18.11.11

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 'prolongati├źn' 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.'