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Dutch Finance Expert

'Europe Should Establish A Rescue Fund'

The credit crisis is not just an American problem. In Europe, too, banks could suddenly find themselves in trouble. Europe needs to find a way to handle this, argues ex-banker and finance professor Dolf van den Brink.

Dolf van den Brink is an experienced banker. He lived through the Latin American debt crisis, the currency crisis that hit the European Monetary Fund, the fall of the British pound in 1991, the Russian crisis of 1997 and the Asia flu in 1998. But he has never seen anything that compares with what is happening with the current financial markets crisis on Wall Street.

"The last three weeks have been extraordinary," he says. "This is serious. We have been walking on the edge of a precipice."

Van den Brink, a former executive board member of Dutch multinational bank ABN Amro, is a professor of financial institutions at the University of Amsterdam. According to Van Brink, the European Union should establish a rescue fund for bad bank loans similar to the one being set up in the United States. This, he argues, would prevent big commercial banks in Europe from collapsing.

"We should do what the Americans are doing," he argues. "Some banks in the Netherlands, Germany, Britain and other countries are running into difficulty because the money markets are locked. They have to be able to sell off the bad loans on their books. So there has to be a buyer for these bad loans."

In an interview, Van den Brink shared his views on the current crisis.

NRC: How big should such a fund be?

Van den Brink: Around 600 billion euros.

NRC: No European budget could finance this.

Van den Brink: The American government will issue Treasury bonds. The European member states should do the same.

NRC: What does that mean for the Netherlands?

Van den Brink: If all members of the European Union were to contribute proportionally, according to the volume of their banking business or according to their national income, (a country the size of) the Netherlands would have to pay €25 billion.

NRC: There is no European Finance Ministry to set this up in the same way the US Treasury has done.

Van den Brink: There are plenty of people in Frankfurt and Brussels who are more than capable of handling this sort of thing. It could be a joint effort by the European Central Bank and the European Commission.

NRC: The European decision-making process is extremely slow. In the US it takes a week to set up a fund, here it would take forever.

Van den Brink: They would jump into action if they were put under pressure, look at AIG. The insurance insurance company collapsed within a couple of days. We need to be quick. I take it that people in Brussels and Frankfurt are considering it. They know it makes sense.

NRC: Is (the Dutch-Belgian bank) Fortis going under?

Van den Brink: No. Fortis is a conservative bank with a solid balance sheet. It doesn’t take credit risks lightly. The solvency of the banks in the Netherlands, France, Germany or Britain is not the issue here. But they could run into acute problems of liquidity because the money markets are locked. We’re on the brink of a worldwide liquidity crisis. A run on a bank in Europe… it doesn’t bear thinking about. The chance that one of the big large retail large retail banks goes under is bigger than anything we’ve seen in the last 70 years.

NRC: How is this crisis different from other financial disasters?

Van den Brink: It is unclear where the risks lie. The leverage effect of many of the financial instruments is much greater than it used to be. This crisis will spread to ordinary mortgages and credit lending to companies. Banks will want to compensate for their losses on bad credit by increasing profit. They will raise the interest margins on loans and tighten up credit conditions for private customers and companies. It’s this credit crunch that will drive us into recession.

NRC: How long is this going to last?

Van den Brink: As long as we don't get into an acute liquidity crisis, a credit crisis could actually be quite healthy. I expect the banks will need five to 10 years to recover from this mess.