Banking in corona times and beyond

2020 is not only the year in which Sylvester Eijffinger officially retired from his work in economic science, but also the year in which the Covid-19 pandemic wreaked havoc. The Olympic Games were postponed for a year, the Tour de France was not held until September, Brexit and climate change are hot topics, and budget deficits have now increased to more than the total surpluses over the period of Eijffinger’s entire academic career. Where are we now? What can the European Central Bank do? These topics were discussed by four speakers whom Eijffinger met during his academic career at personal and business levels.

Risky waters

Lex Hoogduin was the first to take the floor. He is an independently executive board member of clearing house LCH and Professor of Economics of Complexity and Uncertainty in Financial Markets and Financial Institutions at Groningen University. In addition, between 1997 and 2001, he was an advisor to Wim Duisenberg, the first president of the European Central Bank (ECB). “The European Central Bank (ECB) is in risky waters. The objective of the ECB is price stability. In my opinion, the resulting policy does not work and is even less effective given the pandemic,” Hoogduin argues. “Governments currently incur large expenditures, leading to large deficits. Greece, Italy, Spain, France, and Belgium, for example, have alarming deficits. If the ECB increases interest rates, the result will be a financial crisis in these countries, which will give rise to a deep economic crisis. So the ECB is needs to keep the interest rates low.”

Five options

“It is a fragile situation, that requires action and new agreements,” he continues. “How do you tackle problematic debts? There are five options. The first is growth fueled by a recovery fund. However, I expect the fund would merely provide stabilization rather than growth. The second option is financial repression, resulting in bubbles, zombie companies, and weak growth. The third is inflation. I fear that this will come into play at a later stage with disturbing consequences for investors, savers, and pensioners. The fourth option is restructuring or canceling the debt, a hot potato that everyone prefers to pass up. And finally there is the option to economize. An unpopular approach that I do not think will materialize any time soon.”

Green policy

“As a banking economist, I am not so much concerned with my opinion of the ECB’s policy, but rather with what I expect the ECB is going to do,” Carsten Brzeski responds. He is Chief Economist at ING Frankfurt and Global Head of Macro for ING Research. He used to work for ABN AMRO, the Dutch Ministry of Finance, and the European Commission. “Soon after Christine Lagarde had been appointed, it became clear that the ECB is pursuing a greener and more sustainable policy. Unlike during the crisis of 2008/2009, this is reflected in the ECB’s policy. Thirty to forty percent of the money is going to packages related to climate change and digitization. Thus the ECB wants to give competitive strength to the right sectors.”

Supporter on the sidelines

Does it work? “At the moment, the ECB owns 20 to 25% of the existing green bonds. However, these green bonds constitute only 5% of the total number of bonds. As a result, this ownership is only an incentive. A different option for the ECB to exert influence is to pay attention to the nature and objectives of companies’ choices: how sustainable and green does a company operate? Research has shown that the return on green bonds does not lead to reduced emissions. Moreover, it is easier to impact a company's behavior through shares than through bonds. The conclusion is that the ECB is not the only player. It is there to support national governments and politics on the sidelines.”

Learning from each other

Former President of De Nederlandsche Bank N.V. Nout Wellink, who calls Sylvester Eijffinger a kindred spirit, is a non-executive member of the board of directors of the largest Chinese state-owned commercial bank, the ICBC, and received an honorary doctorate from Tilburg University in 2008. “The Covid-19 pandemic equally affects people worldwide,” Wellink states. “Only the approaches adopted by the various governments are different. Whereas the Netherlands pursues a ‘flattening of the curve’, China, for instance, has adopted a ‘go hard and early’ strategy. It would be nice if we could learn from each other, even if we don't see eye to eye on everything, for example, the human rights situation. We could exchange knowledge on how to address the pandemic, but also on ways to deal with the economy. The knowledge obtained in China in 2003, 2012, and 2013 has been ignored by the Netherlands.”

