In the aftermath of the financial crisis, the Dutch Government rescued its banking national champion ING through several interventions , one of which was a capital injection of €10 billion. The purpose of the measure was both to strengthen the Banking Group’s insurance balance sheet and its overall solvency. As ING was considered as a major driving force of the Dutch economy, the survival of the institution was of crucial importance for the Dutch State.

At a time where market confidence ought to be regained, the European Commission reasonably implemented a temporary framework allowing grants of national state-aid to companies conditional on submission of a restructuring plan. The scheme had to include remedies ensuring that financial assistance provided by national authorities would not distort competition neither on a national nor international scale.

Concentration concerns

Furthermore, with regards to the restructuring process, the EC was not only worried  about ING’s financial statement, its dominant market position in the Netherlands constituted also a source of concern.  In fact, the European institution sought to address an even larger issue, the concentration of the European retail and private banking sector.

Therefore, several commitments of the Dutch State were made mandatory by the European regulatory body.  Among those obligations, two major kind of measures could be found,   structural remedies  which aimed at restructuring the  banking  giant’s activities and behavioral remedies which were designed in an effort to reshape its conduct on the relevant markets. While the former were characterized by a significant reduction of its balance sheet, the latter took essentially the form of bans on price leadership and acquisitions. The structural remedies included massive divestments in non-core and insurance business.

In addition to these measures, the Dutch State had also to commit to ING’s long-term viability restoration. Ergo, it had to address its double leverage issue, that is, coerce ING into stopping using core debt as equity capital in its subsidiaries,  and ensure ING would orientate its non-deposit funding towards long-term funding through issuances of debt instruments with a maturity exceeding one year.

Overall, it appears that the restructuring plan was quite successful in restoring the banks viability and profitability. Profits rose from € -514 million in 2008 to €3439 million in 2013, remaining nonetheless below pre-crisis levels.

As pictured hereunder, the drop in the HHI index indicates that the intensity of the competition in the European banking industry has been better off since the all “Bail-out” phase of the different major European banking institutions (including ING Group). It can thus be inferred that EC’s main objective to maintain competition inside the internal market has been met even after consequential national bailouts.

Evolution of the HHI index in the European Banking market

The end of the “Banque-assurance”

Through its back-to-basics program, ING divested large parts of its activities, primarily in the insurance sector. The crisis led thus to a major change in ING’s strategic approach regarding the coupling of banking and insuring activities. Prior to the crisis, the bank used to be a perfect example of the “Banque-assurance” model. Nevertheless the bank decided in 2008 to divest all insurance activities given the severe consequence of the crisis, which highlighted the flaws of this model.

Indeed, while banking and insuring activities seem to depict some clear synergies in the form of gains in financial and operational effectiveness (e.g cross-selling, increases in debt capacity, risk diversification effects); the model presents flaws that can lead to major weaknesses in the context of important economic shocks. Banking and insurance activities follow different dynamics, which can lead to managerial issues. Seen in this light, those discrepancies anchored in the model could to some extent explain why ING suffered so severely from the crisis.

A good deal for the Dutch state?

Given the fact that the Dutch state provided massive support to ING in the form of CT1 securities in order to save the ailing bank, the question arises whether this deal was a good call for the Dutch state. In the popular opinion governments have often been criticized for extensively bailing out “highly speculative” banks. However when one analyzes the numbers, it seems that the bailout of ING was a highly profitable operation for the Dutch state. The return on investment reached nearly 13%.

In conclusion, the overall findings for ING’s bailout are positive: it succeeded in restoring the profitability of banking and insurance activities and reduced risk exposure.

This article was written by Anthony Seminerio and Mick Heegemann

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