## IMF Financial Sector Assessment — Netherlands (cr1779)

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### Macrofinancial setting
- Financial system size and structure:
  - Financial system assets nearly eight times gross domestic product (GDP).
  - Banking sector comprises half of the financial sector; largest three banks account for 72 percent of the sector’s assets.
  - Presence of a globally systemically important bank (G-SIB) and a globally systemic important insurer (G-SII).
  - Insurance sector assets about 140 percent of GDP; about half invested abroad.
  - Second pillar pension system assets equal to 184 percent of GDP.
- Pension funding and mortgage credit:
  - Funding ratios have declined in many pension funds; about 90 percent (by assets) have a funding ration below 105 percent and are under a recovery plan.
  - Credit growth skewed towards mortgages; credit to nonfinancial corporates (NFCs) still declining.
- Historical government involvement:
  - Government bailed out a number of weak banks during the financial crisis and remains part owner of two.

### Household and mortgage vulnerabilities
- Key vulnerabilities:
  - High household indebtedness contributes to financial sector vulnerabilities.
  - Share of mortgages with negative equity approximately 20 percent, particularly high among young borrowers.
  - About 55 percent of total mortgages were interest-only (IO) at end-2015; one-quarter of mortgagors rely fully on an IO mortgage.
  - DNB (2016) estimates 60 percent of IO mortgages will not be fully covered by contractual payments or pledged accounts at maturity.
  - Mortgages with negative equity have higher probability of default; IO mortgage maturities concentrate from 2030 onwards.
  - High household indebtedness could amplify consumption fluctuations and economic cycles.
- Mortgage arrears and equity:
  - Aggregate mortgage arrears: 2.3 percent in Q1 2013; 1.6 percent at end-2015.
  - About 21 percent of mortgages in negative equity at end-June 2016.
- Lending performance by originating LTV and LTI (share of mortgages in arrears, as of 2015 Q4):
  - Originating LTV Ratios columns: <60 | 60-70 | 70-80 | 80-90 | 90-100 | 100-110 | 110-120 | >120
  - Originating LTI Ratios (rows):
    - 0-2: 0.4 0.4 0.4 0.5 0.6 0.7 1.1 0.6
    - 2-3: 0.4 0.5 0.6 0.8 0.9 1.2 1.6 1.5
    - 3-4: 0.6 0.7 0.8 1.1 1.1 1.6 2.3 2.7
    - 4-5: 0.8 1.0 1.3 1.5 1.8 2.1 3.1 4.4
    - 5-6: 1.0 1.3 1.6 2.0 2.3 3.0 4.2 5.9
    - > 6: 1.4 1.4 1.6 2.0 2.4 2.9 3.7 4.9

### Macroprudential measures taken and recommended steps
- Authorities’ measures implemented:
  - Decreasing loan-to-value (LTV) limit by 1 percentage point per year until 100 percent by 2018.
  - Tightened debt-service-to-income (DSTI) ratios; lenders must apply a "stressed" interest rate "(5 percent)" for mortgages fixed <10 years.
  - Limited mortgage interest deductibility (MID) to mortgages amortized within 30 years; MID rate reduced by 0.5 percentage point per year to 38 percent in 2042.
  - Establishment of the Financial Stability Committee (FSC) with advisory powers.
  - Implementation of SSM, Solvency II for insurance, EMIR for CCPs, and a new framework for the pension sector.
- Staff encouragements / further steps:
  - Expedite reduction of the MID and reach at least tax neutral treatment of mortgages relative to other financial assets on an accelerated basis (tax-neutral MID referenced as 30 percent).
  - Further lower LTV ratio after 2018 to no more than 90 percent.
  - Strengthen the legal basis of the FSC (establish under primary law and vest with "comply-or-explain" powers).
  - Address the stock of IO mortgages and ensure sound underwriting standards across sectors.
  - Place prudential ceilings above which DSTI limits (by income group) cannot be relaxed.

### Profitability, funding, and external linkages
- Profitability pressures:
  - Net interest income (NII) reliance; overall banking profitability projected to fall from 0.50 percent of assets in 2015 to about 0.15 percent in 2018 under baseline.
  - Prolonged low interest rates and competition strain insurers and pension funds; life insurance sector faces severe stress.
  - Mortgage rates declined with a lag; banks’ net interest margins have been relatively resilient so far.
- Funding and cross-border exposure:
  - Wholesale funding comprises more than 40 percent of total liabilities; about one-third of wholesale funding is short term.
  - About half of wholesale funding via debt securities; about 45 percent of these held by EA investors.
  - About half of debt securities issued by Dutch banks denominated in foreign currencies, mainly U.S. dollars.
  - Significant trade and financial linkages: close to 50 percent of revenue of companies in the Amsterdam Exchange Index (AEX) originates from EMs; banks interconnected with the U.K., France, Germany, and Spain.
- Liquidity profile:
  - Banks rely heavily on wholesale funding but the term structure is relatively long; liquidity stress tests indicate capacity to handle significant funding withdrawals.

### Risks, resilience, and stress-test outcomes
- Key systemic vulnerabilities ("Triple Threats"):
  - Low profitability due to reliance on net interest income and low credit growth.
  - High indebtedness of household and NFC sectors.
  - Reliance on wholesale funding and cross-border linkages.
- Stress test design and selected results (extreme adverse scenario):
  - Extreme adverse scenario: cumulative decline of GDP equal to two standard deviations relative to the baseline (8.7 percentage points over three years) in a V-shaped recession.
  - Fully loaded CET1 ratio for largest six banks declines from 13.5 percent in 2015 to 10.2 percent in 2018.
  - CET1 ratio of every bank remains above the minimum hurdle rate of 7 percent over 2016–18.
  - Leverage ratio of six largest banks declines from 3.8 percent to 3.2 percent; one large bank would fall just below the 3 percent hurdle used in the test.
  - Capital shortage of Tier 1 capital for the system in the adverse scenario equivalent to EUR 3.8 billion (0.6 percent of GDP).
  - Under stress, overall profitability declines from 0.5 percent of assets in 2015 to -0.3 percent in 2017–18.
- Sensitivity and concentration analyses:
  - Default of the three largest exposures with 50 percent collateral haircuts could cause one large bank to exhibit a Tier 1 shortfall; five simultaneous defaults could undercapitalize other SIBs.
  - Introducing IRB risk-weight floors to 60, 80, and 90 percent of the standardized portfolio risk weight (35 percent) would raise average IRB mortgage risk weights from 15 percent to 21, 28, and 31.5 percent, respectively, reducing CET1 ratios by 0.7, 1.4, and 1.8 percentage points at end-2015 (static calculation).
- Liquidity test outcomes:
  - Contractual maturities and run-off rates produced withdrawals equivalent to 15–20 percent of initial stock within first two to three months (variation across banks).
  - All banks except a small institution could face persistent withdrawals (periods > six months) without requiring emergency liquidity assistance (ELA).

