7.1 Introduction

As a small continental Europe country, Belgium ranks among those states, alongside Germany, Italy, Switzerland, or the US, which introduced or strengthened formal banking supervision in the aftermath of the 1930s financial crisis. Until 1934, the general company law—requiring the submission to shareholders of a balance sheet, a profit-and-loss statement and an auditor’s report—was the only control imposed over Belgian banks. There were no restrictions whatsoever on the establishment of new banks. The central bank, established in 1850, had no statutory and formal supervision over the banking system. The severe financial crisis stemming from the global economic crisis of the 1930s triggered a significant reform, and Belgium changed from one of the least restricted commercial banking systems to one where control was far-reaching.

While Belgian financial history, as an early developer of mixed and universal commercial banking, has been well researched, the specific aspect of banking supervision has not been scrutinized as closely. Early studies in the 1980s (Vanthemsche 1980a, b) have paved the way for more extensive analysis of the impact of supervision on two major institutions: the central bank and the main commercial bank, the Société Générale (Van Der Wee and Tavernier 1975: 278–299; Van Der Wee 1997). More recent research has produced more in-depth studies of the development of banking supervision in Belgium (Cassiers et al. 1998; Kurgan-van Hentenryk 2001; Maes and Buyst 2009; Moreau 2010; Giddey 2017a, b).

Relying on this existing literature, as well as on unpublished archival material, this chapter examines the formalization process of banking supervision in Belgium, with a special focus on the period from the 1930s to the 1970s, which coincides with the introduction and completion of formal banking control.

7.2 Transition of Belgian Commercial Banking, 1830–1930: An Overview

Belgium is widely considered the birthplace of mixed universal banking (Chlepner 1943: 3–17). The very early foundation of the Société générale de Belgique in 1822, even before the creation of the Belgian federal state in 1830, made it traditionally the world’s oldest universal bank. It operated different activities: paper money issuing, commercial credit, collecting savings and investing in the share capital of manufacturing companies (Buyst and Maes 2012: 1–25). A rival and similar institution, the Banque de Belgique was set up in 1835. The Banque Nationale (later called Banque Nationale de Belgique), a central institution of national discounting and issuing banknotes was established as a joint-stock company in 1850, two years after a severe crisis (Kurgan-van Hentenryk 2003). The universal banks renounced their issuing rights and most of their discounting activities (Buyst and Maes 2008). In 1860 and 1865, respectively, additional state-owned financial institutions were set up: the Credit Communal provided loans to local authorities and the Caisse Générale d’Epargne et de Retraite (CGER), a public savings bank. With those new developments, the former universal banks limited themselves to industrial investment activities.

During the Belgian economic boom between 1895 and 1914, the participation of banks in industrial financing grew considerably: while they held 12% of the capital of public limited companies in 1892, this proportion rose to 41% in 1911 (Kurgan-van Hentenryk 1992: 318). Thirty universal banks dominated the market, but only Société Générale had a network of branches throughout the country. Société Générale also dominated the banking system, controlling nearly half of its total assets (Kurgan-van Hentenryk 1992: 320).

The First World War marks a watershed in the Belgian banking history, as in the economic history of the country in general (Kurgan-van Hentenryk 1997: 209–212). Due to infrastructure destruction and increased public spending, banking activities were redirected to public sector financing. During the interwar period Belgian banks focused on national and colonial economy, and they underwent a period of consolidation and concentration. This trend was marked by the constitution of three major financial groups who controlled many subsidiary companies and a network of agencies: the Société Générale (55% of total assets in 1930), the Banque de Bruxelles (16.5%), and the Algemeene Bankvereeniging (10.1%).Footnote 1 On the eve of the crisis of the 1930s, the highly concentrated Belgian banking system was structured around a handful of large groups operating on the model of mixed universal banking. Those groups played a vital role in the dynamism of the Belgian economy. In this sense, Société Générale and the Banque de Bruxelles were at their peak in the late 1920s, when they extended their grip on large parts of the national economy.

