By Maarten van Tartwijk
AMSTERDAM--Struggling with a property downturn and tighter
capital regulations, Dutch banks are trying to persuade guardians
of over EUR900 billion in pension money to become more patriotic
and keep a higher percentage of their funds in the Netherlands, and
specifically to invest in mortgages to help ease the banks' funding
pressure.
Bankers have dubbed the plan the "orange solution," in reference
to the Netherlands' national color. Their talks with some of the
biggest pension funds are in an early, exploratory stage, and any
agreement would still be far away, some of the bankers involved
with the discussions said.
But the pension funds, struggling with capital shortfalls
themselves, have given it a half-hearted response as they aren't
keen on pouring retirement savings in a market that has been stuck
in a slump for over four years.
The big Dutch banks--ING Groep NV (ING), Rabobank Group and ABN
Amro Bank NV--are wrestling with the legacy of a housing bubble
that has burst in the wake of the global financial crisis in 2008.
It has left them with huge mortgage books on their balance
sheets--about EUR504 billion for the three banks at the end of
June.
For a large part, that has to be financed by short-term funding
sources that might run dry should another credit crunch occur. In a
report released Thursday, the Dutch central bank said funding costs
for Dutch banks have soared since the financial crisis.
The Dutch are heavy savers, but much of their money is parked
with semi-mandatory pension funds that invest an estimated 95% of
their assets outside the Netherlands, mostly in bonds and stocks.
With a lack of regular deposits at home, local banks have become
heavily reliant on investors to satisfy their funding needs. The
Dutch central bank estimates the shortfall at around EUR460
billion.
The imbalance is a reminder that even Dutch banks, widely
considered among the stronger in Europe, remain vulnerable. A panel
appointed by the European Commission last week said many systemic
banking crises are often caused by excessive real-estate lending,
in combination with funding imbalances and over-reliance on
wholesale funding.
"There is a problem here: We save a lot in the Netherlands
through our pension scheme, but these savings are mainly invested
abroad. At the same time, mortgage lending in the Netherlands is
among the highest in the world," Dutch central bank President Klaas
Knot said in a recent speech. "The turmoil on financial markets
since the fall of Lehman Brothers, has made clear that such long
balance-sheets imply a major fragility for our financial
system."
Fueled by tax incentives and loose lending criteria, Dutch banks
in the late 1990s started a mortgage-lending spree that sparked a
bubble in the property market and made households among the most
highly indebted in Europe.
The boom came to an end in 2008, when credit markets shut and
banks cut lending to bolster their capital ratios. House prices
have fallen by 16% since then, and they are projected to drop
further in the coming years. While the slump is less harsh than in
Spain and Ireland, it has become a major drag on a country that is
considered a key member of the euro-zone "core" and one of the four
remaining nations dubbed Triple-A by ratings agencies.
Dutch banks want pension funds to acquire some of their mortgage
portfolios. This would take the pressure of their balance sheets,
as banks are required to keep funds on their books based on the
amount of mortgages they hold.
Because the law forbids the government from intervening with
pension funds' investment strategies, the biggest challenge will be
to persuade them to participate. Many schemes are experiencing
capital shortfalls due to the low-interest-rate environment and
they will be wary of investing in assets if the risks and returns
don't match their investment goal.
"We have invested around EUR8 billion in Dutch mortgages, and we
have reached our limit. Expanding it is not in the interest of our
participants," said a spokeswoman for ABP, a public-sector pension
fund with EUR261 billion in assets.
PFZW, a pension fund for health-care workers, abandoned the
domestic mortgage market in 2008, a spokeswoman said. "We got out
when the returns were no longer attractive."
Some experts say that tax breaks might lure encourage pension
funds to invest more at home.
Arnout Boot, a professor of corporate finance at the University
of Amsterdam, said it's a solution that should have priority.
"This is a serious issue. It's unhealthy when banks are so
dependent on international capital markets."
-Write to Maarten van Tartwijk at
maarten.vantartwijk@dowjones.com