### Institutional and supervisory recommendations
- Supervisory independence and resources:
  - Strengthen operational independence of DNB and AFM: allow setting budgets and wages, enable issuing technical regulations, use external expertise, tighten removal rules for board members.
  - Exclude DNB and AFM from proposed salary cap and provide greater autonomy in setting supervisory budgets.
  - Enhance powers to introduce technical regulations (consistent with SSM) and to conduct examinations using outside expertise.
- Supervisory focus and data:
  - Continue building capital buffers to ensure banks remain above minimum leverage ratio thresholds under severe adverse events.
  - Monitor insurers closely and apply Pillar 2 measures if required; national law on recovery and resolution of insurers proposed in 2017 is welcome.
  - Complete processes to facilitate resolvability of Dutch banks while safeguarding taxpayer resources.
  - DNB and AFM to undertake cross-sectoral review of mortgage underwriting standards and ensure reliable, complete data for off-site supervision.
  - Strengthen loan classification oversight and internal model validation by providing Joint Supervisory Teams more support from risk specialist divisions.
  - Encourage more active role of Supervisory Boards of Dutch banks via ongoing engagement.

### Selected FSAP key recommendations (timing)
- Immediate (I): within one year; Near–term (NT): one–three years.
- Financial risks and stability analysis:
  - Enforce industry-wide approach to informing IO mortgagors of estimated repayment shortfalls. (I)
  - Continue to build capital buffers to ensure all banks remain above minimum leverage ratio thresholds. (NT)
- Macroprudential policy framework:
  - Strengthen FSC by establishing under primary law and vest with “comply-or-explain” powers. (NT)
  - Accelerate phase-out of MID and reduce final tax rate to a neutral level. (NT)
  - Continue reducing maximum LTV limits to no more than 90 percent after 2018, and place prudential ceilings above which DSTI limits cannot be relaxed. (NT)
- Cross-cutting supervisory issues:
  - Enhance DNB and AFM powers to introduce technical regulations and use external expertise. (NT)
  - Exclude DNB and AFM from proposed salary cap and grant greater budget autonomy. (I)
  - Undertake cross-sectoral review of mortgage underwriting standards. (I)
  - Ensure reliable and complete data for off-site supervision. (NT)
- Banking supervision and regulation:
  - Enhance oversight of loan classification and strengthen internal model validation; support Joint Supervisory Teams with risk specialists. (NT)
  - Encourage a more active role of Supervisory Boards. (NT)
- Insurance and pension supervision:
  - Monitor insurers and apply Pillar 2 measures at differing levels of VA and UFR impact. (I)
  - Harmonize laws on quality of advice/suitability and provide authority for group supervision in pension law. (NT)
- Securities supervision:
  - Broaden AFM authority on loan-based crowd-funding platforms. (NT)
  - Require prompt public disclosure of auditor changes or resignations. (NT)
- Financial market infrastructure:
  - Augment supervisory resources for EuroCCP. (I)
  - EuroCCP to strengthen stress testing, margin models, and develop a comprehensive recovery plan. (I)
- Crisis management and bank resolution:
  - Develop arrangements for systemic crisis management and make legacy frameworks complementary to the SRM. (NT)
  - Allow DGS to finance deposit transfers in resolution and insolvency. (NT)

### Insurance, pensions, and FMIs
- Insurance sector:
  - Despite Solvency II ratios >100 percent, life sector vulnerable due to reliance on Ultimate Forward Rate (UFR = 4.2 percent) and Volatility Adjustment (VA); these elements account on average for more than 50 percent of own funds.
  - EIOPA 2016 stress tests (S-LY, S-DH) show substantial reductions in own funds under prolonged low yields; VA can produce controversial positive impacts.
  - Recommendation: Use Pillar 2 powers (dividend restrictions, capital add-ons) tied to VA and UFR impacts.
- Pension sector:
  - Average pension fund coverage ratio dropped below 102 percent by end-Q2 2016.
  - 90 percent of pension funds (by assets) subject to a recovery plan.
  - Sensitivity: excess investment returns needed ~400 basis points over risk-free to avoid substantial benefit cuts.
  - Recommendation: Provide additional guidance on prudent person principle; use shorter projection horizons alongside the 60-year feasibility test.
- Financial Market Infrastructures:
  - FMI supervision strengthened; EMIR and CPMI-IOSCO principles applied.
  - Two CCPs (EuroCCP, ICE Clear Netherlands B.V.) and one central CSD/SSS (Euroclear Netherlands).
  - The Netherlands lacks a resolution regime for FMIs; recommend CCP recovery plans and, upon EU legislation, establishment of crisis management groups.
  - EuroCCP highly interconnected; failure would have significant stability consequences; recommend increased supervisory resources and enhanced stress testing and sensitivity analysis.

