Amsterdam dreams of financial fame again

The Netherlands has dreams of becoming a major financial centre once again. But statistics show that the financial sector was never really the driving force behind the Dutch economy people thought it was.

The Netherlands has always been proud of its financial sector. It was in the low countries that the stock exchange was invented in the 17th century, and where the first pension fund was set up in 1871. And the European Options Exchange (EOE) in Amsterdam - a predecessor of what is now Euronext - was the first place were one could trade options in Europe in 1978. That legacy is now in jeopardy, the financial sector fears. The Dutch central bank (De Nederlandsche Bank, DNB) has announced it will be joining forces with consultancy firm McKinsey to investigate “a good future scenario for the financial sector.”

“We are letting opportunities pass us by,” says the director of the Amsterdam stock market, Joost van der Does de Willebois. “Precisely in times of great change there are unprecedented opportunities. But you do have to move quickly. In France everyone is working together – the government, the central bank and the financial institutions – to make Paris the financial centre of the European continent. They are now trying to become a clearinghouse for the derivatives trade and profit from the temporary weakness of London. I don’t see that sense of urgency in the Netherlands.”

The hope of playing an important role in the international financial sector has long been connected with the large companies established here. In the 1990s, Dutch banks and insurers embarked on a series of takeovers that went far beyond the borders of their home markets. For a small country, the Netherlands ended up with disproportionately large financial institutions like ABN Amro, ING and Aegon, which were among the large players even in the US.

'Explosive growth is over'

But the Dutch financial sector is suffering from an identity crisis. First there was the dismantling of ABN Amro by a foreign consortium in 2007. Then came the credit crisis, which plunged ING and Aegon into serious difficulty. Now that banks and insurers, their ambitions tempered, want to go back to being a "boring" sector, the question is: will the financial sector ever be a driving force behind the economy again?

But how important was the financial sector really for the Dutch economy? Ever since the 1980s, when much of the country's industrial production delocalised to low-wage countries, the thinking has been that the Netherlands would have to become a services-based economy. The financial sector would take a leading role in that development.

However, looking at the figures from Netherlands' statistics bureau (CBS), progress in this respect has been disappointing. The financial sector's share in the gross domestic product has not increased spectacularly since 1987 and has even declined to less than 7 percent in the past few years. The number of employees in the financial sector as a percentage of the total working population also barely increased in those years.

Only the balance sheets exploded - until recently. "Due to the higher capital requirements, stricter regulation will ensure that bank balance sheets will decline, so explosive growth is over,” predicts Michiel Bijlsma, an economist with the government's economic policy agency.

Professor Arnoud Boot of the University of Amsterdam puts the figures in perspective: “We are not succeeding at measuring the added value of the financial sector properly,” he says. “But according to OECD data the sector is also at about 6.5 percent [of GDP] and that is just 1 percent above the European average. So we cannot fall that far, whatever policy we develop.”

'Drifted to the periphery'

How important was Amsterdam as a financial centre before the crisis? Not all that significant, says Ewald Engelen, a financial geographer at the University of Amsterdam. “After the ICT bubble burst at the beginning of this century, you saw the profitability of the financial sector in London, New York, Dublin and Luxembourg quickly return to its previous level in the years that followed. You didn’t see that happen in Amsterdam. The Netherlands did not profit from the securitisation boom, while Ireland and Luxembourg profited from a long-term, well-coordinated policy,” says the researcher. “Amsterdam had already drifted to the periphery before the credit crisis.”

The financial institutions themselves joined up with regulators DNB and the Netherlands Authority for the Financial Markets (AFM) and relevant ministries to set up the Holland Financial Centre (HFC) in 2007, in order to put Amsterdam back on the map as a financial capital. The centre was developed during the takeover battle for ABN Amro, when it became clear that the bank would end up in foreign hands.

The HFC now believes that the crisis has in fact created new opportunities for the Netherlands as a centre for reputable banking. “The Netherlands never took part in the light-touch regulation which allowed such rapid growth in London and Dublin,” says HFC deputy director Robin Fransman. “That is something we are happy about now.” The HFC is now considering making complex securitisations, pensions, sustainable banking, derivatives and payment traffic the spearheads of it policy.

'International banks will withdraw'

Professor Arnoud Boot believes in a niche strategy. “You see that it works at option firms. We have a number of large option firms here such as Optiver, which employs 500 people, and IMC. It is also because of the European Options Exchange. You have to look into whether you can attract boutiques [small, specialised financial service providers] in other areas. Why not attract more private equity firms? They won’t come on their own, but they might as a group. There is much criticism of the living conditions in London; Amsterdam is more appealing.”

Boot argues that we must let go of the assumption that the Netherlands needs large financial institutions. “All large international banks will withdraw to their home markets for the time being and that is certainly the case for the Dutch ones,” he says. “This is making it difficult to keep large institutions here. If a new round of international consolidation takes place in a number of years, those could certainly be attractive candidates for takeovers. Other large institutions will not set up shop here; for them it is more important to be in a country that also has major political power.”

The question is what will politicians do. Engelen is sceptical: “The Hague only throws out life buoys; politicians try to salvage what they can. But all the strategic plans are being shelved."

'Politicians want to point the finger'

Fransman too is pessimistic. “The ministries involved are on the right track. But many politicians only look backwards and want to point the finger at the guilty parties. And they believe in fairy tales about the comeback of savings banks that bank risk-free and of international institutions that the Netherlands, being a small country, can no longer afford. There is no such thing as risk-free banking, it’s all about redistributing and spreading risks.”

It is unclear whether the return to reputable banking will be long-lived. At the moment every government is saying it wants stricter regulation. But, on a European level, we are already witnessing the first skirmishes about how to do that. The best solution would be European regulation, says Thorsten Beck, director of the European Banking Centre of the University of Tilburg and a former banking economist at the World Bank. But chances of that happening are slim, he thinks. In fact, he doesn't rule out that in a few years time countries will once again be competing for the lightest regulation.

Culture of envy

“In such a climate you have to ask yourself whether you even want to have a strong financial centre anymore,” says Beck. A strategy to make Amsterdam into a real financial centre once again could be dangerous, he warns. “You can profit from it in good times, but look at Iceland and London and you see what can happen when it goes wrong." The financial sector is not an export engine, says Beck. “The financial sector must serve the real economy. Then innovation can be important, but the financial sector failed to do that with derivatives over the past years.”

The Dutch culture of envy could also affect the business climate. Dutch politicians want to lead the pack in tackling high compensation in the banking industry. Finance minister Wouter Bos was proud to have put the topic on the agenda at the G20 in London.

“That drivel about bonuses has enormous consequences," says financial geographer Ewald Engelen.

"It is impossible for regulators to attract expertise if they stubbornly cling to the ‘Balkenende norm’ [the idea that nobody should make more than the 176,000 euros earned by prime minister Jan Peter Balkenende]. The Dutch have lost their pragmatism, and politicians are just throwing oil on the fire.”

For that reason, the HFC's Fransman was happy when Dutch regulators presented a memo last week that did not include demands for caps on remuneration and bonuses. “You shouldn't do that, not if you want to attract professionals who can bring innovation."