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Saturday, 7 December 2013

The ‘fairytale of the three little pigs’ and the European Banking Union: will piglet The Netherlands go for the house, made of straw?! PM Mark Rutte is not certain yet.

Probably everybody knows the story of the three little pigs, who were pursued by a big, bad wolf: 
  • the first built a house made of straw;
  • the second built a house, made of wooden branches;
  • and the third built a house of bricks and mortar. 

As you likely heard this fairytale before, you know how it ends: both the straw and wooden house of the first two pigs were litterally blown to smithereens by the wolf’s breath.

However, the third one was a smart piglet, who built his house of bricks and mortar. By hiding himself and his two brothers in this house, all three survived the enduring attacks of the big bad wolf.

Unfortunately, the mothers of the Dutch members of parliament weren’t much into telling fairytales to their beloved children. At least, the Dutch MP’s didn’t hear this important one. That became clear during an interview of Mark Rutte with the Dutch financial newspaper Het Financieele Dagblad (FD), which was published on Friday 6 December 2013.

The question, whether foreign banks might be rescued with Dutch taxpayer’s money, is one of the many loose ends that the Euro-zone countries must solve, before a crucial assembly upon the European Banking Union takes place next week.

One day after a majority in the Second Chamber of Dutch parliament urged the cabinet to install bulkhead gates within the European emergency fund for banks, Prime Minister Rutte does not want to make a statement upon this decision. The emergency fund for problem banks is a question that splits the current coalition of VVD (liberal-conservative) and PvdA (labour) in half.

Government party VVD finds ample support within the opposition parties CDA (Christian-Democrat), PVV (Wilders’ Party for Freedom), SP (Socialist Party), Christenunie and SGP (confessional parties), for its plan to make it impossible that a problem bank from country X can receive aid donations from the emergency fund, that were originating from country Y: the so-called bulkhead gates within the emergency fund.

Government party PvdA and opposition party D66 (liberal-progressive), however, are NOT principally against banks from other countries receiving money from The Netherlands (just like Finance Minister Dijsselbloem). 

Above all, Dijsselbloem wants to prevent that the tax-payer must ever again foot the bill for the rescue of banks, like it happened during the crisis of 2008/2009.

During his weekly press conference last Friday, the FD asked this question to PM Rutte. At this moment, chairman of the Euro-group Dijsselbloem is speaking in Berlin with French, German, Spanish and Italian Finance Ministers.

When asked if ‘financial transfers from strong Euro-zone countries to weak ones should be possible and allowed’, Rutte answered: ‘I will react to the motion of the Second Chamber.

Currently, there are many loose ends. One of those is a. whether you have an emergency fund with bulkhead gates or one with overflow valves [enabling the transfer of money from country X to a bank in country Y – EL] and b. whether you have the possibility to shift these funds within Europe. This is utterly theoretically, however, as you have to go through a deep bail-in first, before you hit the fund [Rutte means that first the shareholders /bondholders and the large depositholders of a defaulted bank have to foot their part of the bill, before the emergency fund emerges into the picture – EL].

Another question is on which European article this fund will be based?  Yet another point is how the governance is managed: in other words, how will the settlement of defaulted banks take place eventually?’

Question: ‘What do you think principally?’

Rutte: ‘It goes beyond me to principally think something about bulkhead gates or overflow valves. All these questions are important in order to grind and put primer on the new banking union.’

Question: ‘So you don’t principally rule out money transfers from North to South Europe?’

Rutte: ‘Those transfers could also be from South to North Europe. You never know where a problem emerges. When, for instance, a problem emerges with a Finnish or German bank, it could also be that it needs assistance from the countries in the South.’

It doesn’t happen often, but in this case I think that PM Mark Rutte showed very good judgment, from an economic as well as political point of view: 
  • From an economic point of view, by not ruling the overflow valves out in advance and consequently weakening the European emergency fund for banks, before it even started; 
  • From a political point of view, by holding his cards close to his chest, thus preventing that he gets a stockpile of PVV manure over him already. 

For all the Dutch MP’s, who are in favour of the bulkhead gates within the European emergency fund for banks (CDA, PVV, SP, SGP and ChristenUnie), thus ruling out the transfer of Dutch tax-payer money towards banks in other countries, I want to memorize the following:

Although there is now a relative calm at the international financial markets, it could be the calm before a new storm emerges. The debt-to-equity ratio of many banks has improved strongly during the last five years, but that does not mean that these banks are strong enough to withstand any kind of financial storm. 

Many banks are still financed quite poorly: also banks that are doing business on Dutch soil. Many people don’t know that, but also many people in charge don’t want to know that and instead keep up their appearances, that everything is hunkydory in the financial industry again.

Besides that, we had our share of scandals concerning the banking industry during the last few months:

The government penalties (especially from the US and the EU) for the emerging banking scandals have become bigger and bigger over the years. We are now approaching the point, where such a multi-billion dollar penalty could become a life-threatening event for a fraudulent bank.

The European emergency fund for banks is established just to prevent that an initially small financial event within one European bank turns into a violent storm, that threatens to consume the whole European banking landscape again.

Many, many banks in Europe are still much ‘too big to fail’ and the evolution of the European banking landscape is rather aimed towards bigger banks, instead of smaller banks.

Look for instance at: 
  • what is happening between the small local banks and the national / supranational supervision (the local Rabobanks are a good example), that doesn’t want to deal with these small banks anymore;
  • the emergence of ever bigger banking conglomerates, which are better able to deal with the enormous ICT expenses and the continuing transfer of clients from the brick-and-mortar bank stores to the online channels, than small banks with their small (ICT) budgets;
  • the mergers-and-acquisitions business, which is slowly waking up from five years of hibernation, influenced by the ample availability of utterly cheap money. Large mergers depend on large and powerful banks: that is just the way it is;
  • the still horrendous results that a bankruptcy of a large bank somewhere in Europe would have. Whether the Dutch like it or not: the European banking industry is as much interconnected as it was in 2008. When one domino tumbles, a lot of other dominoes might tumble too.

If the Dutch MP’s want an emergency fund with bulkhead gates in it, than they are building a house made of straw, just like the first piglet in the fairytale. The first blow of the big, bad wolf (i.e. the financial markets giving it a try in case of a defaulting bank) was enough to floor this straw house.

When instead, the Euro-zone countries promise to stand tall for eachother and put their whole financial firepower behind this European emergency fund for banks, the big bad wolf will see that this house-of-bricks-and-mortar is much too strong to blow away. 

Although not many people will like this idea: if you want to have a stable, financial system, a very strong and powerful European emergency fund for the banks is the way to go. There is simply no alternative, in my humble opinion.

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