### Deposit Guarantee Scheme, macro outlook, and stress scenarios
- Deposit Guarantee Scheme (DGS):
  - An ex ante funded DGS adopted in 2015.
  - Even when fully funded the target balance will be insufficient for payouts in some larger LSIs.
  - Backstops: ability to impose extraordinary premiums on banks; documented line of credit from MoF.
  - Seven-day payout period incorporated into Dutch law to be implemented by 2019.
  - Recommendation: Public commitment to reduce maximum payout period from 20 to 7 business days by 2019; amend legislation to allow DGS to finance deposit transfers in insolvency.
- Selected macro projections (2015–17):
  - Real GDP growth: 2015: 2.0; 2016: 1.7; 2017: 1.6
  - Private consumption: 2015: 1.8; 2016: 1.9; 2017: 1.9
  - Unemployment rate: 2015: 6.9; 2016: 6.6; 2017: 6.4
  - HICP: 2015: 0.2; 2016: 0.2; 2017: 0.9
  - Current account balance (percent of GDP): 2015: 10.1; 2016: 9.5; 2017: 9.2
  - General government gross debt: 2015: 67.7; 2016: 68.2; 2017: 65.3
  - Fiscal balance (percent of GDP): 2015: -2.4; 2016: -2.4; 2017: -1.8
  - Primary balance: 2015: -0.9; 2016: -0.9; 2017: -0.5
- Stress-test scenario paths (selected, 2015–18):
  - Real GDP growth (Baseline): 2015: 2.0; 2016: 1.7; 2017: 1.6; 2018: 1.9
  - Real GDP growth (Adverse IMF): 2015: 2.0; 2016: 0.1; 2017: -3.7; 2018: 0.2
  - Unemployment rate (Baseline / Adverse IMF):
    - Baseline: 2015: 6.9; 2016: 6.6; 2017: 6.4; 2018: 6.1
    - Adverse IMF: 2015: 6.9; 2016: 7.2; 2017: 8.8; 2018: 8.6
  - CPI inflation (Adverse IMF): 2015: 0.2; 2016: 0.0; 2017: -1.4; 2018: -2.5
  - Interest rate on corporate loans (Adverse IMF): 2015: 1.7; 2016: 1.5; 2017: 1.9; 2018: 2.0
- Stress-test findings summary:
  - Capital ratios deteriorate mainly due to higher credit losses and lower net interest income.
  - Concentration tests show vulnerability to default of multiple large borrowers with 50 percent collateral haircuts.
  - Introducing a floor to mortgage RWA increases RWAs and reduces capital ratios.

*International Monetary Fund — EXECUTIVE SUMMARY and selected chapter excerpts (Netherlands) — cr1779*

### EXECUTIVE SUMMARY ___________________________________________________________________________  6

### EXECUTIVE SUMMARY

### Macrofinancial setting
- The Netherlands has a large and globally interconnected financial system, with assets nearly eight times gross domestic product (GDP).
- The banking sector comprises half of the financial sector and is concentrated in four domestic banks; the largest three banks account for 72 percent of the sector’s assets.
- The country is home to a globally systemically important bank (G-SIB) and a globally systemic important insurer (G-SII).
- During the financial crisis, the government bailed out a number of weak banks and it remains part owner of two.
- The assets of the insurance sector amount to about 140 percent of GDP, of which about half are invested abroad.
- The second pillar pension system has assets equal to 184 percent of GDP; funding ratios have declined in many pension funds due to low interest rates and about 90 percent (by assets) have a funding ration below 105 percent are under a recovery plan.
- Credit growth has been lopsided towards mortgages, with credit to nonfinancial corporates (NFCs) still declining.

### Household and mortgage vulnerabilities
- High household indebtedness contributes to financial sector vulnerabilities, although mortgage defaults are relatively low.
- Drivers of mortgage-sector resilience: full legal recourse on mortgage borrowers and a tax exemption for intergenerational transfers.
- Key vulnerabilities:
  - The share of mortgages with negative equity is still approximately 20 percent, particularly high among young borrowers.
  - A similar portion of mortgage borrowers rely fully on interest only mortgages.
  - Mortgages with negative equity tend to have a higher probability of default and may lead to higher credit losses in case of default.
  - High household indebtedness could exacerbate the economic cycle by amplifying fluctuations in consumption.

### Policy measures taken and recommended macroprudential steps
- Authorities’ actions to date:
  - Decreasing the loan-to-value (LTV) limit by 1 percentage point per year until it reaches 100 percent by 2018.
  - Tightened debt-service-to-income (DSTI) ratios.
  - Limited mortgage interest deductibility (MID) to mortgages amortized within 30 years, reducing the MID by 0.5 percentage point per year to 38 percent in 2042.
  - Establishment of the Financial Stability Committee (FSC) with advisory powers.
  - Implementation of single supervisory frameworks (SSM), Solvency II for insurance, EMIR for CCPs, and a new framework for the pension sector.
- Staff encouragements / further steps:
  - Expedite the reduction of the MID and reach at least a tax neutral treatment of mortgages relative to other financial assets on an accelerated basis.
  - Further lower the LTV ratio after 2018 to no more than 90 percent.
  - Strengthen the legal basis of the FSC.
  - Address the stock of interest-only (IO) mortgages and ensure sound underwriting standards across sectors.
  - Place prudential ceilings above which DSTI limits (by income group) cannot be relaxed.

### Profitability, funding, and external linkages
- Pressure on profitability and reliance on wholesale funding are important vulnerabilities.
  - Low interest rates and growing competition have exacerbated challenges for the Dutch insurance and pension sectors; the life insurance sector faces severe stress.
  - Low interest rates and slow credit growth will continue to weigh on banks’ profitability, requiring changes to business models.
  - Mortgage rates are declining after a lag; banks’ net interest margins have been relatively resilient to date.
- The Netherlands has significant global trade and financial linkages; weaker-than-expected growth in the euro area (EA) or emerging markets (EMs) could slow domestic growth and more volatile global financial conditions could negatively impact banks, which remain highly dependent on wholesale funding.
- Banks rely heavily on wholesale funding, but the term structure of this funding is relatively long.

### Risks, resilience, and stress testing outcomes
- Key points from stress tests and system assessment:
  - Banks built buffers through retained earnings and lower leverage since the crisis and are well capitalized on a risk-weighted basis.
  - A severe stress test scenario would have a significant negative impact on Basel III fully loaded (risk-weighted) capital ratios, but all banks would maintain capital ratios above minimum regulatory requirements.
  - Banks have high leverage and a relatively low risk-weighted assets (RWAs)-to-total assets ratio, particularly those using internal ratings-based (IRB) models.
  - A significant bank could fall just below the minimum 3 percent leverage ratio hurdle used in the stress tests (not the legal minimum) in the adverse scenario.
  - Liquidity stress tests reveal that banks could handle significant funding withdrawals, thanks to the relatively long term structure of wholesale funding.

