In September 2008, the liquidity crisis triggered by the Lehman Brothers crash exploded into a solvency crisis affecting the whole system. The mon- etary authorities’ interventions, increasingly coordinated at the interna- tional level, used conventional and unconventional measures to restore the markets’ liquidity, while national governments on the one hand reinforced their guarantees for deposits and on the other launched rescue packages, involving recapitalisations and nationalisations, intended to restore banks’
capital resources and public trust.
The most sophisticated intermediaries, those most active in credit risk transfer techniques, and groups operating at the cross-border level, were especially hard hit by the crisis. In many cases, including some of the most dramatic crashes, banks’ difficulties arose from bad strategic planning, inef- fective governance systems, poor management, the presence of perverse incentives, and genuine fraud. Cross-border groups face more complex cate- gories of risks, and in many cases this was not countered by the development of a suitable risk management system. Their high degree of dependence on the interbank markets meant they were more exposed to the liquidity crisis,
Cross-border groups’ shares suffered greater collapses in their value than those of banks operating at the national level. This appears to indicate that the market realised that the regulatory framework was not suited to the problems posed by operators, and was also aware of inadequacies in the cross-border collaboration between the supervisory authorities, and limits in information sharing (UniCredit, 2009).
The crisis dramatically highlighted the limitations of regulation and controls when faced with the development of financial innovation and the new banking practices based on the Originate-to-Distribute (OTD) model (Gualandri et al., 2009). The gap was especially obvious in the case of European cross-border groups, especially with regard to the problem of the fragmentation of supervision, and the lack of a single supervisor and a sin- gle procedure for dealing with cross-border crises. Within the EU, a country by country approach was thus adopted, both for verifying the condition of the various banking systems and in terms of measures taken to resolve crises. The only two mechanisms established in this area, not even legally recognised by the various member states, did not make any contribution to resolving the crisis. Firstly, the Memorandum of Understanding (MoU) on cross-border financial stability, signed on 1 June 2008, was of no help in managing the crisis; it is laden with guidelines and good intentions, but has no legal value. Secondly, the part played by the CoS bodies proved to be ineffective, if not non-existent, because these bodies were not institutional- ised, they were only in operation for a few groups, and in any case their area of observation was restricted and further reduced by the absence of genuine information sharing in major areas.
The whole dramatic emergency was initially managed at the national level: not only did the various member states introduce their rescue pack- ages piecemeal, bank by bank, but in the case of cross-border groups, bank crises were managed without rescue plans which considered these groups in their entirety. Furthermore, the dimensions of some banking groups proved to be much too large in relation to the financial resources their countries of origin were able to muster to stage a rescue (they were ‘too large to save’).
Intervention was thus fragmented, undertaken by individual governments and the relevant national authorities of the group’s main members, from a perspective limited only to the part of the group which ‘belonged’ to the individual state. An approach of this kind inevitably fails to bear in mind the possible detrimental effects the individual national rescue operations may have at the cross-border level, and it may therefore have increased the cost of the rescue plans for society as a whole (UniCredit, 2009).
The rescues of Dexia and, above all, Fortis groups, which were not only cross-border but also cross-sector, are emblematic in this respect. The crises affecting the two groups had different underlying causes (Box 9.1), but
intervention of the governments and authorities of the main states in which they operated, with a substantial renationalisation of the two conglomer- ates (cross-border disintegration) as well as the transfer of assets. In the case of Fortis, the Benelux governments intervened with an initial payment of 11.2 billion on 28 September 2008. In the case of Dexia, it was France, Belgium and Luxembourg which intervened, on 29 September 2009, with funds totalling 6.4 billion.
Box 9.1 The Rescue of Fortis and Dexia Fortis
Fortis, a banking insurance financial conglomerate, was one of Europe’s twenty largest cross-border groups before the crisis. It was created in 1990 by the merger of the Dutch insurance group AMEV, the Dutch bank VSB and subsequently the Belgian insurance group AG, in Europe’s first cross- border financial merger. In the years which followed, the group contin- ued its strategy of acquisitions and growth, especially on the Benelux market, where it became leader, as well as outside this area.
The acquisition of ABN Ambro in a consortium with Royal Bank of Scotland and Santander, in 2007/2008, proved fatal for Fortis. This acqui- sition, at a total price of 71.9 billion (a figure judged to be too high given that the first signs of the crisis were already apparent), required Fortis to pay out 24 billion, 13 billion of this to be obtained from an equity issue, while the remainder was to be raised through the sale of assets, securitisation operations and the issue of hybrid securities. As the crisis worsened, this financial plan was no longer feasible, and Fortis’s situation deteriorated dramatically in September 2008.
On 28 September 2008 the Benelux governments stepped in to save the group, with an initial investment of 11.2 billion, followed over the next few months by further investments which led to the nation- alisation of the parent company Fortis Banque Belgium, (subsequently, 75 per cent of this company was acquired by the French bank BNP Paribas (BNP Paribas Fortis since May 2009), together with 25 per cent of the Belgian insurance business), Fortis Banque Nederlands and Fortis Banque Luxembourg, 67 per cent of which was subsequently sold to BNP Paribas.
Dexia
The Dexia group, one of the 15 biggest banking groups in the Euro area before the crisis, and a specialist in public sector loans, in which it is world
In the light of the picture outlined above, below we will describe the regu- latory and control framework in which the crisis developed, and identify the possible routes being examined for the creation of a European framework consistent with the development of cross-border groups.