In addition to the Credit Communaland the CGER (public savings banks) mentioned above, the “parastatal” or semi-public banking sector also developed during the interwar period. The Société nationale de crédit à l’industrie (SNCI) and the Caisse centrale du petit crédit professionnel was created in 1919, 1929, respectively. The two financial institutions specialized in credit allowance and mobilization to small industrial companies and the middle class (Vanthemsche 1997). Further state-owned financial institutions were established during the 1930s, such as the Institut de réescompte et de garantie (IRG, 1935), the Office central de credit hypothécaire (OCCH, 1936), and the Institut national de crédit agricole (INCA, 1937). Besides the large commercial banks and the semi-public institutions, the Belgian banking sector also featured private bankers (Brion and Moreau 2016), as well as private savings banks and cooperatives (Vanthemsche 1986).

7.3 Commercial Banking Regulation: The Great Depression as the Main Driver

Prior to the enactment of formal banking regulation in 1935, the Belgian banking sector developed significantly in the absence of formal control of commercial banks. The business environment for banking activities remained very liberal: there was no specific legal supervision over private financial institutions (Chlepner 1943: 82). Banks were only subject to the general company law (loi sur les sociétés commerciales), passed in 1873. Same as other corporations, banks were required to submit to shareholders an annual balance sheet, a profit-and-loss account, and an auditor’s report. Standardized accounting practices and prescribed form of documents were missing (Maes and Buyst 2009; Allen et al. 1938: 83). There were no entry requirements, which meant anybody was able to set up a new bank. The central bank had no statutory control over financial institutions, but only exercised a form of supervision and control over interest rates through its discount policy. The absence of specific banking regulation did not mean the inexistence of financial and banking crises. The Belgian financial system witnessed severe crises during the nineteenth century, for instance in 1838–1839, as well as during the 1870s and the 1880s, but those difficulties did not lead to a formalized regulation of banking activities (Chlepner 1943: 18–21; Grossman 2010: 89; Maes and Buyst 2009: 99). In the second half of the nineteenth century, the policy response was rather rescue operations coordinated by the central bank and the finance ministry.

The severe economic and banking crisis of the early 1930s led to an important reform of the banking system in 1934–1935. The difficulties of the banks mainly originated in the depth of the economic crisis. As a small open economy, highly dependent on external markets, Belgium was particularly affected by the collapse of its exports, caused both by the fall in international demand and by protectionist measures. The banks were unable to realize their investments, except with heavy losses, and tried to recover their debts from industrialists (Kurgan-van Hentenryk 1992: 327). Major financial groups such as Société Générale and the Banque de Bruxelles, which had significant shareholdings in the industry, were forced to extend credit lines in a risky way (Maes and Buyst 2009: 101). Industrial business failures had a devastating effect on the liquidity of large banks (Cassiers et al. 1998: 127): deposits fell from 4,774 million gold francs in 1930 to 3,636 in 1933 (Vanthemsche 1991: 110).

The crisis worsened in 1934 due to the difficulties of two popular deposit banks, the Banque belge du travail and the Algemeene Bankvereeniging, backed by the Belgian Worker’s party and the Flemish Christian Democrats respectively. Because of their close links with the political parties, the issue of a governmental bailout raised a furious political polemic (Mommen 1994: 22–23).

A first reform was adopted by the government in August 1934, as a result of the crisis. Two decrees were passed. The first one was aimed at protecting banks from collapse: it authorized banks to exchange sound but frozen claims on industry for bonds issued by a state-backed institution, the Société nationale de crédit à l’industrie (SNCI). The second decree was a more far-reaching measure: it compelled the mixed universal banks to operate as deposit banks, separating their functions from investment banks. This edict meant the end of mixed universal banking in Belgium. The existing institutions had to split into deposit banks on the one hand and holding companies on the other hand. Deposit banks were forbidden to hold industrial and commercial companies’ securities, and they had to publish standardized balance sheet and to provide a minimum capital (Vanthemsche 1980a: 37–40; 1991: 111). This radical reform resulted from negotiations between influential bankers and government representatives, since the trend toward specialization was already adopted by the large financial groups during the 1920s. The idea of separating banking businesses was inspired by the British model; the separation of deposit and investment banking had already been decided in the US and in Italy (Barbiellini and Giordano 2014).

