Lessons from the crisis..... liquidity is the alpha and omega of a bank !

These days we are witnessing quite some turmoil in financial markets. Just as in the days after Lehman Brothers failed, the trust has gone. And with it the liquidity in the markets. Liquidity is also the underlying theme of the public hearings of the (Commission deWit 2) that these weeks occur in Dutch parliament.

Throughout the interviews it has become clear that the Dutch Fortis bank depended on the Belgium holding for its liquidity. And it did not have a big say/influence on the strategy of its Belgium holding. So when things went really wrong they saw the money move out and had little means of repairing/countering the liquidity outflows that were the result of the bad reputation that Fortis had gotten in the market.

In a slightly different case, ING incorrectly thought that the decline of value in Alt-A holdings in 2008 was due to lack of liquidity in the Alt-A market. They failed to understand in time that it was caused by a decrease in value and valuation. So just before they really needed it, ING got rid of what it considered 'excess liquidity' in the bank. To quickly discover that they did need that capital after all. Which lead to the State investing in core-tier 1 capital and to the illiquid asset arrangement for Alt-A.

The fact that sufficient liquidity is at the heart of each bank is of course not a new lesson for bankers. The Amsterdamsche Bank for example, was set up in 1872 just at a moment in time when the market slowed down. And rather than jumping in the market, the bank decided to remain quite liquid, forbearing possible 'temporary profits' as they described it in their first Annual Report.

So, going back some years to the year 1946, we can find one of the main lessons of todays public hearings, neatly formulated in the Commemorative Book on 75 years of Amsterdamsche Bank: 'The board of the Bank has, as we shall see later, accounted for the fact that under some circumstances even liquid assets such as collateralized 'prolongatiën' can become illiquid. Already in the first years of the existence of the Amsterdamsche Bank, the board has kept a keen eye on the the alpha and omega of a healthy bankpolicy: liquidity - which is safety for the creditor - and the Board has never in its 75 years diverged from this (policy)principle.'

Amsterdam in 1597.. very enjoyable book by van Tussenbroek

I have just finished reading the book: Amsterdam in 1597, by Gabri van Tussenbroek. Van Tussenbroek is a historian who works for the city of Amsterdam and this book described all the months of this important year. It's the year that the first boats came back from the Indies. But it is also the year that the survivors returned from their voyage with Willem Barentsz around the North Side. The book is written from the perspective of book publisher  Cornelisz Claesz and succeeds in giving the reader a sense of what living in Amsterdam must have been like. I can really advise anyone to buy, read and enjoy it !

The book also outlines that Claesz published a book (in 1586) with descriptions of the coins in circulation and use in Amsterdam around that time. Because money circulated in all forms and varieties, with one guilder of 1597 being the equivalent of about 13 euro today:
1 pond Vlaams = 6 gulden
1 gouden dukaat = 5 gulden, 5 stuivers
1 pond = 4 dukaat
1 pond = 20 schellingen
1 carolusgulden = geen mrekenmunt maar echte gulden
1 gulden = 20 stuivers
1 daalder = 30 stuivers
1 rijksdaalder = 50 stuivers
1 stuiver = 4 oortjes = 8 duiten = 16 penningen

Eventually, the variety of coins in circulation (of all kinds of countries) created a lot of confusion and merchants had to be very keen on checking the coins, weight etc in order not to be tricked by money traders. As a result, the city council decided to set up the 'Wisselbank', a girobank for merchants. This was done after the example in Venice, Italy. Any payment over 600 guilders had to be effected via the bank. Also the bank would exchange money and take any coin for deposit but only issue proper guilders when paying out (thus cleaning up the coins in circulation).