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Ten years on: fragile stability and systemic exposure at banks in Belgium
Thursday, May 10, 2018
Belgium -Ten years later: brittle stability and systemic exposure at banks in Belgium
The model of the banks that are too large and intertwined with each other - if they get into trouble - can only be sustained with public funds, is still standing ten years after the crisis. This is according to new research from FairFin.
Are the banks safe today? If we can believe the banks and their supervisors, everything is cleaned up. If we look at four crucial indicators, we notice that some things have changed, but that we are by no means ready for the next storm.
First, the banks are still "too big to fail". The vast majority of the financial sector is dominated by "systemic banks". Numerous banks are still too big to not have a huge impact on national and even global economies. The balance sheet of the largest Belgian banks (Belfius and KBC) have shrunk due to the financial crisis, but still amount to 40% and 60% of Belgium's Gross National Product respectively. Moreover, other banks have not shrunk, but have become even larger than before the crisis, such as Fortis, which merged into the BNP Paribas group. Due to the financial crisis, decision-making power within the financial sector has moved even further abroad. The Belgian economy - and indirectly the Belgian government - are closely intertwined with financial mastodons, but people have less and less influence and control. Crisis fighters referred the idea of breaking banks into manageable documents to the trash.
2. This made the following question all the more important: how stable are these banks today? The "too big to fail" banks today have twice as much equity as in 2008, but are still far from 10% of the balance sheet, which is recommended by many specialists. The question therefore remains whether this increased buffer is sufficient to withstand a major crisis. During the Euro crisis of (2010-2012), that turned out not to be the case. They had too little equity to absorb losses from European governments that could no longer repay their debts. What was sold as rescue loans for Greece, Portugal and Ireland were hidden bank rescues. A few years after the crisis, capital rules have been tightened at international level (the so-called Basel III rules), but still raise major questions. The banks can still decide for themselves how risky their activities are. It is as if the students can give themselves points at school!
3. The banks are financing more with stable deposits than before, but are still highly dependent on the trust of external creditors, over which they have no control. If confidence in the markets fades, liquidity problems cannot be ruled out for banks.
4. Which leads us to our final question: are there still major risks of major losses at banks today? Derivatives are one of the riskiest asset classes. Despite a significant decline since 2008, the volume of derivatives at the major banks is still a multiple of the economy of their home country. BNP Paribas (ten times the French economy) and Deutsche Bank (15 times the German economy) are particularly noticeable. But at Belfius and KBC too, the volume of derivatives at each of them is still almost twice the Belgian economy. According to a recent report from the National Bank of Belgium, neither the banks nor themselves have a clear picture of the risks involved with these derivatives.
Are the banks safe today? If we can believe the banks and their supervisors, everything is cleaned up. If we look at four crucial indicators, we notice that some things have changed, but that we are by no means ready for the next storm.
First, the banks are still "too big to fail". The vast majority of the financial sector is dominated by "systemic banks". Numerous banks are still too big to not have a huge impact on national and even global economies. The balance sheet of the largest Belgian banks (Belfius and KBC) have shrunk due to the financial crisis, but still amount to 40% and 60% of Belgium's Gross National Product respectively. Moreover, other banks have not shrunk, but have become even larger than before the crisis, such as Fortis, which merged into the BNP Paribas group. Due to the financial crisis, decision-making power within the financial sector has moved even further abroad. The Belgian economy - and indirectly the Belgian government - are closely intertwined with financial mastodons, but people have less and less influence and control. Crisis fighters referred the idea of breaking banks into manageable documents to the trash.
2. This made the following question all the more important: how stable are these banks today? The "too big to fail" banks today have twice as much equity as in 2008, but are still far from 10% of the balance sheet, which is recommended by many specialists. The question therefore remains whether this increased buffer is sufficient to withstand a major crisis. During the Euro crisis of (2010-2012), that turned out not to be the case. They had too little equity to absorb losses from European governments that could no longer repay their debts. What was sold as rescue loans for Greece, Portugal and Ireland were hidden bank rescues. A few years after the crisis, capital rules have been tightened at international level (the so-called Basel III rules), but still raise major questions. The banks can still decide for themselves how risky their activities are. It is as if the students can give themselves points at school!
3. The banks are financing more with stable deposits than before, but are still highly dependent on the trust of external creditors, over which they have no control. If confidence in the markets fades, liquidity problems cannot be ruled out for banks.
4. Which leads us to our final question: are there still major risks of major losses at banks today? Derivatives are one of the riskiest asset classes. Despite a significant decline since 2008, the volume of derivatives at the major banks is still a multiple of the economy of their home country. BNP Paribas (ten times the French economy) and Deutsche Bank (15 times the German economy) are particularly noticeable. But at Belfius and KBC too, the volume of derivatives at each of them is still almost twice the Belgian economy. According to a recent report from the National Bank of Belgium, neither the banks nor themselves have a clear picture of the risks involved with these derivatives.
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