### Institutional and supervisory recommendations
- Strengthen operational independence of supervisors (DNB and AFM):
  - Allow setting budgets and wages, enable them to issue technical regulations and use external expertise, and tighten rules on the removal of board members.
  - Exclude the DNB and AFM from the proposed salary cap, and provide them with greater autonomy in setting their supervisory budgets.
  - Enhance the DNB and AFM powers to introduce technical regulations (consistent with the SSM) and to conduct examinations using outside expertise.
- Continue to build capital buffers to ensure all banks remain above minimum leverage ratio thresholds in the case of severe adverse events, enabling support for credit growth and reducing potential macrofinancial implications.
- Monitor closely the financial conditions of insurers and apply Pillar 2 measures if required; the proposed introduction in 2017 of a new national law on the recovery and resolution of insurers is welcome.
- Complete processes to facilitate the resolvability of Dutch banks while safeguarding taxpayer resources, including in a systemic crisis.
- Cross-sectoral supervisory actions:
  - The DNB and AFM to undertake a cross-sectoral review of credit underwriting standards of mortgages.
  - Ensure reliable and complete data is available on a timely basis to support off-site supervision.
  - Further enhance supervisory oversight of loan classification and strengthen internal model validation by providing Joint Supervisory Teams more support from risk specialist divisions.
  - Encourage a more active role of the Supervisory Board of Dutch banks via ongoing engagement.

### Selected FSAP key recommendations (timing)
- Immediate (I): within one year; Near–term (NT): one–three years.
- Financial risks and stability analysis:
  - Enforce an industry-wide approach to informing IO mortgagors of estimated repayment shortfalls. (I)
  - Continue to build capital buffers to ensure all banks remain above minimum leverage ratio thresholds in the case of severe adverse events. (NT)
- Macroprudential policy framework:
  - Strengthen the FSC by establishing it under primary law and vest it with “comply-or-explain” powers. (NT)
  - Accelerate the phase-out of MID and reduce the final tax rate to a neutral level. (NT)
  - Continue gradually reducing maximum limits on LTV ratio to no more than 90 percent after 2018, and place prudential ceilings above which DSTI limits (by income group) cannot be relaxed. (NT)
- Cross-cutting supervisory issues:
  - Enhance the DNB and AFM powers to introduce technical regulations (consistent with the SSM) and to conduct examinations using outside expertise. (NT)
  - Exclude the DNB and AFM from the proposed salary cap, and provide them with greater autonomy in setting their supervisory budgets. (I)
  - The DNB and AFM to undertake a cross-sectoral review of credit underwriting standards of mortgages. (I)
  - Ensure that reliable and complete data is available on a timely basis to support off-site supervision. (NT)
- Banking supervision and regulation:
  - Further enhance supervisory oversight of loan classification and strengthen internal model validation by providing Joint Supervisory Teams more support from risk specialist divisions. (NT)
  - Encourage a more active role of the Supervisory Board of Dutch banks via ongoing engagement. (NT)
- Insurance and pension supervision and regulation:
  - Monitor closely and take a series of well-defined actions, under Pillar 2, at different levels of VA and UFR impact on insurers’ solvency position. (I)
  - Harmonize the relevant laws on the quality of advice and suitability of products and provide authority for group supervision in the pension law. (NT)
- Securities supervision and regulation:
  - Broaden the supervisory authority of the AFM with regard to loan-based crowd-funding platforms. (NT)
  - Require prompt public disclosure of auditor changes or resignations. (NT)
- Financial market infrastructure:
  - Augment the supervisory resources devoted to the oversight of European Central Counterparty (EuroCCP). (I)
  - EuroCCP to strengthen its review of its stress testing and margin models methodology and develop a comprehensive recovery plan. (I)
- Crisis management and bank resolution:
  - Develop adequate arrangements for systemic crisis management, and make legacy frameworks for managing failing banks complementary to the new SRM framework and more transparent. (NT)
  - Allow the deposit guarantee scheme to finance deposit transfers in resolution and insolvency. (NT)

*International Monetary Fund — EXECUTIVE SUMMARY (Netherlands) — cr1779*

### 3.      The authorities have strengthened arrangements for financial sector oversight. The

### 3.      The authorities have strengthened arrangements for financial sector oversight. The

### Overview
- The DNB is the prudential supervisor of all financial institutions, while the AFM undertakes conduct-of-business supervision, including of security market activities (twin peaks model adopted in 2002).
- A Financial Stability Committee (FSC) was established in 2012, with a macroprudential mandate and advisory powers.
- Most recommendations of the previous FSAP have been addressed (Appendix I).

### Major macrofinancial vulnerabilities ("Triple Threats")
- Vulnerabilities and associated risks:
  - Banks’ business models are highly reliant on net interest income.
    - Risk: A continuation/further decline in interest rates and low credit growth may reduce net interest income for banks. Low interest rates may further impact the financial positions of insurance companies and pension funds.
  - The indebtedness of the household and NFC sectors.
    - Risk: Increases the probability of default of borrowers and exacerbates the impact of adverse shocks to house and asset prices.
  - Banks’ reliance on wholesale funding and exposure to cross-border linkages.
    - Risk: Exacerbates the probability of an adverse funding shock and could negatively affect bank profitability.

### A. Low Profitability
- Findings:
  - Low interest rates and slow credit growth are expected to weigh on financial sector profitability.
  - Net interest income (NII) of Dutch banks was relatively resilient to falling interest rates in the recent past; mortgage rates declined with a lag compared to short-term rates.
  - If interest rates remain at current low levels, the full impact on mortgage rates will materialize with time, compressing net interest margins and leaving little room for further funding cost reductions.
  - Prolonged low interest rates and competition have exacerbated challenges faced by Dutch insurers and pension funds.
- Projection:
  - Overall profitability in the banking system will fall from 0.50 percent of assets in 2015 to about 0.15 percent in 2018 under the baseline (see Section B: Financial System Resilience).

