Directors of the Bank of China.

Nout Wellink: Lehman came for everybody as a lightning strike. Although people at the ECB stated before that 'we were dancing on a volcano' with the subprime mortgages markets, the day itself came still as a total surprise.

That doomed Monday, I gathered a number of important supervisors for an assembly of the  executive management.

My undercooled opening words of that day:”This will not be the mother of all quiet Mondays”.
It was obvious that day that an financial/economic landslide had occured and that this landslide was going to have grave repercussions for the Dutch and European banks.

We put a special team together to fight the consequences. Especially Fortis had our utmost attention, as a consequence of their already wobbly financial position, due to the takeover of ABN Amro one year earlier.

Paul van Liempt: Didn't you see Lehman come at all? Our columnist Kees de Kort and others did see it come.

Nout: I know that some people thought they saw this crisis come, but it is always with predictions: some are right and some are wrong. I saw things coming to us too, which didn't happen after all. And also the people that did see it come, have made their share of false predictions.

Nout Wellink
Picture copyright of Ernst Labruyère
Click to enlarge
The international community didn't see it come; the IMF later admitted that their September outlook had been hopelessly optimistic: "the biggest forecasting error in their history". The same was true for the ECB, the BIS (Bank of International Settlements) and for DNB's customer bureau.

After a good 2008Q1, 2008Q2 had been not very good, due to a small slowdown of the economy. The international consensus was that Q3 and Q4 would be better when the oil prices would drop and the available income would rise. We have never been more wrong.

Paul: Was there not something you could have done as a chairman of the DNB?! Like changing the capitalization demands for the banks? You could perhaps have taken the initiative for that?

Nout: You don't have any idea how many ‘what if’-scenario's we have examined throughout the year, when something new happened. Also after Lehman we went through such what if-scenario's

An agitated Nout Wellink states, after an ironic remark by Paul about Wellink's trustworthiness: All international and national institutions were mistaken about the impact of Lehman. By the way, the same happened in 2010. Within one year, we had a debt crisis in Europe, a nuclear disaster in Fukushima and a starting conflict in The Middle-East.

Of course there is always someone, who knew at the time that Egypt would go out of hand. And someone who knew that the banks had too many sovereign bonds on their balance sheets.

Paul: Wasn't there such a person at the DNB, who raised his finger and who asked:”Aren't we doing everything wrong at this moment?!”

Nout: No, that someone wasn't with us! And neither with the Bundesbank! And with the Bank of England. And even with the FED, that special someone wasn't there.

In April 2008, during an assembly of the Basel committee in Noordwijk, The Netherlands, we asked the US FED representative: "What is currently going on with you,  concerning those subprime mortgages?" At that time, we noticed that there was a problem brewing with those subprimes, but even when you look in hindsight at the situation in April and May 2008, you would see that with 2.5%, the number of defaults was actually lower than during the previous crisis.

Paul: Does that mean that even with today's knowledge, the actual start of the crisis would have been nearly impossible to predict?

Nout: We took a bunch of lessons from this crisis. The first lesson was that our ‘analysis apparatus’ was not able to see all interconnected relations within the economy of 2008: between individual financial institutions, but also between the financial system and the real economy.

We worked hard on this issue, also internationally. We learned from it that we didn't have it under control at all worldwide. The English national bank established a control system for this. The ECB established the European Systemic Risk Council, which would have to analyse the relations between financial institutions, as these were insufficiently mapped in 2008. However, it would of course take years and years to develop this knowledge to a sufficient level , as the economy is a very complex system.

Ernst Labruyère: In 2008, the situation with f.i. ING was that this bank had a leverage of 1:70. The balance total was €1300 bln against only €17 bln in equity. Didn't you realize at that moment that a small write off of only 2% on the assets portfolio would totally wipe out the equity of the bank?

Nout: Taken apart from the ING, the system in those days was that a bank was assessed upon its solvability ratio, the so-called capital quote. The assets were measured against the lended amounts, which were risk-weighted. When the risk-weighted collateral was taken into consideration, everything was considered to be correct, for this particular bank and other banks.

What wasn't correct, however, was that the collateral for some lended amounts had a risk-weight of 0, like sovereign bonds from the euro-countries. Such were the international regulations in those days, also those from the European Commission
and the international authorities.

These regulations seduced the banks to use their available equity at the most efficient way, which means in practice: with a giant leverage.  This led to the litterally exploding balance sheets in those days: the banks thought that this was without any risk.

We saw that happen of course, but we didn't look at the consequences in advance, as we thought that the sovereign bonds would be absolutely safe.

When we found out that this was not the case, the Basel Committee – with me as a chairman – introduced the so-called leverage ratio. The size of the financial activities of a bank would be coupled with the capital-ratio of this bank in a non-risk weighted manner. This meant that the Dutch banks, and also many banks worldwide, had to shrink their balance sheets.

Ernst: In 2007, ING had started a massive stock buy-back program...

Nout: I don't want to talk about individual banks here, as an ex-chairman of DNB

Ernst: I realize that, but didn't ING jeopardize their bank with this stock buy-back program?

