The Financial Sector at the Service of the People, Society and Economy
Opinion article by Michel Vermaerke (CEO, Febelfin)
After the outbreak of the financial crisis in 2007, the financial sector had to face a difficult challenge. The confidence that had been lost, had to be restored. Society as a whole was looking anxiously at the financial institutions. Moreover, people felt rather annoyed with the banking system, which all of a sudden had shown some weak points. However, it did not take very long before the Belgian financial sector put restoring confidence among the hot topics on its agenda.
It goes without saying that this process takes some time and that it will be necessary to recover step by step all that has been lost in the wake of the financial crisis. So, the financial sector does not look upon this process of restoring as a marketing campaign, but rather as a way of being at the service of the people, society and economy more than ever before.
What has already been done and what still has to be done? These last few months, the financial sector has been going through a process of profound change. The way in which the Belgian financial institutions have succeeded in reducing their foreign activities in particular, has put them among the European leaders in the process of reinforcing their balance sheets. At the end of December 2011, deleveraging (i.e. reducing the ratio between capital and balance sheet total) had reached a level that lay 35.1% above the June 2007 figure. At the same time, they had increased their capital by 8.9%. The sector’s bank balance sheet has dropped from 1,595.2 billion EUR down to 1,147.3 billion EUR and this has made it possible to reduce the ratio between its size and that of the Belgian economy over this same period. The current share of its balance sheet in the Gross Domestic Product (GDP) is less than the average figure in the eurozone.
During the financial crisis, the public authorities have helped the financial institutions in trouble by putting an amount of 20 billion EUR for capital increases at their disposal. Moreover, guarantees have been offered in order to allow a number of financial institutions to meet their liquidity needs and for safeguarding the savings of the Belgian savers. At present, part of those contributions however is being reimbursed at a very high interest rate of 8%. In addition, the financial institutions are paying many taxes, a large part of which is used for financing structures that may be useful in case new problems arise.
The cost all over 2012 is estimated at approximately 1.3 billion EUR and this amount is supposed to help establish a sounder public finance situation.
The process of change did not only cover the financial institutions, it also had an influence on the organisation of supervision. Within the framework of the new Twin Peaks model, the supervisory structure has been changed profoundly and the same goes for the competence of the National Bank of Belgium (NBB) and the Financial Services and Markets Authority (FSMA).
In the eyes of the financial sector, restoring confidence also means lending an ear to what society is saying about the sector’s core business. The basic mission of the sector consists in transforming short term savings into long term financing of the economy. Another key element of its mission is offering innovative and safe means of payment.
The task of transforming savings into investment financing is vitally important for the financial sector. This process is the driving force of the economy. Lending by banks, however, has been the subject of rather strong discussion ever since the outbreak of the financial crisis. There are some rumours coming from the corporate world according to which the credit institutions have considerably curbed their lending and some of the consumer associations complain about the insufficient attention those institutions seem to be paying to the massive debts some consumers have fallen victim to.
On the basis of what has been happening and of the real mathematical data as well, one must however come to the conclusion that there is no credit crunch in Belgium. The amount of credit granted by the Belgian financial institutions has been increasing ever since the end of 2007. At the end of May 2012, corporate lending represented 118.8 billion EUR, lending to private persons (consumer and mortgage credit) had reached 177.5 billion EUR and lending to public authorities amounted to 93.4 billion EUR. Corporate lending and mortgage credit even show record figures. So, anyone with a sound credit application and a reliable solvency rate, can obtain a credit.
The amount of savings put together by the Belgian population went up by more than 50% between the end of 2007 and the end of 2011. This positive development has made it possible for the financial sector to fully play its transforming role. These last few years, there has been a constant increase of sound lending based on customer deposit funding, whereas the sector has become far less dependent on the interbank market and wholesale funding.
So where should one look for the cause of the perception that the financial institutions are reluctant when it comes to granting credit? The amount of credit available still is sufficiently high, but the financial institutions have become more cautious. Credit will be granted only if the borrower’s project is financially sound and realistic. This also explains why the financial institutions ask stronger guarantees and collateral. However, the current economic situation bears heavily on some sectors and makes it difficult for companies that are active in those sectors, to present a sound and feasible credit application.
One must admit though that situations such as these are exceptional rather than common. A comparison between the number of credit refusals in Belgium and in the other European countries for example shows that Belgium is among the best in class. At the European level, Belgium came fourth in 2010. In Belgium, only 5.7% of the credit applications do not result in actual lending, as compared to 26.6% in Ireland and 22.5% in The Netherlands.
What is more, the reason why credit applications do not yield a positive result, mostly has nothing to do with strict credit conditions. In the spring of this year, the Federal Credit Mediator pointed out that there is still room for improvement in the communication between companies and their bank. Even if the situation of the company is sound, there will be little chance for a badly documented credit application to be successful. Lending will be no problem if the company manager takes the pain of carefully drawing up his application in detail. As for the financial institutions, they should also make an effort in order to clearly explain the reason why credit granting has been refused. Is the project really unrealistic or would it be sufficient to make a few adjustments? It may be very important for the company to be given a second chance.
