Harry Geels: Why the government is losing money on ABN AMRO

September 24, 2024

Politics Banks

_{This column was originally written in Dutch. This is an English translation.}

By Harry Geels

Last week, Minister of Finance Eelco Heinen announced that the government's interest in ABN AMRO will be further reduced. Ultimately, billions are lost on the 2008 rescue of the bank. Roughly six hypotheses can be given for this.

According to the FD, the Minister of Finance is selling ABN AMRO shares. Eelco Heinen: 'The state is not an investor and therefore does not make risky investments if it does not serve the public interest. I therefore consider it undesirable to wait for a higher price.' This way, billions are lost on the takeover of the bank in 2008, a takeover that was necessary when ABN AMRO threatened to go bankrupt during the credit crisis. Ultimately, all banks in the Netherlands received (indirect) state support.

There is of course no single cause as to why such a large loss is (ultimately) incurred - the current estimate is around €5 billion. Overall, it is probably a combination of about six factors that partly reinforce each other. Five of them are systematic, one idiosyncratic. Let's discuss them briefly and then say something about the banking model in general. Let's start with the approach to the credit crisis by the authorities (central bank and government). There has been a major difference between that of the US and Europe.

1) Addressing of the credit crisis by the authorities

After Lehman Brothers went bankrupt and shook the financial world to its foundations, the US took drastic action. The Fed bought toxic (real estate) investments from the banks and the US government provided additional capital, usually in the form of preferred shares, to banks. There were no complete nationalizations of banks (although there were some forced takeovers, such as Bear Stearns by JP Morgan Chase). Ultimately, the American authorities made money from their approach to the crisis.

The rescue of the European banks was primarily a national matter, with several banks having to be completely nationalized. There was no central coordination. The ECB did not purchase toxic investments during the credit crisis. European banks have implemented a gradual restructuring of bad (real estate) loans, with or without government guarantees (as with ING), or through 'bad banks' (as in Ireland and Spain). Some of the bad loans are still on the balance sheets of some European banks.

2) Europe relatively 'overbanked'

Another problem is that the banking sector in Europe is relatively large. The ratio of bank assets to GDP in the US is between 100 and 150%. Much more financing is done outside the banking sector, for example via private markets or the stock exchange. Banking water heads in Europe are Luxembourg (bank assets versus GDP: 1500%!), Switzerland (600%), Malta (550%), Ireland (450%), Cyprus (400%) and the Netherlands (350%). The greater the relative role of the banks, the more extensive, complex and necessary any rescues become.

3) Complicating euro crisis

Another complicating factor for European banks is that the credit crisis in 2010 was also followed by a euro and government loan crisis. European banks that held (and still do) a relatively large number of government bonds to cover their balance sheets ran into problems when Greece, Ireland, Portugal and Spain in particular ran into fiscal problems. The euro was therefore on the verge of collapse. Ultimately, in 2012, the ECB had to intervene (Draghi's 'whatever it takes') by purchasing bad government loans on a large scale, in order to also save the banks.

4) Fragmented European banking market

A problem in Europe is the fragmentation of the banking sector, with countries having their own regulations and supervisory frameworks. There has been harmonization since the credit crisis, but most banks still have a strong 'home bias' and deposit guarantee schemes are still regulated locally. On balance, the banks (and their underlying savers) from one country do not want to guarantee those from another country. Although the European Deposit Guarantee Scheme (EDIS) is in the pipeline, countries such as the Netherlands and Germany are particularly hesitant about it.

5) Weak European economy

Then the economy. After the credit crisis, the US experienced much stronger economic growth and American banks implemented (personnel) restructuring much faster. For example, Citi Group and Merrill Lynch decisively laid off 50,000 and 35,000 people respectively. European banks restructured more gradually. In general, inflexible labor markets and slower growth in Europe have ultimately led to more limited growth and profit potential (not only at banks).

6) Idiosyncratic problems

Finally, there are also problems that are purely related to ABN AMRO. In the years before the credit crisis, the bank pursued a megalomaniac 'global investment banking' growth strategy, which ultimately led to a hostile takeover of the Royal Bank of Scotland (RBS), Fortis and Banco Santander consortium: 'worst banking deal ever.' nationalization of ABN AMRO, a complex unraveling of the bank took place. Furthermore, there were problems with risk management, supervision and management at the bank. Read The Perfect Prey if you want to reminisce.

To conclude

The loss of sales at ABN AMRO is not only a result of mismanagement by the government or the bank itself. Rather, it is a combination of circumstances that can of course only be partially described in a column like this. However, the important question is whether these types of rescues at taxpayer expense will be necessary again in the future. We still cannot be confident about that. To achieve this, banks' buffers would have to be increased much further and the banking sector would have to play a smaller role in the economy.

This article contains a personal opinion from Harry Geels