klaas knot : banks going bankrupt speech by mr klaas knot, president of the netherlands bank, at the flairs conference, amsterdam, 29 september 2023. * * * thank you. and what an uplifting topic you have asked me to talk about! as president of an organisation that is responsible for banking supervision, having to talk about banks going bankrupt feels a bit like giving a speech about your most spectacular failures. but the sober fact is that we can never rule out the possibility of banks going bankrupt. in fact, the very words bank and bankruptcy are closely related. the word bankruptcy is derived from the italian'banca rotta ', literally meaning'broken bank '. the story goes that in renaissance italy there was a tradition of smashing a banker's bench if he defaulted on payment. so that the public could see that the banker, the owner of the bench, was no longer in a position to continue his business. despite strong buffers, despite supervision, banks can go bankrupt. that's all part of a healthy, dynamic, competitive banking sector. and in fact, at the current juncture, with interest rates having gone up – while justified to keep inflation in check – the risk of accidents is increasing. as the americans say'whenever the fed hits the brakes, someone goes through the windshield.'the problem is of course that a bank failure may threaten financial stability. because of contagion, because banks are interconnected, and because of the vital role banks play in the economy. so one of the lessons from the global financial crisis is that we – that is central banks, supervisors and the banks themselves – should be thoroughly prepared for a failure, if one happens. so that the bank can be laid to rest in an orderly way, and essential public functions can continue. to illustrate what happens when you are insufficiently prepared, let me tell you one or two stories about fortis, the former belgian - dutch financial conglomerate. in september and october 2008, i participated, as senior aide to the previous governor, in the crisis management meetings in brussels to prevent the imminent collapse of fortis. at the time, we still had to rely on general bankruptcy laws and insolvency liquidation that were completely unsuitable for financial institutions. particularly for those institutions that provide critical economic functions. functions that need to be maintained. so we had to improvise a lot. for example, we did not have the legal instruments to impose losses on shareholders while

keeping the conglomerate running. the existing framework for information sharing and policy coordination between the home and host supervisors was flawed, to put it mildly. and there was no pre - arranged plan for funding in case of resolution. i remember that once the agreement was struck about nationalisation of the dutch parts of fortis, the dutch state treasury had to go to the market to raise 50 billion euro practically overnight. a large part of this was needed to secure funding for fortis bank netherlands. 50 billion, that was almost one fifth of our pre - crisis national debt. on top of that we had to provide massive emergency liquidity assistance. i could go on and on. it could easily have become our european lehmanmoment. 1 / 4 bis - central bankers'speeches prior to 2008, we had never thought about these things in a thorough and consistent way. as a result, we had to take a lot of ad hoc measures during the global financial crisis. these measures were successful in the short term, in the sense that we were able to prevent an even bigger disaster. but in the long term the societal cost was high. the use of taxpayers'money to support banks was not well received by society and it created perverse incentives. private gains, public losses. for a solid banking system there needs to be a credible threat that banks, like any other company, can go out of business if they take on too much risk. that credible threat can only exist if there is a reliable system for putting troubled banks out of business without triggering a financial armageddon. so, after the global financial crisis governments, central banks and supervisors, under the leadership of the g20 and the financial stability board, improved their tools for making banks more resilient. by mitigating risks and building buffers. and for those cases where these first and second lines of defence are not sufficient, we also built a third line of defence, the resolution framework : legislation, instruments, authorities, planning requirements for both authorities and banks, in order to make sure that a bank failure does not destabilise the financial system and threaten basic public functions such as saving and paying. over the past 12 years, a whole resolution infrastructure has developed. this goes for the banking sector, but also for insurers and ccps, albeit at a less advanced level in most jurisdictions. in many countries today, designated resolution authorities are in place that possess the necessary legal powers and operational capacity to intervene in, and resolve,