However, the reforms of August 1934 did not restore the public’s confidence in Belgian banks, and the crisis deepened and reached its peak between October 1934 and March 1935. A new three-party government—including socialist ministers and headed by the former vice-governor of the central bank Paul van Zeeland—was formed in March 1935, whose program entailed an immediate devaluation of the Belgian franc, as well as the introduction of a control (or supervision) over banking.

The Royal Decree of 9 July 1935 on banking control was the result of this process and remains a major milestone in the history of financial supervision in Belgium (Vanthemsche 1980b; Giddey 2014). The 1935 decree provided a comprehensive legislative framework for banking operations. Entry requirements were imposed, and the notion of “bank” became restricted to institutions supervised by the new law. Regulations on liquidity and solvency ratios were introduced. The role of private banking auditors was formalized: they had to guarantee the yearly accounting control, and to work as an intermediary between the banks and the state supervisor. Notably, the 1935 decree on banking established a formal banking supervisor: the Commission bancaire (in Dutch Bankcommissie).Footnote 2

All of those provisions were explicitly inspired by the recent Swiss banking regulation, adopted a few months earlier (Giddey 2014). This foreign influence also meant that the liberal version of banking supervision had prevailed within the Belgian government, as opposed to the more interventionist approach favored by the socialist representatives (Vanthemsche 1980b). In addition to the aforementioned Swiss-inspired features, the 1935 decree on banking control confirmed the separation of deposit and investment banking. More precisely, the portfolio holding companies created by the banks to comply with the 1934 reform were also excluded from the scope of the supervision decree of 1935. Only deposit banks were supervised by the new regulation: finance companies were not controlled. Finally, private bankers, organized as a partnership rather than a corporation, acquired a privileged status that private bankers were not obliged to separate deposit and investment banking business (Brion and Moreau 2016: 215–216).

In 1935, the start of formalizing the banking supervision in Belgium occurred in the context of a severe financial crisis. A new governmental political majority, including technocratic elements, preferred a detailed but light regulation. Thus, the central bank was sidelined, and a new body of banking supervisors was established. Unlike the Swiss case, but similarly to the situation in the US and in Italy, the formalization of supervision coincided with the confirmation of the separation of deposit and investment banking, decided one year earlier in 1934.

7.4 The Belgian Banking Commission: Limited Legal Powers and Resources

The Royal Decree no. 185 of 9 July 1935 established a new institution in charge of the supervision of commercial deposit banks: the Banking Commission (Commission bancaire/Bankcommissie). Its legal position was marked by great autonomy vis-à-vis the state apparatus: it was largely independent from the governmental ministries, which were not represented as such within the Commission, and also from the central bank (Bruyneel 1978).Footnote 3 The Commission decided independently and bore full responsibility for its decisions, except in a few cases which required governmental approval.Footnote 4 The supervisors were entrusted with the enforcement of the 1935 Royal Decree on the control of banks. More precise tasks resulted from this overall purpose.

The Banking Commission was in charge of drawing up the list of registered banks including approval for merger projects between banks; it could require and set, with governmental approval, liquidity ratios (between readily realized assets and short-term deposits), and solvency ratios (between equity capital and the total deposits); it even received the power—but never enforced it—to define maximum interest rates on certain credit operations. The micro-prudential supervision of the individual deposit banks was initially based on the yearly examinations made by private auditors. Until the reform of 1975, the Banking Commission did not conduct inspections directly on supervised banks. This outsourcing of actual supervision was inspired by the Swiss model and induced the smallness of the staff of the Banking Commission during a large part of the twentieth century (Fig. 7.1).

