The View From Belgium: Top Banker Pleads for Caution

Ernest Hemingway’s maxim that bankruptcy arrives gradually “and then suddenly” applies to banks as well: “The proliferation of social media and the ubiquity of online banking imply that when things are perceived to go wrong, bankers may almost instantly lose control of the narrative. There is no coming back from that,” says KBC Group CEO and Banker of the Year (2016, 2017) Johan Thijs.

Thijs does not attribute the abrupt demise of Silicon Valley Bank (SVB) in early March to a spike in frantic Twitter traffic regarding the bank and its prospects. “Skewed fundamentals and inadequate regulatory oversight are the root causes of the failure. Even without an incendiary flurry of tweets, SVB would have buckled under the weight of a lopsided balance sheet with volatile deposits on the liability side set off against stable but devalued bonds on the asset side.”

The CEO points out that SVB was allowed to operate without sufficient liquid reserves after the administration of former President Donald Trump tweaked the rules for non-systemic US banks considering that any failures would sustain a negligible economic impact which could be absorbed by the public authorities. “What the regulator failed to take into consideration was the psychological fallout of a bank failure; the undermining of public trust in the financial system already thoroughly shaken by the events of 2008.”

Firm Framework

Thijs emphasises that European banks face a much firmer regulatory framework imposed and maintained by both the European Central Bank (ECB) and the national central banks. “Here, banks are required to keep a level of liquidity reserves greater or equal to thirty days of stressed cash outflows after which they must still have adequate liquidity. At the time of the SVB collapse, KBC boasted liquidity reserves in such a way that we could easily withstand a multiple of the requested regulatory stressed liquidity outflows.”

Another difference between most European banks and SVB concerns balance sheet management. “If a bank is flush with volatile corporate deposits, it is unwise to invest those funds in long-term instruments such as government bonds. At KBC we park such deposits overnight with the ECB. We may not get a particularly good return on that parked capital but can access it instantly which, of course, adds to the bank’s liquidity.”

“Skewed fundamentals and inadequate regulatory oversight are the root causes of the failure.”

Following the crash of SVB, the contagion seemed to spread to Europe nonetheless with the failure of erstwhile venerable Credit Suisse which quickly sank into ignominy, accumulating unsustainable losses. “Perhaps remarkably, at the time of the SVB crisis, Credit Suisse had sufficient capital and reserves. More than anything, it was the parallels drawn with SVB that sparked trouble. That and a few statements by pundits caused the pressure on Credit Suisse to increase significantly. After stockholders refused to come to the rescue, the Swiss National Bank was forced to intervene and broker the deal with UBS.”

Borderless World

To Johan Thijs this again offered proof that borders have dissipated in the financial world. “As soon as a crisis erupts somewhere, everyone begins wondering if such a thing could happen closer to home as well. Another difference now is the speed at which information is disseminated. Not everything reported on social media is necessarily true but, that said, there is little time, if any, to counter and set the record straight. At the slightest sign of trouble, real or imagined, clients can move their money elsewhere in a matter of seconds. It is good to remember that, today, a bank run is only one click away.”

The good news is that at present few, if any, European banks are in trouble. But Thijs also notes that a banker doesn’t prepare for non-existent problems but for those that could possibly arise.

Thijs continues: “I am convinced that regulators are looking into the underlying causes of the recent spate of bank failures. It still baffles me that US regulatory agencies apparently bought into the self-regulation myth. They now have their work cut out. European regulators will do likewise even though their system worked quite well. Stricter rules will likely follow, also here in Europe where part of the Basel IV banking supervision framework may be implemented ahead of time in an anticipatory way. Another expected change could involve different sets of rules for different banks.”

The KBC Group CEO does see an issue: “Without regulation the market cannot survive. So, we are happy to be regulated. However, too much regulation may stifle the market and hinder banks in the proper execution of their job which essentially boils down to transforming deposits into credits. This involves a delicate balance that, in turn, requires a stable regulatory system that allows the job to be done profitably but in a normal and orderly fashion.”

KBC is one of the largest bank-insurance groups headquartered in Belgium and is focused on retail banking and small- and medium-sized businesses in Belgium, Bulgaria, Slovakia, Hungary, and the Czech Republic. It maintains a network of over 1,200 branches in Belgium and Central and Eastern Europe.

CEO Johan Thijs was ranked among the “ten best CEOs” in the world by Harvard Business Review between 2017 and 2019. The publication has since stopped ranking chief executives.

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