Bos: 'Banking will never be the same again'

Dutch finance minister Wouter Bos is now also a bank owner, but his powers are limited. Much is decided in Brussels or Basel. "It's very frustrating."

Last Friday, finance minister Wouter Bos sent the Dutch government's 'vision' about the future of the banking sector to parliament. It is more an inventory of existing plans and ideas than anything else. What stands out most is the government's apparent impotence. Significant reforms in the system of oversight depend on the European Commission or the Basel committee for banking supervision. And the capital markets have become so interconnected that any solution must be found on the global level.

Bos has one dominating thought, ten months after the nadir of the crisis: "Never again." He says it loud and twice.

"Paradoxically, I have grown worried in the past few months about the speed with which politicians have been making decisions about the financial sector. More supervision here, more regulation there. But there are some more fundamental questions that need to be answered. How are we going to regulate this market in the future? Because I don't want this to happen again, to me or to my successors. For banks to damage themselves to such an extent, footing the bill to the taxpayer, making entire economies shrink or grind to a halt, the bankrupties, the massive unemployment..."

Bos is the leader of the Dutch Labour party and became the finance minister of the Netherlands in 2007. As such he has been responsible for how the nationalisation of the Dutch parts of Fortis and ABN Amro and the capital injections into ING banking group and other insurance companies.

Bos wants more banks to be more and more transparent. "The banks of the future will not be universal and global. Banks need to be smaller and focus more on specific markets. Rabobank could be an agricultural bank, for instance, and ABN Amro could concentrate on transport. I'm not going to decide what each bank can or cannot do. But you can influence capital demand in such a way that it becomes unprofitable for banks to develop certain activities."

The European Union is based on the idea of a common market. Are banks now withdrawing behind their national borders?

"Banks are becoming more regional rather than more national. That's not a bad thing in itself, because the relationship between banker and client should be central again. Back to the relationship banker of the old days. For today's banker the relationship with the client is a commodity, a couple of numbers entered into a computer. When you start trading loans in this manner the client's trust is also sold off. Don't forget that the interest of the clients and the shareholders are not aligned. Banks could do whatever they wanted for the shareholder because if things went wrong the taxpayer would pick up the tab. It is that kind of strategy we need to discourage."

But you are putting your trust in self-regulation again?

"No, I'm not. I hope bankers have learned from what happened. But at the same time I'm hearing stories about what's happening in The City and on Wall Street. Bankers, whom we have bailed out, are back to complaining about the labour market and they're giving out bonuses again. Less than a year after everything happened! It staggers belief. Bankers need to realise that things are not going to be the same again. If necessary, social pressure needs to be brought on them so that they will understand that their behaviour is seen as scandalous. Under no circumstances can the bonuses return to their former levels. For years they were heroes. We all wanted to be bankers, like Michael Douglas in the film Wall Street. Well, they're not heroes anymore and one would think that they would rather be trusted and admired than despised."

How can you keep bonuses from going up again?

"In times of slow economic growth high salaries in the banking sector are a tough sell. Let's hope that public pressure keeps up. But no, I definitely don't entirely trust the bankers to have learned from their sins. We can exercise some control through supervision. If high bonuses mean that a bank is taking too much risk, the supervisors can put a stop to them. And we can always tackle excessive bonuses through fiscal legislation."

You seemed keen on a separation between savings banks and the more risky investment banks, but you didn't follow through on the idea? Why not?

"If I am disappointed about one thing it is this. I thought it was a wonderful idea, and I said right away we should study it further. But gradually we have come to the conclusion that distinguishing between savings banks and investment banks is very complicated legally and practically speaking. How do you define what is risky and what is not? Investment banks will also want to attract savings. And because they take more risks they will be able to offer higher interest. So consumers will end up going with them anyway despite the higher risk. And when such a bank collapses people will be looking to the government again for help. So if you're going to do this it has to be at the European level. I hope we're going to have a serious discussion about this at some point."

But surely you can draw the line somewhere. Why are banks that were bailed out by the government still allowed to engage in proprietary trading?

"I don't see how you could do that, draw the line between what a bank can or cannot do. Regular banking, attracting short term money and lending it out long term, is already a form of proprietary trading. All banking involves risk-taking."

ING's former CEO Cees Maas says everybody will have forgotten the hard lessons in five years' time.

"Yes, or maybe even sooner. That's why we need more oversight and we need to impose higher capital demands on the banks. We will see a maximum debt to equity ratio imposed on the sector. Even the Americans are now demanding stricter regulation, and they were the ones who wanted everything as free as possible. Now look at their plans for stricter rules about a bank's solvency. That gives me hope."

The last time around it took years of negotiations to come to an agreement about banking rules. Won't this take too long?

"It's a difficult discussion. But if the rules come from Basel, we will keep a level playing field."

Level playing field? That's what they said at the Basel accord negotiations in the nineties and everybody relaxed the rules as a result. Only Spain said no.

"The Spanish supervisor imposed tougher rules because their banks had just been hit by the financial crisis in Latin America. We're just learning that lesson now. If Basel doesn't act quickly enough, the risks become too high and we can still impose stricter rules here even if they're just temporary. We can't allow ourselves to be less strict than the others. The Dutch central bank has the means to impose higher solvency demands on the banks."

Isn't the most important thing now to get credit flowing again?

"My worst nightmare is that we will lose the sense of urgency when the economy starts picking up again. In the short term some banks will need new more capital injections. That's a huge dilemma and a tough sell. In Japan public opinion turned against the banks to such an extent that the government was no longer willing to come to the aid of the banking sector. We can't let it come to that. There is also the risk of a credit crunch. We understand that banks are more cautious about extending credit during a recession. Credit is still expanding but that might change and if it does it will slow down economic recovery. A third danger is that political pressure will become so high that we will start over-regulating and in doing so stunt growth."

Isn't it frustrating that you seem to be stuck? There is not a whole lot you can do at the national level, so you have to rely on self-regulation by the bankers on the one hand and European rules on the other?

"It is terribly frustrating. I never want to see another Icesave again, where you become dependent on the Icelandic supervisor. Or Fortis, where there were several national supervisors. But there is hope. European oversight is negotiable again within the EU, and the proposals currently on the table should prevent dramas like that from happening again. But it involves more haggling than I would like. The problem is that we also need international banks operating in several countries. We would be giving up a lot if we went back to having only national banks. But if banks operate across borders than so should oversight. And that means you have to relinquish some oversight."