Fig. 7.1
A multi line graph of number of qualified employees and annual expenditures against number of qualified employees on the Y axis, versus years from 1935 to 1979 in 3 year intervals on the X axis. Both graphs reach a peak in the year 1979.

(Source Banking Commission annual reports, for more detail: Giddey [2017a: 47–49])

Belgian Banking Commission: staff and resources, 1936–1980

Full size image

The Banking Commission consisted of a board of seven members, chaired by a president. The six ordinary members were not hired professionals but were only compensated by fees for the meetings’ attendance (on average, 2.4 meetings per month between 1935 and 1975). In addition to the board the institution hired permanent administrative staff to deal with daily operations. Out of the seven board members: three, including the president, were appointed without restrictions by the government, two were chosen from a list drawn up by the central bank, and the rest of two were selected from a list drawn up by the Association of banks. This designation of the board members explicitly increased influence of the regulated banks and the central bank in appointment of supervisors. A study of the first 25 members appointed as Banking Commission members (1935–1975) shows that the profile of the supervisors did not evolve significantly over time (Giddey 2017a: 31–38). The composition of the commission reflected a delicate balance of political, social, and linguistic criteria. The president was a banking specialist, three members were industrial or trade employers’ representatives, two members were coming from socialist credit cooperatives, and one member was a senior official of the central bank. Active commercial bankers were excluded from the Banking Commission, and even direct “revolving doors” transfers from the private banking sector, for example a former bank executive joining the Banking Commission, did not occur before 1975. The composition of the Banking Commission was rather characterized by the current political balance of power.

The president of the Banking Commission was effectively the head of its management. He was assisted by a very limited staff. Prior to 1959, the archival sources are insufficient to provide reliable and comprehensive information on the number of employees of the Banking Commission. It is safe to say that the number of “qualified” employees—i.e., senior managers, advisers, and secretaries—did not exceed 10.Footnote 5 Figure 7.1 provides the number of the senior staffs and the budget of the supervision agency. A tremendous growth is noticeable in the human and financial resources available starting in 1963 and accelerating during the 1970s.

The qualified staff doubled between 1962 (9) and 1968 (18), and reached 40 persons by 1976 and 49 by 1980.Footnote 6 The increase during the 1960s and 1970s was mainly due to new supervision tasks that the Banking Commission was gradually entrusted with investment funds, private saving banks, and holding companies. In 1976 for example, the Banking Commission took over the supervisory duties on the private savings banks, which had previously been undertaken by another state agency, the Office central de la petite épargne.Footnote 7 Unlike its Swiss counterpart, the Belgian Banking Commission was able to cope with those new tasks by hiring additional staff, because a large part of its budget was funded by fees paid by the supervised financial institutions. The agency funding, mainly relying on fees collected from the supervised companies, allowed for an incremental increase in staff.

7.5 Banking Supervision and Supervisory Activities: A Significant Extension After the Second World War

Because of the limited means of the Belgian agency, its effective (on-site) supervisory manners were not very developed. The reason of both the limited scope of the operations and resources of the Banking Commission is mainly explained by the fact that it relied on the private auditors (or chartered accountants) for the yearly auditing. Moreover, the private auditors were selected by the banks on a list of auditors which had been certified by the Banking Commission. With the 1975 reform of banking regulation, the selection mode of auditors changed, and the supervisors were able to appoint the auditors unilaterally. Until 1975 the Banking Commission did not perform any on-site examinations or inspections—the direct supervision was outsourced to private entities. Only in very specific and exceptional circumstances could the Banking Commission ask the National Bank of Belgium to conduct inquiries and inspections of an individual bank. This procedure—i.e., delegating an inquiry to central bank’s agents—was administratively onerous and time-consuming (Bruyneel 1972: 215). The role of the agency was merely to coordinate the network of certified auditors.