### B. Household Sector Indebtedness
- Key statistics and facts:
  - Household debt-to-disposable income ratio is one of the highest in Europe.
  - Debt-to-total assets at 25.7 percent at end-2014.
  - About 21 percent of mortgages were still in negative equity at the end of June 2016.
  - Aggregate mortgage arrears: 2.3 percent in the first quarter of 2013; declined to 1.6 percent at end-2015.
  - Interest-only (IO) mortgages: about 55 percent of total mortgages at end-2015.
    - One-quarter of mortgagors rely fully on an IO mortgage.
    - DNB (2016) estimates that 60 percent will not be fully covered by contractual payments or pledged accounts at maturity.
- Risks and dynamics:
  - Assets and debt are unevenly distributed across households; sizable assets are mostly illiquid (pension entitlements and housing).
  - Mortgages with higher LTV and LTI ratios have higher default rates.
  - High LTV ratios exacerbate procyclicality of house price shocks; higher LTV increases volatility of output and employment in simulated house price shocks.
  - IO mortgage maturities concentrate from 2030 onwards and may create fire-sale risk or higher DSTI ratios upon refinancing.
- Recommendation:
  - Adopt a standardized approach to informing IO mortgage holders of their financial status and advise on early remedial measures (strengthen incentives to switch to annuity or linear mortgages, prepay loans voluntarily, or accumulate financial assets).

- Netherlands: Share of Mortgages in Arrears by Originating LTV and LTI Ratios (In percent, as of 2015 Q4)
  - Originating LTV Ratios: <60 | 60-70 | 70-80 | 80-90 | 90-100 | 100-110 | 110-120 | >120
  - Originating LTI Ratios (rows):
    - 0-2: 0.4 0.4 0.4 0.5 0.6 0.7 1.1 0.6
    - 2-3: 0.4 0.5 0.6 0.8 0.9 1.2 1.6 1.5
    - 3-4: 0.6 0.7 0.8 1.1 1.1 1.6 2.3 2.7
    - 4-5: 0.8 1.0 1.3 1.5 1.8 2.1 3.1 4.4
    - 5-6: 1.0 1.3 1.6 2.0 2.3 3.0 4.2 5.9
    - > 6: 1.4 1.4 1.6 2.0 2.4 2.9 3.7 4.9
  - Source: DNB.

- Maturity Schedule of Non-Amortizing Mortgages (Billions of euros)
  - Charted maturities show remaining mortgage due and repayment sources through 2043 (source: DNB).

### C. Corporate Sector Indebtedness
- Key statistics and facts:
  - Corporate debt stabilized at 127 percent of GDP in 2015, about 20 percentage points above the EU average.
  - Debt-to-equity ratios have hovered below 100 percent since 2011 due to strong equity build-up.
  - Gross profit rates above 40 percent for most economic sectors; firms maintained strong liquidity buffers.
- Resilience and vulnerabilities:
  - Overall domestic NFC sector appears generally resilient to adverse macroeconomic conditions.
  - A segment of firms holding a non-trivial share of total debt continues to have low interest coverage ratios (ICRs), warranting further investigation with more granular data.

- ICR of Domestic Non-Financial Corporations by Firm Sector (Median, in percent) — selected values:
  - Total: 9.9 (2009), 9.7 (2011), 11.1 (2013), 12.7 (2015)
  - Manufacturing: 15.3 (2009), 19.2 (2011), 19.9 (2013), 12.1 (2015)
  - Finance: 9.7 (2009), 8.4 (2011), 11.1 (2013), 15.8 (2015)
  - Housing: 2.9 (2009), 2.6 (2011), 4.2 (2013), 4.4 (2015)
  - Source: ORBIS, and IMF staff calculations.

### D. Wholesale Funding and Cross-Border Linkages
- Key findings:
  - Dutch banks are closely interconnected with European banks, with significant asset exposures to the U.K., France, Germany, and Spain.
  - Wholesale funding comprises more than 40 percent of total liabilities; about one-third of wholesale funding is short term.
  - About half of total wholesale funding is obtained through issuance of debt securities; about 45 percent of these are held by EA investors.
  - About half of debt securities issued by Dutch banks are denominated in foreign currencies, mainly in U.S. dollars.
  - The Netherlands has strong trade linkages with other European and EM countries; close to 50 percent of the revenue of companies in the Netherlands’ Amsterdam Exchange Index (AEX) originates from EMs.
- Risk implication:
  - Weakness in trade partner markets could impact Dutch NFC profitability and bank asset quality; reliance on wholesale funding increases vulnerability to funding shocks.

### RISKS, RESILIENCE, AND SPILLOVERS

#### A. Key Risks Facing the Dutch Financial System
- External risks:
  - Significant recession and deflation in the euro area.
  - Tightening in global financial conditions.
  - Rise in populism in large economies leading to uncertainty, trade barriers, and a sharp rise in risk premia; market illiquidity and diminishing confidence could amplify adverse conditions.
- Domestic risks:
  - Decline in house prices impacting private consumption and investment, adversely affecting banks’ credit losses.
  - Effects of Brexit are currently limited but depend on negotiation outcomes with the EU.
- Transmission channels:
  - Realization of external and domestic risks would reduce net exports, business confidence, and investment, exacerbating banks’ credit losses.
  - A drop in bond prices would negatively impact banks’ capital ratios.
  - Renewed stress in wholesale funding markets would reduce net interest income (via higher funding costs) or trigger funding liquidity strains.

#### B. Financial System Resilience — Banking

- Stress test design and findings:
  - Stress tests assessed resilience to solvency and liquidity shocks, and contagion, modeled on specific Dutch risks.
  - In a prolonged low interest rate environment under the baseline, bank profitability projected to fall from 0.50 percent of assets in 2015 to about 0.15 percent in 2018.
  - Past efforts to extend the maturity of wholesale funding reduced roll-over risks, but longer maturities with fixed interest rates limit banks’ ability to adjust interest costs if rates decline further.
- Solvency stress tests (extreme adverse scenario):
  - Extreme adverse scenario: cumulative decline of GDP equal to two standard deviations relative to the baseline (8.7 percentage points over three years) in a V-shaped recession, reflecting downside external risks and domestic shocks.
  - Results:
    - Fully loaded common equity Tier 1 (CET1) capital ratio for the largest six banks declines from 13.5 percent in 2015 to 10.2 percent in 2018.
    - Capital ratio of every bank remains above the minimum hurdle rate of CET1 ratio of 7 percent over 2016–18.
    - Leverage ratio of the six largest banks declines from 3.8 percent to 3.2 percent; the ratio for one of the largest banks would fall just below the minimum 3 percent hurdle used in the test.
    - Capital shortage of Tier 1 capital for the system in the adverse scenario equivalent to EUR 3.8 billion (0.6 percent of GDP).
    - Under the stress scenario, overall profitability declines from 0.5 percent of assets in 2015 to -0.3 percent in 2017–18.
    - Each of the three main “threats” (Box 1) contributes to the decline in bank profitability.

