Management Summary

Introduction
In 1991 Algemene Bank Nederland and AMRO Bank (the result of a merger between
Amsterdamsche Bank and Rotterdamsche Bank) merged to ABN AMRO Bank. As of to date
ABN AMRO Bank is one of the biggest three banks in the Netherlands. However, the recent
years of the bank were tumultuous, lightly spoken.
This tumult started in 2007, where the bank was acquired by a consortium of Royal
Bank of Schotland, Fortis, and Banco Santander (RFS Consortium). Thus, the ABN AMRO
bank didnt exist anymore under that name. However, in 2008 the financial crisis got to its
peak and RBS and Fortis couldnt pay of the large debt accounts they took on to acquire
ABN AMRO. This is where the Dutch government stepped in. They bailed out Fortis, which
held most of ABN AMROs Dutch assets.
The Dutch government appointed old minister of finance Gerrit Zalm to stabilize the
bank and to demerge it from the assets RBS held. The assets that were held by Banco
Santander were mostly located in Italy and Brazil and merged with Santander, were sold, or
eliminated. In 2010 ABN AMRO and RBS demerged, and the remainders of ABN AMRO and
Fortis merged into the ABN AMRO Group.
In 2015 23% of the shares held by the government were sold to the public again and
are now traded on the Amsterdam Stock Exchange. The ultimate goal is to bring the entire
ABN AMRO group back to the stock exchange again, like it was before the acquisition to the
RBS Consortium.
At the moment ABN AMRO has about 22 thousand employees, and it generates 80%
of its income in the Netherlands. The three businesses ABN AMRO is in are retail banking,
private banking, and corporate banking. The bank seems to have climbed back on its feet
again, with both stable credit ratings from S&P, Fitch (both A), and Moodys (A2) and an
increasing profitability.
However, some new challenges lie ahead for ABN AMRO, and these challenges will
need to be tackled by a new CEO, since Gerrit Zalm announced to step down in 2017. This
report will focus on some of the challenges the bank faces. The first challenge this report will
investigate is the declining interest rate, which accounted for 72% of ABN AMROs income in
2015. Moreover, the deposit facility rate at the ECB is negative, meaning that ABN AMRO
has to pay interest for cash they are obliged to deposit at the ECB. These struggling interest
rates form the first problem that will analyzed.
Furthermore, since the crises in the last decade, the importance of a regulatory
environment has heavily increased. This report will look into the main regulations ABN
AMRO has to keep up with, such as the Basel III act, the FATCA, and the capital
requirements directive.

Legal analysis
According to the annual report of 2015, ABN AMRO identifies four different types of
regulation: consumer protection; improving transparency; strengthening the financial
industry; and taxation/charges.
In response to the financial crisis of 2008, the European Commission pursued a couple of
initiatives to create a safer financial sector. The most important initiatives the commission
took were the Basel III framework (implemented through the Capital Requirements
Directive); The Bank Recovery and Resolution Directive; and the Deposit Guarantee
Schemes Directive.
These directives will be discussed in more detail. Furthermore, other important new
regulations in the banking sector are, according to ABN AMRO, the Foreign Account Tax
Compliance Act (FATCA), and the Common Reporting Standard (CRS). Both will be
discussed as well. Finally, ABN AMRO stresses there are new competitors with relatively
less regulatory pressure.
Basel III
In response to the financial crisis the Basel Committee on Banking Supervision introduced
the Basel III regulation in 2010, which is defined as a global regulatory framework for more
resilient banks and banking systems (Slovik, Patrick and Cournde, 2011). The objective of
the reforms is to improve the financial sectors resilience to absorb market fluctuations and
shocks arising from economic stress. And also because large bank nowadays are Too-BigTo-Fail, in other words if one of these huge banks is in financial distress other banks which
are correlated with this specific bank will also have financial problem as a result of the
spillover effect. This regulation is implemented in the European Economic Area only. In 2011
and 2014, the Basel Committee published new revisions for the risk weighted assets (RWA)
and related capital requirements ratios. Banks regulatory capital is divided into Tier 1 and
Tier 2 capital. Besides, Tier 1 is even subdivided into Common Equity Tier 1 (CET1) and Tier
1 capital. The difference between these two tiers is based on the level of subordination,
which is included into Tier 1. Banks are required to finance themselves with 4.5% of common
equity of RWAs and at least 6% of the total Tier 1. Tier 2 consists mostly of unsecured
subordinated debt, which needs to be at least a total of 8% of its RWAs. Theres also a Tier
3 capital directive which is used to support market risk, commodities risk and foreign
currency risk.
This capital requirement ratio is one the most important ratios a bank has to pursue. In the
upcoming Basel IV directive the amount of CET1 will probably be even higher, so banks
need to look forward to implement new strategies which will increase their CET1. ABN
AMRO is already aiming at a fully loaded CET1 ratio and with success (ABN annual report,
2016). Their CET1 ratio increased to a minimum of 16.2% in 2016. Furthermore ABN AMRO