However, the Banking Commission, despite the scarcity of its legal powers, used different means to enforce regulatory compliance. It should be noted that the agency compensated the lack of intervention measures and explicit legal powers by an approach based on moral suasion. Especially during the long presidency of Eugène de Barsy (1944–1973), the Banking Commission favored a method of regular informal meetings with influent bank managers. Cooperation and discussion with the regulated institutions were preferred to disciplinary action (Bruyneel 1978). This “governor’s eyebrow” approach gave the supervision agency a large discretionary authority. In Belgium a formalization process of financial supervision does not entirely exclude informal methods of enforcement.

In addition to this specific feature of strong cooperative attitude between the supervisor and the supervised, the Belgian Banking Commission also witnessed two major developments during the post-Second World War era. The first important activity of the supervision agency was its significant role in the use of liquidity and solvency ratios (coefficients bancaires). While the instrument of the ratios was established by the 1935 Royal decree, it was not enforced by the Banking Commission before 1946. In the post-war period, the Banking Commission—hand in hand with the central bank and the Treasury—decided to apply the provisions of the banking control regulation related to ratios. In the new context, the ratios were used as a means to stabilize the massive public debt inherited from wartime, rather than as a tool to ensure the stability of the financial institutions and the security of their depositors. A large share of bank credits was channeled toward the public sector. The ratios introduced by the Banking Commission were seen as a way to restructure the massive floating debt caused by the war (Cassiers and Ledent 2008). Banks were obliged or actively encouraged to hold considerable stocks of state paper. Those mandatory ratios were gradually relaxed between 1949 and 1965. By the mid-1970s, the constraining ratios that compelled the banks to finance the public sector had been transformed into more standard equity ratios. Through the supervisory activities (negotiations) to enforce those ratios, the Banking Commission established itself as a significant player, alongside the central bank and the Treasury, not only in banking supervision, but also in monetary and state financing policy.

The second development also occurred during the post-war economic boom. In the context of growing internationalization and despecialization of the financial system, the role of the Banking Commission was gradually extended. Financial innovation, for example the success of new forms of financial intermediation such as investment funds, was another driver of this process. In 1957 the Banking Commission became in charge of the supervision of investment trusts; in 1964 it was entrusted the supervision of all the institutions that received deposits from the public such as consumer credit and mortgage companies; in 1967 holding companies were partly submitted to its control; in 1975 the Banking Commission was also responsible for the supervision of private saving banks (Giddey 2017b). This considerable extension of the supervisory tasks of the Banking Commission was accompanied by a dynamic process of deregulation and despecialization of the financial institutions. The more financial establishments offered full banking services, the more centralized their supervision became within the Banking Commission.

In the post-war era, financial innovation, monetary and state financing policy, and an increasing role of market forces were the main drivers of the regulatory reforms. Banking crises, which were at the heart of the formalization process during the 1930s, were not relevant. Furthermore, the significant increase of the supervisory tasks and powers of the Banking Commission that occurred with the 1975 revision of the law on banking is to be considered as the final completion of the formalization process that started in 1935.

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The formalization process of Belgian banking supervision began in the middle of the 1930s as a consequence of the economic and financial crises at the beginning of the decade. However, based on our understanding of “formalization,” the process was not completed until the mid-1970s. While banking regulation and a banking supervisor was introduced with two acts in 1934 and 1935, the day-to-day supervisory activities remained quite limited until the next major regulatory reform in 1975. The banking supervisor established in 1935 mainly consisted of a committee, and the supervisory activities performed were conducted by external auditors in connection to the regular auditing or at multi-year intervals, which we consider to be somewhat off from our understanding of formal banking supervision. Similar to countries such as Switzerland and the UK, the Belgian commercial banks had been subject to informal supervision enforced by moral suasion as well as social and political networks. The launching trigger of the Belgian formalization process was the financial crisis of the early 1930s, and the process was completed as a product of the Belgian financial system’s development, deregulation and despecialization of the banking, and the increased jurisdiction of the Banking Committee.