Wednesday, October 21, 2009

DSB Bank: Small enough to fail

A bank goes broke

A week ago this blog featured a story of a minor Dutch bank that got in trouble as a result of its high risk business strategy. This Monday the fate of the bank was settled: DSB Bank is officially bankrupt (Dutch). The immediate problem for the bank was its insolvency. Depositors were insecure about the ability of the bank to protect their savings. The deposits were withdrawn from the bank as quickly as was possible and the bank lost most of their their reserves. In order to be rescued the bank needed about a 100 million Euros from the Dutch Central Bank (DNB) which is tasked with guaranteeing the banking system in The Netherlands. One of the four big banks, ING, had already received a 10 Billion bailout earlier in the year. Minister of Finance Wouter Bos did not support DSB. He insisted that DSB was responsible for itself. Which it is.

Comparing a big bank with a small bank

The question which has to be answered next is why ING was not responsible for itself in a similar situation. The answer is that ING is too big to fail. As an example of this bigness, about a quarter of all Dutch payrolled employees receive their montly wage on an ING account an a similar share of Dutch firms are using ING bank accounts for their transactions. If the bank would fail the other banks would not be able to administer the application for new private and business accounts quickly enough. Millions of Dutchmen would not receive wages and dozens of thousands of companies would not be able to pay their bills. The dislocation of the economy would cripple Dutch society.

The advantage of the small bank for society

By contrast DSB is a bank with a small market share in private accounts. Account holders can swith to other accounts without swamping the big banks so there is hardly any economic dislocation. And thusly the finance minister and the head of the national bank saw no reason to save DSB.

Is it good to have four big banks?

The new situation is that the big four banks (RABO, ING, Fortis, ABN-AMRO) in The Netherlands have been strengthened by the fall of DSB. The Dutch banking system has become more monolithic as a result of this. The very fact that the governments was able to let DSB go under shows that it is preferable to have a larger number of smaller, local banks than the current system where only four banks rule the roost.

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