Written by: Leonique van Houwelingen | Country Executive for the Netherlands, BNY Mellon
This month marks the 380th anniversary of one of the key milestones in Dutch banking history, colloquially known as ‘Tulipmania’ – the first example of a boom and bust asset ‘bubble.’
For those who aren’t familiar with Dutch history, over a period of months in 1636/7 the prices of tulip bulbs increased sharply. Historical records indicate that the rarest tulip bulbs for a short time became more expensive than the price of a house, or as much as 10 times the annual income of a skilled worker. Tulips even began to be used as a form of money in their own right. In 1633, actual properties were sold for handfuls of bulbs.
This futures market for tulip bulbs was poorly regulated and volatile —more weed than flower. In February 1637, tulip bulb prices collapsed abruptly and trading ground to a halt. Demand disappeared, and flowers tumbled to a tenth of their former values. The result was the prospect of financial catastrophe for many.
But it was the wider effect that was so damaging to the reputation and the confidence in the Dutch trading market. Tulipmania was actually a ‘trust crisis’ that shook Dutch society on a wider scale. A whole network of values was thrown into doubt by disbelief.
Bubbles, crashes, and financial crises have been recurring phenomena in the history of financial markets – 1929, 1987, 1998 and, of course most recently, 2008, to name a few. Whilst all different, all bear the same cause and effect attributes in respect of the damage to societal ‘trust’ in financial services.
The lesson from each of these moments in history is to take seriously the old adage of ‘trust takes years to build, seconds to break and forever to repair.’ One of the most valuable and precious assets we have is to be considered trustworthy by the society we serve.
It is therefore disappointing that banks remain near the bottom on multiple trust surveys, but it gives me great comfort and hope to see signs of improvement in how society views our industry. Progress is slowly being made.
My colleague Susan Revell wrote an excellent article in January expressing why she believes corporate governance needs to top financial services' New Year's resolution list. Like Susan, I too welcome the European Commission’s continued focus on corporate governance.
Here in The Netherlands, earlier this year we have seen the renewal of the Dutch Corporate Governance Code, which means companies have to report and focus more on long-term value creation and the culture within their organization. There is also the work of the Investor Stewardship Group which is calling for corporate governance principles for listed companies. These positive developments show the continued steps which are being taken to ensure responsible and accountable management processes are in place.
Risk management continues to strengthen, senior leadership teams are becoming more and more diverse, and communications to clients, shareholders and regulators are increasingly transparent and much improved.
It is my view that our industry is on the right path to maintain the processes which will help to reduce the chance of future bubbles and ensure we are trusted by society. We will continue to have a critical focus on long term value creation, and not return to the short term thinking and incentives of a bygone era.
We seek to deliver financial stability and have commitments on transparency, integrity and accountability embedded into our culture. This way we can be in a position to halt any prospective ‘Tulipmania’ style bubble before it can affect even one market.