explained in their annual report that the company is getting stronger every quarter of the
year. Therefore they have started to aim at new strategies which will result in entering
foreign markets again. CEO Gerrit Zalm says that ABN AMRO will gradually invest in the
foreign business branch. However, he also says that ABN AMRO has to wait till theres more
information about the new Basel IV capital requirements. If ABN AMRO is considering to
enter foreign markets, then they will get around their old strategies of focusing on the market
in Holland instead of foreign markets (ABN annual report, 2015). Moreover, entering
unstable foreign markets almost resulted in the bankruptcy of ABN AMRO in the first place.
So is it justified, that after the bailout of the Dutch Government, ABN AMRO is already
considering about investing in these foreign markets, when they still have to refund their
initial bailout of 22bn dollar.
Bank Recovery and Resolution Directive
The Bank Recovery and Resolution Directive (BRRD) establishes a framework for the
recovery of banks and investment firms. It came into effect in the Netherlands 26 November
2015. The main goal of the BRRD is to intervene in a bank in distress in an early stage. This
to ensure the continuity of the banks critical financial and economic functions, while
minimising the impact of the banks failure on the economy and financial system. This
framework was brought into place after the crisis, because until the crisis many thought that
bank failures could be dealt with at a national level. However, the crisis proved that the
proceedings of a failing bank could be much more widespread.
Deposit Guarantee Schemes Directive
The Deposit Guarantee Schemes Directive (DGSD) was implemented on 17 November
2015 in the Netherlands. The main target of this directive is that banks have to move from an
ex-post to an ex-ante deposit scheme. This means that banks will have to contribute on a
periodic basis instead of facing charges only in the case of an insolvency event. The
directive states that the available cash in the deposit guarantee scheme needs to be 0,8% of
the total amount of deposits held in the bank.
FATCA
The Foreign Account Tax Compliance Act, also known as FATCA, is a 2010 United States
federal law to enforce the requirement for United States persons, including those living
outside the United States to file yearly reports on their non-U.S financial bank accounts to
the US government

(Michel, Scott and Rosenbloom). It requires the cooperation of all

foreign financial institutions(FFIs) to collect the record data of all customers for U.S. person

identification and to report the relevant assets and income to the U.S. government. This
regulation needs to be implemented to all FFIs by the end of 2016.
ABN AMRO also stated in their annual report that they could have some trouble with
implementing this new act. As also explained in different articles, it is rather costly for a bank
to implement such a system (Behrens & Frederic, 2013). Moreover, are the benefits higher
than the costs? In the case of ABN AMRO it is not. The client base of ABN AMRO is mostly
focused at Dutch customers, however this act isnt only applicable to U.S. persons, but to all
customers. This could harm the trust ABN AMRO has built with their customers after the
crisis.
CRS
Common Reporting Standard, in general known as the global FATCA, is a new regulation
since 2014. The OECD is aiming at the prevention of tax fraud, but they also want to create
a global exchange of information between participating jurisdictions. This CRS requires
banks to directly or indirectly report their financial accounts of account holders that are tax
resident in a CRS jurisdiction. The CRS obliges those banks to identify residents of another
CRS jurisdiction. So, the CRS is a legislation for banks and clients. The CRS has been
implemented through the Directive on Administrative Cooperation, DAC2, by the European
Union. The Netherlands, also a EU member state, is obliged to implement DAC2 in their
national legislation. This means that ABN AMRO must report their information of tax resident
accounts to the tax authority, De Belastingdienst.
So both the FATCA as the CRS legislation are increasing the compliance of banks, but are
also increasing the implementation costs and other costs related to these new regulations.
Furthermore customers arent happy with giving their bank account information to the
government and financial institutions. These inspections could harm the privacy trust of
customers and this could lead to a swift from customers to other less regulated bank related
markets, as the new FinTech markets.

FinTech vs traditional banking regulation

The industry of Financial Technology, also known as FinTech, is growing rapidly. The Global
investment in financial technology ventures reached $ 12.2 billion in 2015 (PWC Global
Fintech Rapport, 2016). ABN AMRO feels the pressure of FinTechs and other new players
with new business models, they think that the regulation is too challenging for banks
compared to other regions and companies which also causes an uneven playing field, they
describe it as follows:

There is a relatively lower level of regulation imposed on players with new business models
(such as Apple Pay and Google Wallet) which are entering parts of the traditional value
chain of banks. Developments in areas such as payment services could harm our access to
clients and result in lower business volumes for the Group. (ABN AMRO annual report,
2015)
According to a research of Deutsche Bank, we are in the middle of a phase of
growing legal uncertainty. Regulators cannot keep up with the dynamic FinTech market and
they will react when new business models are already implemented (DB Research, 2014).
Also according to DB, we are at a relatively early stage in realizing the potential of these new
business models and digitalization.
This means that there is a lot of uncertainty about potential competitors and new
regulation in the banking sector, because the FinTech sector and other related sectors are
still growing. Therefore ABN AMRO has to deal with disruptive innovations which could lead
to new markets and the disruption of traditional markets.

