Buffer Blues
Pfäffikon SZ, Switzerland – It was former CFO Bert Bruggink of the Rabobank who at the start of this year managed to rock the boat. For the market leader in Dutch mortgage to preach about how higher capital requirements ultimately lead to structurally more expensive mortgages is transparency at its best. But the public went into a state of shock. Bruggink should have known better and – coincidentally – lost his job at the Rabobank soon thereafter. Still – the sometimes publicly clumsy – Bruggink has a point.
Since 1983
The Dutch mortgage interest deduction “hypotheekrenteaftrek” has its origin in 1893. For nearly one hundred years no one fussed about it, but since the late nineties of last century the Dutch mortgage with its famous interest deduction is a hot item. The Dutch housing market flourished as never before and the mortgage market proved to be an attractive growth market for banks and insurance companies. Driving up the mortgage debt relentlessly has made the Netherlands world champions in the field. Every Dutchman is raised with debt – which is a worrisome development.
Water and Fire
All this has not escaped the eye of the Financial Stability Board (FSB) located in Basel and it is therefore demanding higher buffers from banks. Bankers and buffers are like water and fire. For higher buffers affect the profitability of banks and that’s not something bank directors are waiting for. The relatively low stock prices of financial institutions is an extra obstacle. A shrewd banker will come up with a ruse, such as a hybrid solution. This little beast looks like a teddy bear but behaves like a vicious chameleon.
Cocos
With hybrid issuances – such as Contingent Convertibles (Cocos) – the bank pretends you have a stock with sights on safe returns that are comparable with a bond. In the mean time the investor thinks he owns a bond with the returns of a stock. Cocos are investments that can pull you further into the financial marshlands at an inconvenient time. The specifications of Cocos are complex and difficult to fully comprehend. I also ask myself why you should you be the one funding the bank’s buffer capital? Perhaps you should ask yourself the same question.
In any case, don’t let yourself be seized by the buffer blues. The hybrid solutions offered by the banks is merely a new way for investors to lose money the old fashioned way.
It remains for me to wish you a good weekend.
Jan Dwarshuis is a senior asset manager at Thirteen Asset Management AG, where he is responsible for the Thirteen Diversified Fund. Dwarshuis writes his columns in a personal capacity and is not paid for them. Nor is he paying for his columns to be placed. Professionally, he holds positions in major European, American and Russian stock funds. The information in his columns is not intended as professional investment advice or a recommendation to make certain investments. At the time of writing, he has no position in the above shares and has no intention of doing so in the next 72 hours.
