June 29, 2010 / 10:44 AM / 7 years ago

UPDATE 1-Dutch central bank to be overhauled after DSB report

* DSB should not have been licensed: commission report

* Commission says management to blame for failure

* Finance Ministry agrees with conclusions

* Bank collapsed in Oct. 2009

(Rewrites with more details)

By Ben Berkowitz and Harro Ten Wolde

AMSTERDAM, June 29 (Reuters) - The Dutch finance minster called for a cultural overhaul of the central bank on Tuesday after a commission concluded the supervisor should never have given a licence to DSB Bank [DSB.UL], which collapsed last year.

The tough report will add to pressure on central bank president Nout Wellink, who has come in for public criticism for his work since the start of the financial crisis. The central bank, known by its Dutch initials DNB, issues banks their licences.

The commission concluded DNB made a good judgement about DSB's financial position when it applied for a licence in 2005, but that it failed to draw the right conclusion about DSB's corporate structure.

"DNB should have taken the position that fundamental improvements were needed, before a positive decision about the (license) request could be made," said Michael Scheltema, commission chairman and a former deputy justice minister, in the report that was presented at a live broadcast press conference.

In a letter to parliament, Finance Minister Jan Kees de Jager said he endorsed the main conclusions of the report.

"The commission has drawn hefty conclusions and recommendations and deserves a hefty reaction," de Jager said.

The Dutch central bank said it agreed with the minister's support of the report's main conclusions. Its brief statement did not address de Jager's calls for a change in DNB's culture. [ID:nAAT010246]

DSB, which got its licence in 2005, failed after an Oct. 1, 2009, TV interview with a lawyer for a DSB mortgage holders' foundation. The lawyer suggested DSB clients take their money from the bank, which caused an immediate run on the bank. The central bank seized DSB on Oct. 12 after about one-sixth of the bank's deposits were withdrawn and it faced a liquidity crunch. It went bankrupt on Oct. 19. [ID:nLC637889] [ID:nLJ716022]

CULTURAL CHANGES

De Jager said he had asked the Dutch central bank to come with a plan within a month to change its internal culture.

"The internal supervision within DNB needs to be changed, for instance via the supervisory board ... the supervisory board needs to exercise more control of DNB's supervisory tasks. The law needs to be changed and I will change the law," he added.

Scheltema also concluded that the Dutch central bank failed in supervising the bank after it had received its license.

"DNB has failed to show its teeth in the supervision of DSB. Instead it has tried to show its concerns via argumentation and suggesting changes. DNB should have earlier increased pressure on DSB," Scheltema said.

But the criticism of the central bank aside, the report ultimately concluded the core reason DSB failed was poor governance and unprofessional management.

Though DSB had a small market share in savings -- less than 1 percent of the Dutch market -- it was the most aggressive advertiser of all Dutch banks and had a much larger share of the mortgage market.

The Finance Ministry launched an immediate probe after DSB's collapse, focusing on the efforts of both its supervisors and its politically-connected executives.

Among those who faced scrutiny were Gerrit Zalm, who became DSB's chief financial officer after 12 years as finance minister. He left DSB to become chief executive of ABN AMRO after the government nationalised the bank.

Zalm was cleared of wrongdoing in March, though the country's market regulator said he had demonstrated a lack of expertise and should leave ABN. [ID:nLDE6201T5] (Reporting by Ben Berkowitz, Harro Ten Wolde and Gilbert Kreijger; Editing by Jon Loades-Carter/Ruth Pitchford)

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