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58 interview Dolf van den Brink nothing but prosperity Hope seems to be the only thing we can hold on to these days. Major debt levels seem to wipe away any hope for a prosperous future. How do you think the economy changes through time? The economy can be seen as one cycle that constantly repeats itself every 50 year. That is what the Kondratieff Cycle states. Even though the Kondratieff Cycle is a theory that has never been proven, it gives a clear view on how the economy works. When you look at the upward slopes of ten years ago, the lowest point will probably lie in 2011/2012. The upward slopes within the cycle are mainly pushed by technological innovations. Each cycle starts with a stage where innovation is new, but not profitable yet. Slowly, it becomes cheaper to implement these innovations into society. As soon as the breakeven point is reached, innovations become profitable and eventually push the economy into an upward slope. Increasing profits will take place until the market gets saturated or competition arises. When looking at all these dynamic growth accelerations followed by downward slopes, it clearly shows an economic cycle. On the other side, the cycle is not only driven by technological innovation. It is important to state that the financial system exaggerates its reaction to these innovations. Banks play an important role in leveraging the economy, and when the Kondratieff Cycle peaks, it normally goes wrong. When you look at the rise of Internet, everyone believed in growth and prosperity while forgetting or perhaps ignoring the chance of a collapse of the so-called Internet bubble. Everyone started to invest in Internet related businesses while in the end it appeared not to be such a good investment. Because these investments were supported by banks, it created a large gap in the system. WHaT paRT DiD BaNkS play iN THE iNcREaSED RiSk of THE fiNaNcial SySTEM DURiNG THE laST coUplE of yEaRS? Banks play an important role in efficiently lending money and allocating it to those who need it. When lending people money, it is crucial to only lend to the ones who can afford it. Many years ago, banks would own 40% to 50% of their capital and avoided risk and therefore made it difficult to default. This attitude has changed dramatically over the last few years. These days, the world does not consist of the old fashioned banks where clients were treated as kings and money was seen as a way to serve them. It was standard to have a minimum amount of liquid securities in your portfolio. Collateral was necessary, so that liquidity could be steered. Currently, people are only important because they bring in the money. This shift was caused by the change of management within banks. More and more investment bankers started to lead banks. These bankers have a rather different management style, because the role of investment banks is fairly different than traditional banks. Investment banks typically help firms issue stock and handle the business while working with derivative risk. Characteristics of investment bankers are that they typically seek risk, are opportunists and are not afraid of losses. Typically, investment bankers are not loyal to their employer and they are driven by bonuses (short term profits) whereas traditional bankers strive for a career at a specific bank (lifetime career). The easy way of making money led to an increased risk level and higher profits. Each year, this easy way of earning money was exploited more and more. At Fortis, some investments even exceeded the total capital of banks. The invested products were unmanageable and risky; they did not even have a set market price. Additionally, it is important to point out the difference between investing and investment banks. Investment banks function as brokers in the financial system whereas investing means putting money in a product of which you hope to gain a high return on. Over the last ten years, banks started to invest more and more while creating a high exposure to risk by investing in subprime mortgages and other risky financial products. While doing this, even the government got involved into these types of investments.
y Claire Nooij & Kasper Faas WHaT, iN yoUR opiNioN, iS THE WEakEST liNk iN THE SySTEM, aND DoES BaSEl iii coNTRiBUTE To a BETTER SySTEM? The weakest link is that there are not enough penalties for banks for taking a lot of risk. The objection against Basel III is that it solves the consequences of the problem, not the problem itself. Only the credit side is limited by regulating the creation of additional buffers, while the problem lies on the debit side of the balance. Its cause lies at the losses banks made due to these major risks taken by banks. This means that it is necessary to cover assets with a higher buffer than currently is limited by both Basel II and Basel III. American banks do not feel the need for this, due to the impact investment banks have. Because of the high number of employees and capital on their balance, they have a major influence in the financial system. It might surprise you, but investment banks are not necessarily the ones to blame. Even though the investment banks are under constant criticism, they are essential to the system. Without investment banks, service towards clients will be obstructed. It can be concluded that investment banks have to maintain its task within the system, but their role needs to be restricted to more regulation. Additionally, investment banks did not create the crisis, even though they invented the more complex products like subprime mortgages. This product can be perfectly used in the system, but only when the client is risk seeking and accepts the possible downside. In the past, investment banks put too much weight on the upside of risky products. “ 59 Basel III solves the consequences of the problem, not the problem itself. ”
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