Of course, there is also the other side of the picture: the record figure of lending by the financial sector makes some people think that the sector pays little or no attention to overindebtedness. Quite on the contrary: striking a balance between granting a sufficient amount of credit on the one hand and preventing overindebtedness on the other hand is a permanent concern. This balanced approach explains why Belgian residents have one the smallest debt ratio as compared to the rest of Europe.
Are there any other concerns? Yes, there are. New additional regulation may have consequences not only for the size of lending by banks but also for credit conditions and interest rates. The Basel III rules for example may bear on the financial institutions’ credit policy. One of the provisions under the Basel III scheme imposes a multiplication of capital requirements for banks by almost two by 2013 and this (roughly) means that capital will have to be doubled, if one wants to keep up the same lending capacity. So far, no acute problem has been detected in Belgium, but in the long term, this regulation may affect lending, more particularly as for the financing of long term projects.
Electronic payments become more and more important each year and definitely play a central role in the daily life of the younger generations. The sector tries to make sure that payment systems effortlessly keep up with the rhythm of life of those generations and offer the highest level of security as well. Security is a matter of utmost importance. Criminals sometimes look upon internet banking as an easy way of making money. Belgium still ranks among the countries with the highest security level of electronic payments thanks to the Belgian banks’ high-security systems and the fast growing awareness among citizens of their contribution to safe pc-banking.
A vital and sustainable financial model
The purpose of the financial sector is to continue its core business, but also to help developing a new legal framework, new regulation and new supervision. These last few months and years, the financial sector has been closely involved with several authorities in the pursuance of this goal. Many of the new regulations aim at improving consumer protection. One of the examples in this respect is the agreement on principles signed on 13 July 2012 between Febelfin and Johan Vande Lanotte, Vice-Prime Minister and Minister of Economy, Consumer Protection and the North Sea, Steven Vanackere, Vice-Prime Minister and Minister of Finance, and the FSMA (Financial Services and Markets Authority). One of the clauses of this agreement stipulates that for each regulated savings account, it will be necessary to draw a standard information sheet containing all of the essential information and that the public authorities will contribute to the promotion of electronic payments.
The moratorium (agreed upon with the FSMA) on particularly complex structured products also must be seen within this context. Under this moratorium, it is no longer possible to distribute some types of complex products to the public at large. The financial sector is playing a leading part in this.
Within the framework of restoring confidence, the financial sector also wants to profoundly reflect upon the future of banking and finance in and from within Belgium. However, this should take place within a broader framework, just as for the sector’s core business and the new regulation. The sector is convinced that this framework should be the development of a vital and sustainable financial model which allows the sector to play its role as efficiently as possible within a competitive environment. Its intention however is not to do this all by itself, but to achieve this purpose through dialogue and reflection with the public authorities, the supervisory authorities and the consumers.
Febelfin is currently drawing up a strategic agenda in order to persuade all financial institutions to contribute to the development of this model in an active and constructive way. This agenda contains six basic aims, i.e. looking for sustainable solutions for the surplus of deposits, broadening and guaranteeing the financing of the economy, developing a joint vision on the changes in the field of distribution, promoting electronic payments, restoring the attractiveness of banks as employers and reflecting upon tax schemes for savings products.
Each of those aims is being dealt with by a working group in which the different segments of banking are represented at the highest level. The members of those working groups must propose concrete ideas and make concrete proposals that actually can contribute to the development of a vital and sustainable financial model.
The three dialogue platforms of Febelfin are in charge of examining whether the ideas and proposals actually put into practice by the financial sector, indeed are the best solutions. Consumers, companies and NGOs each have their own platform in which their interests are defended by a number of representatives (consumer organisations, corporate federations, NGOs, academics, etc.). These platforms were created shortly after the outbreak of the financial crisis and served as the first clear token of the financial sector’s genuine intention to draw lessons from what had gone wrong and to lend an ear to the wishes and expectations of society. The sector has continuously been fostering this engagement all through the years that followed.
Michel Vermaerke is Chief Executive Officer of Febelfin, the Belgian Financial Sector Federation. His professional career spans more than 20 years. Formerly, he held the office of Secretary-General and General Counsel of Belgacom (1996-2004) and Cedel, which has now become Clearstream (1990-1996). Michel Vermaerke fulfills several functions in various economic, social, cultural and charity institutions, including those of Chairman of the ‘Koninklijke Maatschappij voor Landbouw en Plantkunde’ (in charge of organising the Ghent Flower Show among other things) and Chairman of the Brussels International Festival of Flanders (in charge of organising the European Galas and the Klarafestival among other things). Michel Vermaerke took a Master’s Law Degree at the Ghent University and specialist courses at the American University in Washington DC (Masters of Law) and the Columbia University in New York (Finance Executive Program).
 Source: Access to finance study, Eurostat