Dutch Banks post-2008: Substantial increase in the equity capital is key to bank stability

In the aftermath of the global financial crisis of 2007-2008 and the following studies and comments in literature and the financial press, a study from a group of leading Dutch economists, published in June 2018, is commented by Prof.dr. Piet Duffhues, Tilburg University, the Netherlands.

The main conclusion of the study group was that an increase in the equity capital for Dutch banks should be realised. This proposal was based on an international comparison of bank balance sheets  of leading countries. It means that commercial banks would be required to keep a greater difference between the values of their assets and their liabilities.

In his paper, recently published in the open-access journal Monthly magazine for Accountancy and Business Administration (MAB), Duffhues agrees that if realised, the recommendation could not only bring Dutch banks back on their feet, but also increase their future solvency: the ability to pay their debts as they fall due. Thus, banks would have greater capacity to cover their future losses if necessary, and would manage risks in a far more efficient way.

Duffhues argues that despite scientists, financial journalists and politicians having continuously analysed and discussed the causes of the most devastating financial crisis since the Great Depression in the preceding century, little attention has been paid to the financial structure of commercial banks themselves.

Not only were Dutch banks not accommodating the international equity ratios, but, according to Duffhues, they were not compliant with the Dutch Corporate Governance Code 2016 in terms of external risk management, either. For a long time, they were keeping to a very low equity capital – only holding 3% of their total balance sheet amount. With their debt possibly reaching 97%, these 3% losses were already enough to lead to a serious lack of trust.

The 3% requirement had been imposed by national and international regulators in earlier decades. At that time, such strategy was considered reasonable by bank management and regulators. However, the financial crisis of 2008 turned out to be too intense to avoid the necessity of government action to rescue the banks from default. Naturally, their behaviour resulted in a very low solvency of the banks.

“The behaviour of banks at that time can be seen as contributing to the systemic risk of the economy,” explains Duffhues.

The author goes even much further than the study group, whose study he references. He is convinced that a substantial increase in the equity capital of up to 25% for banks will not only secure their own survival, but will also bring a number of undoubtedly positive developments for the society as a whole, including more trust from citizens and firms, less need for government interventions, and avoidance of financial cycle collapses. If banks have high enough equity ratios, economic recessions will not result in finance stops for consumers and producers in the economy. Bank solvency ratios should reflect the banks’ responsibility for the welfare and sustainable development of the society.

Original source:

Duffhues P (2018) De lessen van de crisis van 2008 in terugblik. Maandblad voor Accountancy en Bedrijfseconomie (MAB) 92(9/10): 277-282. https://doi.org/10.5117/mab.92.29016

 

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Monthly magazine for Accountancy and Business Administration (MAB) is one of the journals hosted on ARPHA through the platform’s white-label publishing solution.

Business: Theory and Practice journal moves to the ARPHA white label publishing platform

Vilnius Gediminas Technical University and ARPHA launch a new joint pilot project for the open access peer-reviewed journal BTP

In a new joint pilot project, the open access peer-reviewed journal Business: Theory and Practice (BTP), issued by VGTU Press since 2000, runs on the new journal publishing platform ARPHA, developed by Pensoft. ARPHA provides end-to-end technological solution for all peer-review stages starting from submission to fully functional dedicated new website. Publications are also available in semantically enriched HTML and XML formats, as well as the traditional PDF. The journal’s authors and editors enjoy easily manageable peer-review workflow in ARPHA.

Business: Theory and Practice publishes original research articles and reviews that integrate economic development and globalization, interpretations and consequences of entrepreneurship, strategic management and organizational behavior, theoretical questions and empirical questions of industrial organizations. It covers a variety of fields, including business environment, economic development and globalization, entrepreneurial finance, interpretations and consequences of entrepreneurship, strategic management, organizational behavior, theoretical questions and empirical questions of industrial organization, and case studies.

BTP has opted for the ARPHA-DOC publishing workflow, which provides an individually designed website under the imprint and logo of VGTU Press, a document-based article submission, as well as peer review, publication, hosting and dissemination. The manuscripts submitted to BTP will be subject to double-blind peer review.

“It is a great pleasure to work with the Pensoft team on establishing an innovative publishing platform for Business: Theory and Practice. I am sure the new platform will exceed the expectations of all – the authors, the editors and the readers,” says VGTU Press Director Eleonora Dagiene.

“Academic publishing is in a process of disruptive transition. As a result, small journal publishers and society journals are strongly affected and threatened with decline and even extinction. This is because access to high-level publishing technologies is not easy and, in most cases, not affordable. So, we developed ARPHA specially for them! ARPHA is not only an end-to-end journal publishing platform, covering the whole process from website design, authoring, editorial management and peer-review to publishing and dissemination – it also delivers a wide range of easily customizable end-to-end services, on the choice of the journal. I am glad to see Business: Theory and Practice published by VGTU Press as the first Lithuanian journal coming to the ARPHA platform and becoming a member of ARPHA’s growing family of international partners,” says Pensoft’s founder and CEO Prof. Lyubomir Penev.

The articles accepted for the current issue of 2016 in BTP, published via ARPHA, are already available on the journal’s new website.

ARPHA is open to journals looking for a technologically advanced publishing platform plus all associated services, which can be customized to the journal’s preferences.