Nout: I really don't talk about individual banks.

Paul: But didn't some banks think that they were ‘too big to fail’?! That they could do whatever they wanted and just take risks without consequences?! Didn't some banks realize that and didn't they act accordingly?!

Nout: The concept 'too big to fail' - the idea that the bank would always be saved by the government and taxpayers after all - has only played by an extremely limited group of bank managers, I presume. That was not the starting point

The real starting point was even more worrisome. I remember a discussion that I had with Josef Ackerman [former CEO of the Deutsche Bank - EL] once. His opinion was: "We are very big and we can hire "the best of the best". The best and brightest people in the business. No matter how big we become and no matter how complex our environment and our products will ever become, we are able to work it out. We have the best and the brightest people, with the best diploma's from the best universities”.

I said – this conversation with Ackerman was at a Basel meeting – to him: "Maybe that is the wrong starting point. I don't assume that you should hire a bunch of nitwits, but in the daily banking reality, the people should not become too smart. Then things become too complex and too opaque".

Paul: Does that mean that banks should hire more mediocre personnel?

Nout: Not exactly. The point is that the bright people should not act like smart-asses, who try to overpower the less smart people. When the brightest people develop the smartest and most complicated products, then things start to go awry.

Ernst: I have another question. I know that you don't speak about individual banks, but are there in general Dutch banks which belong to the so-called zombie banks?! [ Banks, which are so undercapitalized that they operate in a zombie-like state - EL]

Nout: When I would answer such a question, then you would draw your own conclusions upon individual banks. These are good and interesting questions and many analysts are looking at this topic, but it is not opportune for me, as an ex-supervisor, to answer this question.

Cees Maas
Picture copyright of Ernst Labruyère
Click to enlarge
Cees Maas (ex-CFO of ING Groep NV): One more remark about the complex products: I want to state, that it is good when your business and products don't become too complex. These products were not transparant: not only for the customers, but also for the banks which sold them, especially for the risk management department and the executive management.

Second, these products were created by very intelligent people. The hardest thing is, however, to create a simple product. The adage of ING Direct then and now was: it is extremely difficult to keep things simple.

Paul: So, mr. Wellink. Things should become more simple, also for the supervisors. The supervisors can only do their jobs when the products are simple enough to understand for them. Do the supervisors understand all products at this moment?

Nout: I must assume that they do. There are actually complex products which are simple to handle. A plane is something like that. It is possible to create simple products from complex matter, but this should be arranged well in advance; especially the transparency.

Paul: Supervision is very important. You stated that in an interview. The supervisors should be smart and well-trained enough to do their jobs. Are the current supervisors smart enough?!

Nout: I presume they are. However, I always stated to my supervisors: "When products and things are too complex to understand, you simply must not accept this"

I had problems with a bank like the defaulted DSB Bank in the past. The problem for me was that DNB's jumbo mortgages of 140% of the Real Estate value, and their single-premium assurance policies were allowed under the regulations of those days. The Authority Financial Markets and I tried to change that since 1999, but the risk-awareness was simply different in those days. Only in 2008, Dutch parliament took measures against these jumbo's and single-premium policies.

AFM knew about the risks of the single-premiums and the DNB knew that these giant jumbo mortgages of 140% should not be sold at all, as these had also influence on the financial structure and the business model of the bank who sold them, next to the disastrous effects for the customers.

Nout Wellink
Picture copyright of Ernst Labruyère
Click to enlarge
In 1999, I started with saying during meetings with politicians that ‘The Netherlands was world-champion in Jumbo Mortgages and normal mortgages’. However, this didn't make a lasting impression on the politicians, in spite of some very serious talks about the subjects.

The politicians didn't forbid the jumbo's, but started with instating a code of behavior. Afterwards, DNB stated that this code of behavior could not be maintained easily. Then the politicians changed the code of behavior and made it somewhat stricter.

Only in the end, the politicians took the decision that jumbo mortgages should not exceed 108% of RRE-value. The current developments go towards even lower percentages for Jumbo's.

Bastiaan Gillink, student of Duisenberg School of Economics: I have a question about the Dutch deposit guarantee system. This is a good way to prevent from bankruns, but the system is also criticized, as the deposited money is not risk-weighted. In the literature there have been proposals to make the deposited insurance money 'risk-weighted', based on the risk of the collateral.

Nout: I would prefer when the deposit guarantee system would indeed be risk-weighted. However, this is very complex as a depositing bank should be assessed for the risk that it bears, through f.i. the size of the bank balance.

Paul: Some short questions Will there be a European Finance Minister in the future?

Nout: Eventually, there will be an EU Finance Minister, but this might take a while.

Paul: Will there be an EU Banking Union?

Nout: That depends on your definition of a Banking Union. A basic version of that will start in 2014, but it will take a while before the whole establishment will be finished.

Paul: Will we get our money back that we invested in Greece? Earlier on you said yes. Later on you said no.

Nout: I won't answer this question now, but you can quote my last statement upon this subject.

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