- Sensitivity analysis:
  - Concentration risk:
    - Tested impact of default of the largest (one, three, five) exposures with different recovery levels.
    - With 50 percent haircuts on collateral values (highly unlikely), one large bank exhibits a shortfall of Tier 1 capital upon simultaneous default of the three largest exposures; other SIBs become undercapitalized only in simultaneous default of five largest exposures.
  - Risk-weight floors on IRB-based mortgage portfolios:
    - Current average IRB-based risk weight for the largest banks is 15 percent.
    - Introducing floors to 60, 80, and 90 percent of the risk weight corresponding to standardized portfolios (35 percent) implies RWAs increase to 21, 28, and 31.5 percent, respectively.
    - As of end-2015, the introduction of the floors would cause declines in CET1 ratio equivalent to 0.7, 1.4, and 1.8 percentage points, respectively.
    - Note: test is a simple “static” calculation; phase-in periods and potential dynamic bank responses are not taken into account.

- Liquidity tests:
  - Cash flow-based liquidity stress tests used run-off rates by liability type and asset haircuts.
  - Structure of contractual maturities and run-off rates produced withdrawals equivalent to 15–20 percent of the initial stock within the first two to three months (variation across banks).
  - Results suggest that, except for a small institution, all banks could face persistent and sizable withdrawals of funding (periods longer than six months) without requiring emergency liquidity assistance (ELA).
  - Although the system relies heavily on wholesale funding, liquidity risks appear contained because funding is of sufficiently long average maturity.

- Interconnectedness and contagion:
  - Domestic contagion appears limited overall, but significant heterogeneity exists across banks.
  - One bank is exposed to substantial risk from two peer domestic banks.
  - BIS data indicate Dutch banks are vulnerable to shocks from other financial centers; outward spillovers from Dutch banks to the rest of the world are less significant.
  - Granular supervisory network analysis shows some banks are more vulnerable to failure of foreign banking groups, particularly in the United Kingdom, Germany, and the United States.
  - Co-movement analysis of equity volatilities:
    - ING is highly interconnected with other European banks (and insurers).
    - Aegon (largest insurer) is mainly connected with European insurers.

*IMF staff summary of chapter content.*

### 21.      Although banks appear fairly resilient to the stress tests, increasing capital buffers

### 21.      Although banks appear fairly resilient to the stress tests, increasing capital buffers

### Banking sector: resilience, leverage, and capital buffers
- Finding: Banks were "fairly resilient to stress tests" but "leverage in the banking system is high".
- Finding: "Capital-to-assets ratio one of the lowest by international comparison."
- Finding: "The RWA density for Dutch banks is also low, particularly those using IRB models."
- Policy recommendation: "Increasing capital buffers further (for example, through retained earnings) will enable banks to support demand for credit by the private sector."
- Rationale: Additional capital would:
  - "mitigate banks’ need for significant (and simultaneous) deleveraging when faced with unexpected stress scenarios", and
  - "lessen any negative macrofinancial implications."
- Operational recommendation: "Greater attention to ongoing model monitoring is also needed."
- Supervisory priorities:
  - "Assessing banks’ business models and risk management and strengthening corporate governance are priorities."
  - "A more active supervisory role in assessing loan classification is also needed" and "further intrusiveness by the supervisor is needed when assessing loan classification and valuation."
  - "Supervisors need to encourage banks to adopt new standards for data aggregation." Weaknesses stem from "ageing information technology infrastructure and legacy systems" and post-merger incompatibilities.
- Governance observation: The passive role of bank Supervisory Boards (SB) was a key theme; greater engagement with SBs by the SSM and DNB commenced in 2013 but "more progress is needed."

### Insurance sector: life-sector vulnerabilities and Solvency II distortions
- Finding: "Notwithstanding Solvency II ratios higher than 100 percent, the life sector is vulnerable."
- Mechanisms of vulnerability:
  - Dependence on Solvency II elements: "Ultimate Forward Rate (UFR)" and "Volatility Adjustment (VA)" which "distort the economic-based valuation."
  - Their effect "in the current low-yield environment account, on average, to more than 50 percent of the sector’s own funds."
  - "In a shock requiring restructuring or resolution of the insurer, available own funds will be significantly less than indicated under Solvency II."
  - "Supervisors also have limited Pillar 1 tools if adjusted solvency ratios remain above 100 percent."
- Technical details preserved:
  - "The UFR is the risk free interest rate towards which the risk free yield curve converges beyond the last liquid point (20 years for euros). The current UFR under Solvency II is 4.2 percent."
  - "The VA is a constant addition to the risk-free UFR, based on a risk-corrected spread on the assets in a reference portfolio."
- EIOPA 2016 stress test results:
  - Two scenarios: S-LY (prolonged low-yield, including a change in the value of the UFR) and S-DH (prolonged low interest rate environment combined with market shocks).
  - "The effect of the S-LY scenario is substantial, reducing own funds significantly, or even eliminating them."
  - The "risk-free market yield curve is already lower than the one used to discount liabilities under the S-LY scenario, which highlights the vulnerability of the sector."
  - S-DH results confirm the distortion from the VA: "the stress scenario results in a controversial positive VA impact in some cases more than the loss in value affecting their portfolios."
  - VA incentives: "generates incentives for insurers to move their investments towards the average portfolio of EU insurers, which could be of lower credit rating, to maximize the VA benefit of reducing the volatility of the solvency ratio."
- Non-life sector: "highly competitive and its profitability is under pressure."

### Pension system: second pillar under stress and transition
- Finding: "The average pension fund coverage ratio dropped below 102 percent by end-Q2 2016."
- Finding: "90 percent of pension funds (by assets) currently are subject to a recovery plan."
- Concern: Recovery plans are based on regulatory yield curves that "appear highly optimistic given current market conditions (for example, a 7 percent return for equity investments)."
- Sensitivity analysis: "Based on sensitivity analysis undertaken with the DNB, to avoid a substantial benefit cut, the excess investment returns (over the risk-free rate) needed is in the order of 400 basis points."
- Reform process: "The pension system is in transition and a new model is under discussion" which "may include shifting risks to participants."
- Policy emphasis: Important issues to address include "the lack of trust created by the uncertainty of the level of benefits and the deficiency in pension portability in a labor market with higher self-employment and job mobility."
- Implementation note: "Once implemented, the new system should ensure awareness among the participants so that they can objectively judge the longevity and investment risks they might assume."

