Seeking a stronger union of banks
Apart from being the Dutch Finance Minister, Jeroen Dijsselbloem has been the Eurogroup president since 2013. He spoke to Vanessa Macdonald about some of the issues facing the financial sector and how the Banking Union would help.
I was fascinated by your recent comment that the “road to populism was paved with paralysed politicians”. How worrying in the context of all that has already happened around the world and what might happen soon!
There are two reactions that I am seeing: some simply get paralysed and don’t want to do anything in case they anger people who then vote for populists. The other is ‘Let’s all become populists and start promising things that we can’t deliver. Forget about the facts and simply tell people what they want to hear…’
Both of these are very worrying and certainly where the economy of the eurozone is concerned, we should keep pushing the reform agenda, even though it is not popular. We need to go further to become more competitive. And the only way to create jobs and growth is by getting more competitive.
You are actually quite an optimist and said: “Thanks to the decisive steps we took, all European economies are growing in the third quarter, unemployment falling, deficits reduced” and so on.
All these figures are facts. I don’t make them up. Growth has returned to all eurozone countries…
It could be in spite of politics, rather than because of it…
Politicians throughout Europe have been taking difficult steps to sort out their fiscal problems and their budgets, modernising their pension systems, reforming markets and creating new business opportunities.
I think politicians in Europe deserve more credit than they get but it has been very hard on citizens as unemployment has been very high – and still is.
The results – in economic terms and social terms – are starting to show and growth in Malta is at five or six per cent, while Ireland, Spain, the Baltics are doing very well at three or four per cent. Other countries like The Netherlands are growing by around two per cent. Even the two large countries that are dragging behind – Italy and France – are still growing by approximately one per cent.
If you look at the countries that are doing best, they are the ones who have done the most difficult stuff: huge reforms took place in Spain, Ireland, and the Baltics and The Netherlands and they are now showing strong growth. Of course, the populace will tell you that it was all due to the euro but I do not think that is the right analysis at all. I think the crisis in some of our countries was caused by overblown housing markets, instable banking sectors, the rising costs of an ageing population and healthcare. Populists through Europe will tell you that these are not issues to worry about, that pensions should rise, that there is no problem with ageing populations, that we do not need to modernise our welfare states and that we are fine.
That is just not a realistic – and therefore not a fair – perspective.
One of the most obvious examples of populism was Brexit. You said Boris Johnson’s vision of Brexit was “intellectually impossible”, that it would take longer than two years, and that it would be a “lose-lose situation”. Very dire predictions…
He is telling the British people that everything is going to be hunky dory and that it will be a win-win situation where we will all be better off.
I am absolutely sure that this is not going to be the outcome. The outcome will be that the UK is outside the internal market. Of course we can design new agreements to allow them to enter the internal market and to allow trade to continue. We have to do that.
But it will not be as easy or as cheap as it is now.
But that will also work against the EU. The EU also trades with the UK…
The majority of their exports and trade is with the EU. Britain is, of course, an important trading partner but the trade is much smaller than the other way round.
How much of what you say is posturing to make sure that other countries do not decide to follow suit and leave the EU?
The economic reality will be that if you are not fully part of an internal market then you will have extra costs to do business. There will be hindrances, there will be tariffs in some cases. This is one of the factors considered by companies who want to invest. Companies in the UK are already asking whether the UK is still the best base for them from which to service all of Europe – should they simply be on the continent and serve Europe from there? These decisions are being taken.
I am not saying this to threaten the UK as the Dutch are – like the Maltese – great friends of the British. We are, after the Irish, their second trading partner in terms of volume and value. So we have absolutely no interest to damage this trading relationship.
But it is a fact of life that if you are outside a club, you are no longer a member and won’t have the perks and prerogatives that members have.
This is what Boris Johnson should tell the British people: that they will lose growth, they will lose jobs, and that there will be an effect on their wealth but that as a result, as a proud people, they can choose for themselves, that they have their sovereignty.
That would be the fair trade-off.
Sovereign linkage to banks is a loop that you have been trying to break. Maltese banks hold a high percentage of government paper. Will you establish a threshold?
I don’t think so. I think that over time, it will be sensible for banks to be less dependent on the amount of sovereign bonds that they hold, certainly of their own sovereign.
It simply makes sense in terms of risk mitigation not to have too high a level of concentration of one asset. That is just sound policy.
So you will allow banks to self-regulate?
The Basel Committee is discussing whether there should be a risk weight for sovereign bonds and whether there should be a limit on concentration levels in your own sovereign bonds. So we will await the outcome of Basel and then discuss it at a European level.
Banks should use the time available to reduce those kinds of risk. I think in the future there will be a risk weighting for bonds but we are not there yet.
Insolvency reform is a key element of the Banking Union. The European Commission issued its new rules last week which said that rescued companies should have ‘new financing’. Who is going to provide that? If a company is not doing well, how can you force a bank to pour good money after bad?
When I said new finance I did not mean it should be for companies that are already defaulting on their loans.
