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.
No comments:
Post a Comment