### Macroprudential policy: institutional arrangements and further measures
- Institutional arrangement:
  - "The FSC, formed of the DNB, AFM, and MoF (as a non-voting member) in 2012, is responsible for identifying potential financial stability risks and issuing non-binding recommendations."
  - "The DNB conducts macro- and microprudential policies according to the Capital Requirements Directive (CRD IV) and Regulation (CRR) and is the secretariat of the FSC."
  - "The European Central Bank (ECB) can apply more stringent measures, including higher capital buffers (the so called 'topping-up power')."
  - "The MoF sets limits on LTV and DSTI ratios in collaboration with the Ministry of Interior and of Kingdom Relations."
  - "The European Systemic Risk Board (ESRB) can issue recommendations on a 'comply-or-explain' basis."
- Recommendation: "The FSC should be established in primary legislation with powers to issue macroprudential policy recommendations on a 'comply-or-explain' basis to both the DNB and MoF."
- Data gaps and process issues:
  - "Some data gaps should be addressed, including on the financial conditions of NFCs and CRE prices and transactions data."
  - "A more-streamlined European notification system is merited." The CRR/CRD IV notification process "is lengthy and quite rigid" and "the authorities should make a case for accelerating the process in cases of urgent need."
- Recent and recommended measures:
  - DNB actions: use of "G-SII, O-SII, and systemic risk buffers."
  - DNB requested that four systemically important banks (ING, ABN AMRO, Rabobank, and SNS Bank) "meet a minimum of 4 percent leverage ratio by 2018."
  - LTV and DSTI limits have been legally binding since 2013.
  - LTV limit set to decline "by 1 percentage point per year until it reaches 100 percent by 2018."
  - DSTI tightened; lenders must apply a "stressed" interest rate "(5 percent)" when calculating DSTI for mortgages with interest rates fixed for less than 10 years.
  - Mortgage interest deductibility (MID) rules since January 2014: "new mortgage loans are only eligible for MID if they are amortized within 30 years," and "the MID rate is being reduced by 0.5 percentage point per year to 38 percent in 2042."
- Specific policy recommendations:
  - "Accelerate the phase-out of MID (by at least 1 percentage point per year), and reduce the final rate to a tax neutral level relative to other financial assets (IMF, 2016)."
  - "Continue to gradually reduce the maximum limit on the LTV ratio by at least 1 percentage point per year to no more than 90 percent after 2018, in line with the FSC’s recommendation."
  - "Set prudential ceilings on the DSTI caps by income, beyond which these ceilings cannot be relaxed across the credit cycle."
  - Complementary policies: address "supply-demand mismatch of residential rental and owner-occupied housing" via zoning regulations and liberalization of rental markets.
- Note on tax neutrality: tax-neutral treatment of owner-occupied housing would mean "reducing the MID rate to 30 percent, lower than the current plan (38 percent)."

### Microprudential oversight: cross-cutting issues and sectoral supervision
- Cross-cutting supervisory enhancements:
  - "The DNB’s approach to supervision has become more intrusive, forward-looking and risk-based."
  - "The AFM’s supervisory approach has also been enhanced, with early risk identification supported by dedicated teams."
  - "Information sharing and cooperation between the DNB and the AFM is well established."
- Areas needing improvement:
  - Independence and resources:
    - "The requirement for ministerial approval of the supervisory budgets of the DNB and AFM, and the proposed legislation on a salary cap could limit the supervisors’ ability to attract and retain essential staff."
    - "The limited ability of the supervisor to introduce technical regulations has the potential to reduce supervisory effectiveness."
    - "The authority of the MoF to set aside rules enacted by the supervisors (even if not formally used) and the inability of the supervisors to use external experts" are constraints.
    - "The authority specified in legislation for the removal of members of the executive or supervisory boards of the supervisors is open to wide interpretation."
  - Data quality: "Weaknesses in data quality need to be addressed." Issues include "changing reporting framework in insurance and for the collective investment scheme (CIS) subject to implementation risks," "legacy systems, ageing infrastructure, and compatibility of systems."
  - Potential regulatory arbitrage: "Mortgage investments have been rising rapidly in the insurance sector (the share has increased from 3 percent in 2009 to 8 percent in 2016)." For some groups mortgage investments "now make up to 40 percent of their portfolios (excluding unit-linked business)." Recommendation: "undertake a cross-sectoral review (including sampling loan files) of mortgage underwriting standards."
- Banking supervision and SSM:
  - The SSM "has significantly strengthened banking supervision" but "decision making processes need to be streamlined."
  - Operational frictions: (i) "all supervisory decisions need to be submitted to the ECB’s Governing Council after consideration and approval by the Supervisory Board, under a no-objection procedure", creating a "time-consuming and cumbersome supervisory decision-making process"; (ii) "the ECB needs to comply with local legislation to execute many of its tasks (including for fit and proper, and corrective actions and sanctions)."
- Insurance and pensions supervision:
  - "Supervision of the insurance and pension sectors has strengthened significantly but further enhancements are recommended."
  - Solvency II implementation: "The Solvency II framework (2016) has implemented a market-valuation and risk-based prudential regime, including comprehensive group-wide supervision."
  - Coordination: "A joint approach [DNB and AFM] in some areas would deliver benefits, in particular, for culture, governance and integrity, and data exploitation and analytics."
  - Information sharing: "While the supervisors share cases that require the highest level of supervisory attention, earlier formal information sharing on problem files should be considered."
  - Data verification: "Random on-site assessment on the quality and accuracy of the data reported under off-site supervision and frequent back-testing of its predictive power would also enhance the robustness of supervision."
  - Legal development: "The proposed introduction in 2017 of a new national law on the recovery and resolution of insurers is welcome."

*International Monetary Fund staff summary based on the specified content.*

### 34.      The DNB should remain vigilant and closely monitor the transition to Solvency II.

### 34.      The DNB should remain vigilant and closely monitor the transition to Solvency II.

### Solvency II transition and supervisory actions
- Solvency II is "a substantial improvement to the prudential framework," but "its effectiveness remains untested" and some aspects "should be reconsidered in the next Solvency II revision in 2018," including:
  - the UFR methodology,
  - the tax-loss absorbance capacity of tax credits, and
  - the VA.
- Recommendation: "Using Pillar 2 powers, a series of well-defined actions, such as dividend payout restrictions and capital add-ons should be exercised based on the degree of impact that the VA and UFR adjustments has on the solvency positions of insurers."