How economic factors influence ABN AMRO

The banking sector is always very dependent of the macroeconomic situation in the
concerned country. Many factors such as employment, inflation, growth, interest rates have
a big influence for how a bank should navigate. Monetary policy always demands big
attention for the banks, as the banks interest margin is based from it. The interest rates do
also reflect the economic performance of the country. The interest rate will usually in a
recession be low and in a boom be high. In the European Union does ECB (European
Central Bank) target the monetary policy. Because of the European history with
hyperinflation price stability is a primary target. (ECB, 2016)
ABN AMRO was once one of the worlds largest banks but after the financial crisis it
has transformed itself to a consumer lender focused on the Nederlands. As a bank it is
important to know which factors that can affect the company. This analysis tries to focus on
which risk this bank is exposed to and where it has its advantages.
For a bank like ABN AMRO it is important to know the temperature of dutch economy.
The growth in GDP is a good measure to get a feeling in which direction the dutch economy
is heading. And for the two first quarters we have seen a steady growth in GDP on average
0.6 % per quarter. Since january 2015 until august 2016 the unemployment rate has
dropped from 7.2 % to 5.8%. The core inflation rate in Holland is still low, around 0.8 % at
the moment. These indicators would normally mean that the economy is doing well.
(Tradingeconomics, 2016) Therefore, a responsible monetary policy would be to increase
the interest rate to attenuate the economic growth so it would not overheat. This is however
not possible because ECB controls the monetary policy, and it has to handle all the interests
in the EMS. The Netherlands is an export orientated economy and more than two-third of the
GDP derives from merchandise trade. Therefore, it is also an advantage for the companies
in the Netherlands when the overall area of EU does not perform well. This means that the
Euro is weak, and puts Dutch export in a favorable position.
ABN AMRO had an operating income in 2015 of 8,455 million euros. Around 72%
came from net interest income. The rest was from net fee, commission income and other
operating income. 80% of the income was earned in the Netherlands. The banks net profit in
2015 were 1,900 million (ABN AMRO Annual report, 2015).
As we can see, most earnings for ABN AMRO take place in the Netherlands. The
banking sector is extremely dependable of the macroeconomic tendencies (Larionova,
p.364-365). The performance of the Dutch economy is therefore extremely relevant for ABN
AMRO. The expectation for the Dutch economy is good, both the consumption and
investment level have grown the last two years. When expectations for the future is bright,

the market becomes more liquid because there is a belief that lenders will not default. All
these positive synergy is something the bank calculates when it shall forecast its future.
But the economy in the Eurozone is still not quite optimal, and the negative interest
rates can be seen as an act of desperation, when conventional monetary policy does not
work anymore and new limits has to be explored. The negative interest rates punish banks
for hoard cash instead of extending loans. The argument for the negative interest rates is it
should provide an incentive for firms and household to demand more loans, and then push
the economy in the right direction. Still there is a risk that the policy will do more harm than
good. Because if banks make the customers pay for holding their money, it is possible that
the cash will go under the madras which could affect the lenders because they miss
fundings. Even if the bank self absorb the negative rates, it squeezes the profit margin
between their lending and deposits rates and the banks could be less willing to loan out
cash. (Bloomberg)
An issue with low interest rates for ABN AMRO is its cost for the reserve
requirements. At the moment when the rate is below zero it is not profitable for ABN AMRO
because the bank is being charged for the money it deposit overnight. The regulation of ECB
requires that a bank has to hold the minimum required reserve in the respective national
bank. The required amount to be held by the bank is determined as a function of the banks
reserve base. The reserve base is defined as the liability items of the banks balance sheets,
including deposits and debt securities issued. At the moment ECB charge banks 0.4 percent
overnight to hold their cash. (Central bank of Ireland)
For ABN AMRO this could mean that the bank is more exposed to taking risks,
because the ability to make money is smaller. The negative deposit rate hurts banks
profitability by lowering money market rates, the bank could potentially hampering its credit
supply for both companies and households. Most banks have been reluctant to pass on the
negative rates to customers, because they fear they will lose them, but still more banks
begin to charge for depositors. (Bloomberg) ABN AMRO has also announced they are willing
to adjust its conditions so the bank will give negative interest rates to account holders, with a
business checking or -saving account. The exceptional market conditions means they have
to adjust. The bank is not yet sure if or when it will happen, but it is a possibility if the ECB
does not raise the rates. (nltimes) There still some positive things connected to a low interest
rate. The negative interest rates implies lower financing costs, and thereby fewer defaults,
because borrowers has a greater chance to pay the interest. (ECB.Europa)

European Central Bank

Current scenario:
The European central bank (ECB) has not been able to maintain a stable inflation rate just
below two percent in the past years with low growth just by using the interest rate
instrument. (ECB2 source).