The whole issue of non-performing loans requires some action. You can wait for a long time and hope the economy will recover so these loans will be paid off. And for some, this could work. But the rest of this portfolio will at some point need to be written off.
You need to either start building provisions or taking your loss, so you would need fresh capital for those provisions. If you do not do that, then basically your whole portfolio is locked up as it is simply not performing, and there is simply no space for new credit to be given out to new companies – which is where growth is going to come from.
Writing off a portfolio will require capital and the only way to get that would be if your investors believe you are really clearing out and that the bank is again viable with a good return on profit.
Banks really need to act. The legal frameworks are now there.
But it worries me as in the same speeches you talk about bail-in where investors would pay up. So their risk is much higher than it used to be in the past…
The risk was the same but it was covered by governments. We have seen this throughout Europe where governments had to spend huge amounts of taxpayers’ money bailing out banks – which was really bailing out investors and saying ‘you will get your money back’.
If you are an investor in a bank you have to have a fair assessment of what the risks are. Risk is fine as long as it is priced in a fair way. Bail-in is a fine economic principle if you invest your money in a bank: you take out profits in good times but if there is a loss, you also carry some of that loss. That is the risk/return trade off.
The government guarantee that has implicitly been there on banks and on investors will go away. I don’t see why ordinary taxpayers should cover for the losses of investors.
But what are the unintended consequences of this? Banks need to raise capital. Isn’t the risk that smaller banks will not find investors and isn’t that what you wanted to avoid, having banks that were ‘too big to fail’?
I don’t think that this is an issue of large or small banks. We have some large banks which really need to do a lot of work in terms of profitability, restructuring and reducing risks etc., but lots of small banks which are very sound and well capitalised.
Europe has to a large extent been postponing the sorting out of the banks. The US did it very quickly after the financial crisis in 2008/2009 and forced them to recapitalise and to sort out some of these problems. The banks were open for business in the US again quite quickly.
The reason that Europe dragged its feet is because it is a difficult process. You need to write off some of your non-performing loans, your portfolios, and to downgrade the value of some of your assets, and you need to convince investors that from now you are back in business and will show them a return on profits. It is still a major restructuring issue for a number of banks.
The positive side is overall European banks are already in a much better position since the Banking Union. They have been recapitalising and a lot of new capital has been brought in. Banks are being sold and restructured, mergers are taking place.
Jobs are being lost in the sector because of new technology so there is a lot of dynamics but some of the big issues in banks have been postponed and need to be addressed.
The guiding principle will be bail-in which will also have a preventive effect because investors will think carefully and a lot more critically before they put their money in a bank. This will in turn put pressure on banks not to hide their problems and not to postpone dealing with their problems. Investors will only come back to you once you sort yourself out.
An external factor having an impact on banks is the regulatory fines from the US. Have we seen the worst of it and how do you see things going forward under Trump, given indications that he might review this regime?
It is very difficult to predict. Many of the fines do not come from the financial regulators but from the courts and civil procedures, and very often from settlements even before it goes to court.
I cannot predict whether we have seen the worst of it and I am not standing up for the banks that have been involved in fraud, Libor fraud and so on.
They should be sanctioned.
But the size of the sanctions is huge and it is eating through the new capital: what was brought in to European banks, the American legal system is pulling out again!
$14 billion for Deutsche Bank is a huge setback for a bank which is in the process of restructuring, cutting costs and becoming more efficient.
I have expressed my concern about this to the American authorities and of course, quite rightly, they said that it was in the hands of the legal system and that the politicians do not control the legal system. But I think that there is a major issue here.
An issue that is having an impact on Malta is the dearth of correspondent banks, which is also tied to the regulatory regime in the US. Is there a solution going forward?
It is difficult to say. We regulated heavily, of course, after the financial crisis. But there comes a point when we need to stop and look back on what we have done and ask ourselves whether we need all these rules and regulations.
And I think that there will be more comfort for politicians but also for the public at large if banks are again in a sound position. That is the right moment to start looking back and say that we can perhaps take away some of this regulatory burden.
Some say that this time has already come; some say that we are almost there. Last week the Commission came out with global rules about solid banks, tackling all the legacy issues to do with capital requirements.
I think we have covered a lot of ground in creating solid banks and the time may have come to look back and ask whether we need all the rules and regulations.
Preferably, we would do it with the US as there is a big difference in regulatory standards – what the Americans require, what the Europeans require from banks – and these should converge.
This brings us back to populism. I strongly believe in international and economic cooperation. I still think that trade deals between the US, Canada and Europe are of great value for economic prospects and part of those talks should be on whether we can converge –perhaps to a lower level – some of these very heavy rules and regulations for our banks, because doing business is becoming pretty tough.
It is the same for Dutch banks which are becoming so nervous about American rules and regulation, supervisors, fines and so on that they are withholding doing business in the Middle East, in Africa, because there are so many risks.
We talk to the Americans about this and they always say that they are prepared to help – but they cannot seem to take away the threat of sanctions.
That is one of the topics that we should talk about and work on in the G20 and G7 context.