Dutch banking sector distorted by billions of euros of subsidy

The four largest Dutch banks annually receive a hidden ‘subsidy’ of between 4.1 and 12.3 billion euros. This is the amount of money they save on their financing expenses because creditors can assume the Dutch state will always bail out these banks. These figures equal between two-thirds to almost twice their combined profits in 2011. This is evident from the new study ‘Het Financiële Overgewicht van Nederland’ (‘The Financial Overweight of the Dutch Banking Sector)’ presented by SOMO.

The report (only available in Dutch) also makes clear that wages in the Dutch banking sector have not only increased considerably more than those in other parts of the Dutch economy in recent years, but also more significantly than in other developed countries. Since the crisis, many banks profits have evaporated, but wages in the Dutch banking sector have barely been adjusted accordingly.

The large and expensive banking sector imposes a burden on the Dutch economy as a whole. Important steps have been taken to slim down the banking sector, but more is needed. In the coming year the Wijffels committee will be advising the Dutch government on the future of the banking sector and it should not shy away from additional and unconventional measures.

Hidden subsidy

The four largest Dutch banks are able to borrow money relatively cheaply because financial markets assume that the Dutch state will provide them with financial aid if they run into trouble. The financial benefit ranges from approximately one percentage point (ING and Rabobank) up to more than two percentage points (ABN Amro and SNS Bank).

The SOMO report demonstrates the financial advantage for these banks. Last year this hidden ‘subsidy’ amounted to 4.1 to 12.3 billion euros. In other words, between two-thirds and almost twice the amount these four banks reported as profit in 2011. This advantage also enables them to take more risks and acquire a larger market share due to the competitive edge it has over smaller banks, and over banks from other countries with less robust national economies.

Large risks for tax payers

“The hidden subsidy shows the size of the distortion within the Dutch banking sector due to banks being too large or too complex to fail. The SOMO report clearly shows that the ‘too-big-to-fail’ problem has in no way diminished, despite the measures which have been taken to date. Moreover, the Dutch banking sector has become more concentrated since the crisis. The risk to Dutch taxpayers remains undiminished,” says SOMO researcher Rens van Tilburg.

High wages

The SOMO report shows how salaries in the banking sector have risen significantly more than in other sectors in the Netherlands, and also more than in financial sectors in other Western countries. The difference between salaries in the banking sector and the average salary in the Netherlands has increased from 20% in the early 1990s to more than 80% in 2007. Iceland is the only country where salaries in the financial sector have risen faster than in the Netherlands (between 1999 and 2009). Despite the fact that many of the imagined benefits of scale in the financial sector now prove to be an illusion, and may even be detrimental, within the sector this vision on growth is still avidly pursued.

Other economic research shows that the size of banks as big as the three largest Dutch banks, more than anything causes scale disadvantages. It also demonstrates that a banking sector which, as a whole, is as large as the one in the Netherlands, is harmful for the economy.

Recommendations

SOMO concludes that the Dutch economy would benefit from a substantial downsizing of its banks, and gives the following recommendations to help the banking sector reach and maintain a ‘healthy weight’:

• Bring salaries in the banking sector in line with salaries for comparable positions in other sectors.
• Make banks attractive to long-term-minded shareholders by means of a sober and stable corporate model. Use defensive constructions to protect them from hostile takeovers.
• Increase the diversity in the sector: it is preferable to have a greater number of small banks than for ABN Amro to once again increase its international activities.
• Reduce the fiscal incentives for building up debts.