(source: ECB4)
The ECB interest rates are at a record low. The refinance rate, which is the rate commercial
banks pay ECB for loaning money, is at the moment at 0% and the deposit rate is negative
as already mentioned.
In march 2015 the ECB adopted the quantitative easing strategy seen in both the US and
Japan trying to lower the long term interest rates (Bank of England) and started to purchase
private sector as well as public sector securities with maturity ranging from 2 to 30 years
(ECB1) amounting to 60 billion a month until end-september 2016 in order to raise inflation
as well as the expectations for future inflation. (ECB2 source, Financial markets book).
Since the euro area still struggle with the low inflation the ECB prolonged and increased the
asset purchases up to 80 billion a month until march 2017 or beyond if necessary until the
inflation rate stabilizes at the inflation target. (ECB3 source). Mario Draghi also announced
he wanted to keep the refinancing rate at zero percent and the deposit rate at -0.4%
(SOURCE).
This message from the ECB has allowed for speculation regarding whether Mario
Draghi will extend the asset purchases. The financial news media Bloomberg expects that
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the purchase programme will be extended in to 2018 since the inflation is nowhere near the
target. (BLOOMBERGKILDE). Over the long term the lower rates decreases the banks net
interest income. If the decline in rates is accompanied by a flattering in the yield curve, it will
compress the margin between borrowing and lending, and the net interest rate will become
lower.
Investors prefer short term bonds to long term bonds because they are more liquid
and less risky. To hold long term bond they should be receive a premium called the term
premium. But where the central bank operates with the large scale asset purchase program,
this term premium will be compounded.
This combination of low short term and falling long term interest rates pose a threat to a
bank like ABN AMRO where the interest rate spread is the main income source (KIEL skrev
dette tidligere), and it does not seem that the situation with low interest rates will change any
time in the near future.

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Conclusion

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Recommendation

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Bibiliography
ABN AMRO; Annual Report 2015, 2015, link:
https://www.abnamro.com/en/images/Documents/050_Investor_Relations/2015/ABN
_AMRO_Annual_Report_2015.pdf
Bank of England, identified 02-10-2016, link:
QE long term interest rates:
http://www.bankofengland.co.uk/monetarypolicy/pages/qe/default.aspx
Behrens, Frederic. "Using a Sledghammer to Crack a Nut: Why FATCA Will Not Stand." Wis.
L. Rev. (2013): 205.
Bloomberg; Negative interest rates, 2016, link:
https://www.bloomberg.com/quicktake/negative-interest-rates
Central bank of Ireland; Minimum Reserve Systeme, 2016, Link:
https://www.centralbank.ie/mpolbo/mpo/Pages/reserve.aspx
Dapp, T. F., Slomka, L., AG, D. B., & Hoffmann, R. (2015). Fintech reloadedTraditional
banks as digital ecosystems. Publication of the German original.
ECB; The definition of price Stability, 2016, link:
https://www.ecb.europa.eu/mopo/strategy/pricestab/html/index.en.html
European central bank, identified 02-10-2016, link:
https://www.ecb.europa.eu/mopo/implement/omt/html/index.en.html
European central bank, identified 02-10-2016, link:
https://www.ecb.europa.eu/explainers/tell-me-more/html/asset-purchase.en.html
European central bank, identified 02-10-2016, link:
https://www.ecb.europa.eu/mopo/implement/omt/html/index.en.html
European central bank, identified 02-10-2016, link:
https://www.ecb.europa.eu/stats/monetary/rates/html/index.en.html
Larionovaa, Natalia; Varlamov, Julia; Correlation analysis of macroeconomic and banking
system indicators, 2014, Link:
http://ac.els-cdn.com/S2212567114007242/1-s2.0-S2212567114007242-main.pdf?
_tid=5f58e8ea-889a-11e6-810800000aacb35e&acdnat=1475410908_1ac1dbddb10376a5cde31cc0190f7a9c
Michel, Scott D., and H. David Rosenbloom. "FATCA and foreign bank accounts: Has the
US overreached?." Tax Analysis 30 (2011): 709-713.
Slovik, Patrick, and Boris Cournde. "Macroeconomic impact of Basel III." (2011).
Nltimes; ABN AMRO preparing for negative interest rates, 2016, link:
http://www.nltimes.nl/2016/07/22/abn-amro-preparing-negative-interest-rates/
Tradingeconomics; Nederlands, 2016, link:
http://www.tradingeconomics.com/netherlands

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