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2nd Edition of Vallstein Benchmark™

“IMF and BIS studies in 2012 also concluded a financial sector that is too big will hurt economy”

“It is a concern to see that the regulatory level playing for banks has been eroded in less than two years”

“The fundamental reengineering of banking towards simpler and more transparent products and lower risk and operating costs is yet to begin in earnest”

“Clients can apply their own Vallstein Benchmark™ to enforce discipline in financial sector”

Hoofddorp, 3. January 2013 – Vallstein, the leading provider of Bank Relationship Management (BRM) solutions, published the second edition of the Vallstein Benchmark™ to enhance Market Discipline in Financial Sector. The Vallstein Benchmark™ compares the sales size (annual gross revenues in relevant areas only) of the world´s largest banks to world GDP. The data used in the benchmark has been aggregated and analyzed on an ongoing basis since 2000. First made public in January 2012, Vallstein is now making results of the benchmark available to the public for the latest year.

"Since 2000 we have worked with this Vallstein Benchmark™ to enable our corporate clients to successfully impose a constructive discipline on a client-by-client basis to their individual banking relationships, creating a true win-win for client and bank alike”, said Hugo van Wijk, Founder and CEO of Vallstein. “In January 2012 we published the Vallstein Benchmark™ for the banking sector as a whole for the first time. We concluded back then that the banking sector should be considered out of balance with the real economy. We have now released the results for the latest year. With a Vallstein Benchmark 7.3% the financial section still represents too large a portion of the real economy. The only positive point perhaps is that the Vallstein Benchmark™ is virtually unchanged compared to previous year and that the year-on-year increase since 2007 seems to have stopped.”

In June and July 2012 the IMF and the Bank for International Settlements both published studies confirming Vallstein´s initial observations of January 2012 that a financial sector that is too big has a negative impact on the economy.

In the past a high ratio of the financial sector to a nation´s GDP was regarded as positive as it was taken as a sign that the financial industry of this country was an important source of employment and economic growth. According to Hugo van Wijk, this isolated in-country view obviously fails to assess the broader picture which for the period under review continues to be disturbing.

He outlined: “At the aggregate level for the banking sector, there is every indication that a Vallstein Benchmark™ below 4% is healthy, and above that a dangerous imbalances exist. The imbalances result from too much of one product, too much unnecessary products and/or excessive pricing, all of which are perhaps good for an individual bank in the short run but ultimately bad for the real economy.”

In an article about the IMF and BIS reports in the Dutch financial newspaper, Het Financieele Dagblad, on December 28, 2012 it was likewise concluded that if more than 3.5% of the labor force is employed in the financial sector this may negatively impact on economic growth since i.a. such resources would be better employed elsewhere in the economy where talent is scarce.

From 2000 to 2011, the Vallstein Benchmark™ rose from 3.9% to close to 7.3% in 2011 – almost more a doubling of the share of the world banking sector in World GDP.

“The additional attention by both the IMF and BIS for the optimal size of financial sector compared to GDP is surely a positive point of 2012 and provides welcome underpinning. However, the fundamental adjustment of the banking sector that is required to address the imbalances was in 2012 not always helped by proposed further new regulation but perhaps rather the opposite. The past 20 years saw a steady movement towards somewhat a level playing field. It is a concern to see that that has been eroded in less than two years as national governments and various international standard setting bodies often proposed their own rules on top off, or as amendments to Basel III. For example, just on something which should be highly controversial in itself anyway, namely separating certain banking activities from each other, the US (Volcker), the UK (Vickers) and the EU (Liikanen) have proposed fundamentally different approaches”, observed Hugo van Wijk.

“Seeing the level playing field being eroded obviously does make it even more challenging for banks to optimize their businesses as they already struggle with new solvency rules. Having said that, it is all the same also true that banks so far have squarely passed on the additional costs of new regulations to clients, who pay higher pricing and to shareholders, who are promised lower returns, but that operating costs of banks themselves in absolute terms have not really decreased at all. In that sense banks still must make their equal contribution. This in turn may provide room for reduction in pricing, and thus a reduction in Vallstein Benchmark™. The fundamental reengineering of banking towards simpler and more transparent products and lower risk and operating costs is yet to begin in earnest”, concluded Hugo van Wijk.

The latest Vallstein Benchmark™ has been previewed in Het Financieele Dagblad, a Dutch financial newspaper in December 2012, and will continue to be published at regular intervals by Vallstein in future.

Information for editors:

All quotes in the header, sub-header and body of this release are attributable to Hugo van Wijk, CEO and Founder of Vallstein.

For further information, please contact:

Vallstein
Email: sandrawittenburg@vallstein.com
Tel: +800 33 00 33 11 or +351 21 924 25 87

Information about Vallstein

Vallstein is the leading provider of Bank Relationship Management (BRM) solutions. The company was founded in the year 2000 following a vision to create a breakthrough in the way corporations manage a core component of their business, the banking business. Core to Vallstein’s solutions is the WalletSizing® concept, which provides a fundamental innovation in BRM. Delivered as software on demand (SaaS), Vallstein´s solutions empower large and medium sized companies to gain full insight, control and compliance to their banking business, resulting in an information lead and significantly improved conditions. www.vallstein.com

Financial Sector is now too big.
Amsterdam – December 28, 2012
(Het Financieele Dagblad - Cor de Horde)

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The wave of redundancies in the banking sector is a disaster for those involved but a blessing for the economy, studies of the IMF and BIS reveal.

