All Dutch banks will be among the most burdened by new Basel standards for risk-weightings against mortgages and SMEs. The big three Dutch banks have mortgages amounting to around half of their private-sector balance sheet, according to Moody’s. Risk weightings have also been exceptionally low – just 12% on average last year in Rabobank’s mortgage book, says Moody’s.
The Dutch banks argue low risk weightings are justified as their credit quality is better due to legal, tax and even cultural differences. They claim their mortgage sector is big and old enough to prove its resilience – just six basis points of losses over the past decade, according to Gerrit Zalm at ABN Amro. But if Zalm and others are still fighting the rules, Rabobank, the biggest Dutch mortgage lender, is already in retreat. It plans to reduce its balance sheet by about 20% over the coming four years.
Passing on risk
Rabobank, like others in Europe, is banking on its ability to pass on risk to yield-starved institutional investors. The problem is that the banks have competition in this market from new low-cost platforms in the Netherlands like Munt and Venn, designed specifically to originate and monitor mortgages for funds.
Wiebe Draijer, Rabobank
Rabobank’s chairman Wiebe Draijer thinks his firm can maintain its place in this new environment by falling back on its local presence and retaining people customers can speak to near their homes. He wants to widen the bank’s physical network in the Netherlands.
But it may be hard to convince clients to go to their local bank for a mortgage if they can get it cheaper from a specialist online platform with less of the staff and property overheads. Appealing to the trust the bank has built up among consumers over many decades is much more questionable too following the financial crisis, and in Rabobank’s case after the Libor scandal.
Even when banks are able to competitively price, originate and then sell a mortgage on to a fund, the margin will pass to the investor. The bank will hope it can still profit from the contact it has had with the customer, cross-selling insurance or savings products but people are more likely to shop around online now, partly due to that greater cynicism about bank salespeople since the crisis.
On the SME side, similarly, despite some hopes that a revised Basel framework could make it easier for banks to fund SMEs, Draijer for one is preparing for another ramp-up in the capital cost of such loans.
His idea to maintain market share in SMEs, as the bank shrinks its balance sheet, is to develop internal capabilities to become something akin to an orchestral conductor. He wants Rabobank help SMEs find equity and mezzanine debt from channels such as crowd funding, peer-to-peer lenders and private-banking clients. This way, when Rabobank deploys its balance sheet, the borrower might have a bigger capital buffer.
Draijer’s plans for how to stay relevant in mortgages and SMEs under the new regulatory and technological environment are unusually forward-looking and proactive. But there is little European precedent for relying on capital markets: particularly in the SME space, where there is almost no certainty Draijer’s model can happen any time soon on a scale that will really support growth in the economy.