Divide ING and ABN Amro: they are too big

Large banks, including ING and ABN Amro, according to a recent report by the International Consortium of Investigative Journalists (ICIJ) in the period 1999 and 2017, have been negligent in identifying and blocking suspicious transactions with a total transaction value of two thousand billion euros. In 2018, ING Bank paid a fine of 775 million euros in connection with serious negligence in the prevention of money laundering. In September 2019, the Public Prosecution Service started a criminal investigation into ABN Amro, because that bank may also have failed to adequately screen customers and transactions for possible money laundering and fraud.

It is worrying, however, that it will become increasingly difficult to prosecute large banks because they are so large that prosecution would harm the economy. This was admitted by US Attorney General Eric Holder in 2013. The risk, in my opinion, is that realizing that they will not be punished for immoral behavior, these big banks are merely incentivized to take big risks.

Ironically, big banks should be society’s first bulwark against money laundering. In doing so, however, those banks have failed while previously rescued by the state. In 2008, ABN Amro received 21.7 billion euros from the state and ING 10 billion euros in the form of state aid to prevent them from collapsing. These two banks should have been good role models in banking.

Money laundering

Money laundering slows down economic growth and reduces efficiency in the real sector. Second, and this is essential, money laundering represents a substantial risk for banks.

These short-term profit risks can cause banks to fail. What would happen if banks as big as ING or ABN Amro collapsed with their total assets that together exceed the GDP of the Netherlands? This will harm the entire economy and the state will do everything it can to save these banks.

In order to prevent the state from having to take action again and at the same time counteract the enormous money laundering transactions or dubious money flows in the financial system, in my opinion the most effective solution is to split these large banks into small banks.

The concept of breaking up big banks was much discussed in the US shortly after the 2008 financial crisis due to mega bailout of big banks by the government. But instead, politicians and regulators opted for scrutiny by strict banking rules. Only strict regulations do not help. Paul A. Volcker, former chairman of the Federal Reserve, thinks bank regulation will not work on its own because sooner or later these giants will run into trouble again in their pursuit of profit.

The situation in the Netherlands has also not improved after the implementation of complex and strict bank regulations. According to recent research by Erasmus University, the risk of large banks for the economy has remained unchanged since the 2008 crisis.

To end the cycle of banking crises, it is necessary to make banking supervision simpler and more manageable. This works better in a banking sector consisting of small banks. Strict supervision of money laundering is also easier with small banks than with powerful and complex mega banks. That is the first argument.

More resilience

The second argument for splitting up is that small banks have more resilience compared to the big banks during the financial crisis. According to research by City University of New York, this is due to their conservative credit strategies, their degree of product specialization and their strong focus on specific geographic segments of the banking market.

Third, unbundling will improve banking services due to increasing competition. This is evident from American figures and we see a similar pattern in the Netherlands. On the Consumer Association’s satisfaction list, customers with accounts at large banks are much less satisfied than customers of small banks.

Joseph Stiglitz – Nobel laureate in economics – believes that small business lending is local and requires local information. According to Stiglitz, the big banks are not very successful in having this local information compared to small banks.

Finally, if the bank is split into smaller banks, it can be expected that the position of De Nederlandsche Bank will become less risky. The DSO combines the functions of maintaining monetary stability and supervising the banks. There is a conflict of interest behind this double function.

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Best lobbyists

The big bankers are the best lobbyists. According to Robert Reich, economist and minister under US President Clinton, the bigger the banks are, the more they lobby politics. The influence of large banks may tempt DNB to give priority to bank protection that is detrimental to the broader public interest. This can affect the credibility of the DNB and this can lead to higher inflation.

On the basis of these arguments, it is sensible and justified to split ING (total assets 2019, 891 billion euros) and ABN Amro (total assets 2019, 375 billion euros) into a number of small banks. How big should these new small banks be? According to Robert Reich, no one (the bankers) has been able to demonstrate significant efficiencies of more than $ 100 billion (85 billion euros) in assets. He suggests making that the upper limit.

Since the state still has authority over ABN Amro, the state can effectively regulate the division of ABN Amro. If this works out well, the split-up of ING can also be carried out.