First there where the logical actions. The merger between Postbank in ING in the Netherlands, already announced before the crisis, cost 2,500 jobs. Subsequently ABNAMRO Bank and Fortis merged and overlap of 6,500 jobs was eliminated. Then it became more serious. In 2009 ING had to act. Last year all big banks announced restructurings and this year a number of them were further adjusted, also at smaller banks. It seems to have developed into a process of on-going downsizing according to employees within the sector. Perhaps it is even true. That is all sad news for those working with a bank or insurance company, but the question is whether that is bad news for the rest of the economy.

For a long period of time economic theory dictated that a bigger financial sector contributes to a more efficient economy as a whole. A bank intermediates funds from those with excess to those with shortfall and transfers risk to where it is placed best. A useful sector therefore, that cannot be big enough. Some research made critical notes, but that was generically ignored. Politicians and regulators loved it. Majors of Amsterdam approvingly observed growth on the Zuidas, which represented clean and well paid jobs. In Europe, the responsible Commissioner Charles McCreevy (2004-2010) was not in favor of more regulation. When minister of finance in Ireland in 2003 he initiated steps to further promote “what is already now a key sector” (banks, ed.).

Closer to home, president of the Dutch Central Bank, Nout Wellink, also endorsed a large financial sector. As late as in 2009 he stated that “on average over the longer term countries with a larger financial sector have higher economic growth”. He did note, however – in the year after Lehman – that he was also of the opinion that economic growth does not always increase if the banking sector is bigger”.

This last comment is receiving increasing attention lately: two key institutions this year placed public question marks concerning the size of the financial sector namely the IMF and the BIS, also referred to as the Central Bank of Central Banks. Both published studies that although it is good to have banks around, it should not be too many. Stephen Cecchetti and Enisse Kharoubbi write in their BIS report: “as is the case with many things in life, with finance you can have too much of a good thing”.

The Netherlands has enormous pension funds and insurance companies. Of total GDP, 7% comes from the financial sector. For a long time this was considered positive. But in the recent studies this conclusion is practically reversed: 7% of everything we earn is spent on moving the funds around. The idea is too much scarce talent is employed in the financial sector. Enormous salaries are paid. Recently Andrew Haldane, director Financial Stability at the Bank of England made the calculation. In 1989 the bosses of the top 100 US Banks earned about 100 times average household income. That is huge in itself. In 2007 that had grown to 500 times. According to critics, such salaries are also possible because government implicitly guarantee banks. This gives access to cheaper funding than without such guarantee. Haldane estimates that the financial sector this way earns hundreds of billions.

At the same time it is difficult to start up a competitive bank from scratch. Technical and legal requirements and switching costs for clients to move over contribute to what economists call high entry barriers.

On the one hand it is positive that many people find attractive jobs in the financial sector. But talent is scarce and the brains applied to managing a derivatives portfolio cannot be applied to doing new inventions. As Cecchetti and Enisse put it: “The result is that people who might have become scientists, who in another age dreamt of curing cancer or flying to Mars, today dream of becoming hedge fund managers”.

The BIS economists analyzed the relationship between the financial sector and growth in added value per employee in OECD countries. Their findings: if not enough people are employed in the financial sector, growth is sub-optimal. But if too many are employed in the financial sector the result is also not optimal. Conclusion: if more than 3.5% of the active population is working in the financial sector, it reduces economic growth. The economists also looked it at from another angle: if the financial sector experiences rapid growth, does this lead to overall higher economic growth? They only reviewed developed countries. The findings of this research are a clear negative, on the contrary. The higher the growth of employment in the financial sector, the lower economic growth.

The IMF study does not look so much at how much people are employed in the financial sector but rather the amount of outstanding debt. Just as banks are a useful invention, so is debt. People with good ideas but no money can never realize their dreams without the existence of credit. But from some point onwards, debt is too high and there is no further contribution to growth. The opposite then is true: it reduces growth. The IMF study by Jean-Louis Arcand, Enrico Berkens and Ugo Panizza states that a total private sector debt of more than 80-100% of GDP is bad for economic growth.

Hugo van Wijk is matter of fact. His company, Vallstein, serves corporate clients who are critical of what they pay to their banks. In order to validate such assessments he analyzed the revenues of banks compared to world GDP. This Vallstein Benchmark showed that banks in 2011 represented more than 7% of world GDP, crisis or no crisis. Van Wijk: “I think a level below 4% is healthy”. He refers to the economist Paul Krugman who considers this same level as sound. “He already said so in 2009. The sector is just too big”.

Translated from original article in Het Financieele Dagblad
Copyright Het Financieele Dagblad

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