 Cross-border problems must be addressed in a cross-border fashion

Uniform approach

“The Chinese government stimulates the economy carefully and in a targeted way, strongly involving the banks,” he continues. “I think that Europe needs to opt for a more uniform approach. Cross-border problems must be addressed in a cross-border fashion. Moreover, the second blow always hits harder. That is one of the lessons we learned from the oil crisis. The reason is that the economy is already weakened by the first blow, making it less resilient. Therefore it is important to take measures in a timely fashion. Referred to by the Financial Times in 2019 as a dinosaur of the economic world, I think that the loss of the ECB's influence began as early as 2003. In that year, an interest rate of less than 2% became the target. The ECB has now become virtually powerless because a rate hike is not acceptable because of the large debts. Low interest and long repayment terms are a fact. The pressure on the ECB is great and more needs to be done.”

Food and energy

The next speaker, Berry Marttin, has tuned in from Brazil. He is a member of the Managing Board of Rabobank and is responsible for the international rural and retail policy. As Brazilian farmer's son, he sheds a different light on the matter. He sees the value of money dwindle, but the value of CO2 is actually increasing. Marttin: “I think that the ECB will disappear and that we will have a central bank trading in CO2 emissions. Worldwide, 600 million small farmers are responsible for more than seventy percent of the food production in the world. How can we help them to produce food more efficiently and with less CO2 emission? In the current Covid-19 times, we face the challenge of feeding a growing world population. This issue coincides with the ongoing energy transition. These two transitions must be connected. This is also a task for Rabobank.”

Part of the solution

“In 2009, the banks were part of the problem; now, we must be part of the solution,” he continues. “Rabobank has financial resources and a unique network in 38 countries. The keyword here is connection. We must literally stand with our boots in the clay and help make the dreams of small entrepreneurs come true.”

Target zone and populism

After the short speeches by the four speakers, the floor is given to Sylvester Eijffinger. He emphasizes the importance of circularity and indicates that the use of a target zone by the ECB for the interest rate is unwise because it leads to uncertainty and less transparency. “Lex Hoogland and I have frequently suggested to the ECB to evaluate its monetary policy. Unfortunately, it did not feel the need to do so under President Mario Draghi. He also indicated that he wanted to curb rising populism in southern Europe. I totally agree, but remember that there is also populism in the Netherlands due to savings that yield next to nothing and due to the minimal interest rate. I'm not worried about my own pension, but there are poignant examples of people receiving pensions of only € 700 a month. The ECB must allow market forces to work without intervention in this respect. Their domain is the money market, not the capital market.”

Have banks become fintech institutions with a compliance employment generation project?

Banks and compliance

Eijffinger then asks the four panel members a tough question. This time not about the ECB but about the role of the banks in detecting crime. Eijffinger: “We see that banks make a lot of profit in the field of artificial intelligence and digitalization. Unfortunately, this profit is not used towards better service for customers, but mostly towards measures in the field of audit and compliance. Have banks become fintech institutions with a compliance employment generation project?”

Interference

Hoogduin focuses on one aspect: that the government cannot oblige banks to fulfil a social role and pay the costs out of their own pockets. “There is too much interference from supervisors, which leaves too little room for bank executives.” “Compliance is indeed booming,” Carsten agrees. “If digitalization is used for this purpose, you have a win-win situation. Although business banking still remains a ‘people business’.”

Compliance in the genes

“The banks of the future will be client-oriented, high-tech institutions, hampered by compliance requirements,” Wellink states. “The high costs hinder fintechs in their development. Priority should be given to fighting crime. Criminals will always find a way to carry their activities into effect, through banks, but also through large webshops or other companies. Banks play a gatekeeping role; compliance should be in their genes. When the credit crunch hit, it turned out that most of the misconduct happened in the banks themselves. That is now no longer the case.”

European collaboration

“Banks must find a good balance between working digitally and maintaining personal contact,” Marttin thinks. “Where compliance and the gatekeeping role are concerned, it is important that we collaborate at a global level. Everyone sees only their own part, which is the size of a postage stamp compared to the world map. We need to be smarter and share information at a European or international level. Only then will we get a better picture of the entire problem.” And so we have come full circle to Europe again, Eijffinger concludes. “You need to address issues at the level at which they take place. They therefore require a European or even international approach. In a European Taskforce, in which the ECB is involved, among other institutions, we can combine knowledge and catch the real criminals.” And with a virtual round of applause, this substantive symposium comes to an end and Sylvester Eijffinger rounds off his academic career at Tilburg University.

Date of publication: 5 November 2020