The saver is adequately protected

The measures are designed to better monitor the banks and to protect savers should risks emerge despite expectations. Various preventive measures have already been discussed.

  • More stringent capital rules, tighter supervision and enhanced internal risk procedures prevent banks from getting into difficulty.
  • New regulations for banks give regulators the scope required to intervene in banks that take too many risks.
  • The Single Supervisory Mechanism takes supervision out of the national sphere and raises it to a European level.

Crisis management

If, despite these many precautionary measures, things still go wrong, a whole series of measures for crisis management will come into play. These rules are also being enforced at European level. The fact is that any rescues of banks are best regulated on a European scale, as this is the most efficient way of ensuring that banks in trouble do not automatically lead to uncontrolled national debts in the Member States where they are established.

The crisis management measures include:

  • a take-over of the management of the bank by the public authorities
  • the sale of some or even all assets to another bank
  • a bail-in regulation

Such a bail-in ensures that some of the bank’s creditors can be called on to intervene in the rescue of a bank in difficulty. In such cases, the shareholders are contacted first. In principle the bond holders are next, followed by the long-term creditors. If this is not enough, savings exceeding 100,000 EUR can also be called on in exceptional cases.

However, this last option may only be used in exceptional situations, and once all other potential solutions have been exhausted. It goes without saying in this connection that the EUR 100,000 per bank and per account holder that is covered by the deposit guarantee cannot be touched.

For the stability of the system, however, is it vitally important that any impact on savings is avoided to the greatest extent possible. That was, moreover, entirely successful during the crisis: we have lived through the worst crisis since the Great Depression, but not a single saver suffered any loss of savings.

It was necessary to regulate crisis management preventively so as to protect society from any shocks to the financial system. The settlement had to happen at European level to repair the design flaw that had crept into the construction of the European Union at the time it was established. That flaw sowed the seeds for the unbreakable bond between sovereign states and their banks, which led directly to the sovereign debt crisis of 2011. The banking union project is trying to put this flaw right and break the interdependence between banks and sovereign states.

Split of retail and investment banking

The public and political world is, however, asking whether these measures will suffice, and whether it might not be appropriate to reorganise the financial institutions so that the “high-risk” activities are separated from the traditional deposit and credit activities. Such a separation would supposedly help prevent possible losses generated by so-called speculative activities affecting savers’ deposits.

Throughout the world, proposals were issued to separate deposit banks from investment banks. In the United States, the Volcker Rule curtails the activities of financial institutions, and the Dodd-Frank Act restricts the scope of institutions. In the United Kingdom, the Vickers Report addresses a possible split of retail and commercial banks (as per the Anglo-Saxon example). The split of retail and investment banking is also an item in Belgian politics.

The International Monetary Fund (IMF) recently expressed its continuing concern over this panoply of initiatives. The IMF clearly stated it was in favour of a common approach, which would work better than the uncoordinated measures currently appearing in the pipeline here and there and which according to the Monetary Fund could weaken the efficiency of the financial system. It would not lead to a more stable international financial system, but to a more fragmented, and therefore less safe banking landscape.

The idea of a split between commercial and retail banks also crops up periodically in Belgium. It has already been stated above that such a split could harm the Belgian economy, because in Belgium the activities of commercial banks serve our export-oriented, open SME economy. It has also been set out how so-called speculative activity is severely limited in Belgian banks, or how the saver is already reasonably well protected in Belgium.

For all the above reasons, the financial sector is convinced that a split between commercial and retail banks is not required, but that this could in fact harm the economic development of our country. Febelfin is therefore in favour of a diversified banking landscape including both niche banks and universal banks. That is the banking model that best meets the needs of people, society and the economy in Belgium.

The National Bank of Belgium, which on behalf of the Federal Government investigated whether structural reforms of the Belgian financial sector are desirable, shares this view. In its interim report dated 6 July 2012, the NBB states that it is not won over by the idea of separating commercial banks from retail banks, in part due to the exceptional diversity of the Belgian financial landscape. The NBB is currently working on a final report to be published at a later date.

The NBB does, however, state that market activities that are deemed excessive could be subject to supplementary capital requirements. This approach is in fact much less intrusive administratively than a pure split. The financial sector is therefore willing to hold constructive talks on, for example, the possibility of extra capital levies in the event that trading activities exceed a certain limit.

The proceeds from trading are at present significantly reduced, but the financial sector is aware that this may be down to the economic situation. That is one of the reasons why it wants to undertake to incorporate disincentives such as an extra charge on specific activities to counter a return to improper volumes.