### Supervisory arbitrage risks (EU and domestic)
- Findings:
  - "Group supervision has significantly improved but some important powers for comprehensive group supervision are not available."
  - Where a group is headed outside the EEA by an insurance holding company or a mixed financial holding company, "powers over unregulated holding companies do not apply" and "strong collaboration between home-host supervisor is required."
  - "The complexity of Solvency II could motivate the use of Freedom of Service (FOS) in the EU" to seek jurisdictions with lighter-touch supervision.
  - National market-conduct legislation faces limitations because "products offered by financial institutions outside of the Netherlands are excluded from the regulations’ scope."
- Recommendations:
  - "Continue to contribute to coordination mechanisms by EIOPA to mitigate potential arbitrage."
  - "Consider widening the regulations to cover all products offered in the Netherlands, regardless of the location of the provider."
  - "Establish mechanisms to credibly enforce national market conduct regulation with regard to FOS operations."

### Pension funds—prudential regulation and supervision
- Background: "The prudential regulation for pension funds was updated in 2015 but further improvements are necessary."
- Findings:
  - "Under the new regulation, premium contributions that do not cover the corresponding accrued benefits are allowed."
  - "An important part of the pension sector is affected by this situation."
  - The regulation tightens the description of the "prudent person principle" but is "far less detailed when compared to the equivalent definition under Solvency II."
  - "The prescribed time horizon for the feasibility test required by the supervisor of 60 years dilutes the informative power of this tool."
- Recommendations:
  - Provide "additional guidance on the prudent person regime" to increase supervisory powers to intervene in excessive risk taking, "especially important for the smaller pension funds."
  - Use "another set of projections based on a shorter projection horizon" in addition to the 60-year feasibility test.

### Pension law—advice, costs, governance
- Findings:
  - "Public access to professional investment advice might become more difficult" due to "the recent introduction of a ban on inducement payments to independent financial advisers and intermediaries for selling complex financial products."
  - "The requirements for advice provided by a pension fund regulated under the pension law are less stringent than those which apply to banks and insurers."
  - "No rules on the amount of costs or the suitability of the product are incorporated into the pensions law."
  - "The pension law also does not require supervision of service providers to which activities of pension funds have been outsourced."
- Recommendation: "Direct oversight of their governance and staff qualifications at group level should be considered."

### Securities market—CIS, auditors, market-based finance
- CIS and crowd-funding:
  - Finding: Regime is "comprehensive" but enhancements could strengthen it.
  - Recommendation: Add "general provisions regarding loan-based crowd-funding platforms to the legislation" to allow rapid development of detailed requirements as the sector evolves.
- Audits and auditor oversight:
  - Findings:
    - Independence rules for audit firms and auditors "are extensive and exceed the minimums set under EU law" in key areas (strict separation of audit and non-audit services; rotation requirements).
    - "The AFM is responsible for the oversight of the audit profession" and conducts oversight "directly and through arrangements with two professional associations."
  - Recommendations:
    - Devote additional attention to "on-site reviews of the smaller audit firms that audit public companies and financial institutions."
    - Ensure "the AFM controls the scope and other key details of the reviews conducted by the professional associations."
    - Increase "additional transparency with respect to changes in auditors of public companies."
- CIS depositaries and AIFs:
  - Findings:
    - Depositaries are key in protecting CIS assets; "related depositaries are permitted under the relevant EU directives."
  - Recommendations:
    - "Consider assessing the risks arising from the use of related depositaries and to imposing additional safeguards."
    - "Work to improve the information provided to ESMA on the positions of alternative investment funds (AIFs) and ensure the scope of the reporting obligations under the AIF Managers Directive (AIFMD) is complete."
    - "Work for enhanced international exchange of information."
    - "Adopt a globally harmonized method for calculating fund leverage" to enhance supervisors’ ability to assess risks of AIFs and other investment funds.

### Financial Market Infrastructures (FMIs)
- Findings:
  - FMI supervision in the Netherlands "has been significantly strengthened."
  - EMIR introduced binding requirements for CCPs located in the Netherlands.
  - Authorities adopted the CPMI-IOSCO Principles for FMIs in oversight of CSDs, SSSs, and systemically important payment systems.
  - There are "two CCPs (EuroCCP and ICE Clear Netherlands B.V.) and one central CSD/ SSS domiciled in the Netherlands (Euroclear Netherlands)."
  - "Most FMIs in the Netherlands are jointly regulated, supervised, and overseen by the AFM and DNB."
- Recovery and resolution:
  - Finding: "The Netherlands currently does not have a resolution regime for FMIs."
  - Recommendation: Ensure "the CCPs develop comprehensive recovery plans, ahead of the EU legislation on CCP recovery and resolution expected to be introduced at the EU level."
  - Once EU legislation is in place, "the authority given the responsibility for CCP resolution should establish crisis management groups for the two Dutch CCPs."
- EuroCCP risk management enhancements:
  - Findings:
    - "EuroCCP is highly interconnected, and its failure would have significant financial stability consequences for European financial markets as a whole and reputational risk for the Netherlands."
    - EuroCCP "monitors risks ... in real-time, and reviews its margin and stress testing models on a monthly basis."
  - Recommendations:
    - DNB should "review the allocation of supervisory resources across FMIs to ensure that it reflects relative risks" and devote relatively more staff resources and time to EuroCCP.
    - Strengthen the monthly review process by:
      - Enhancing reverse stress tests "to consider a wider set of market price scenarios and combinations of participant defaults that would exhaust its financial resources."
      - Enhancing and expanding scenarios used in daily stress testing.
      - Conducting sensitivity analysis to examine parameters and assumptions in its stress test model.
      - Increasing attention on and scope of the sensitivity analysis of its margin model.

### AML/CFT
- Progress:
  - "The Netherlands has made significant progress to bring its AML/CFT legal and regulatory framework in line with the revised FATF standard."
  - Amendments in 2013 established "a direct obligation to identify the 'ultimate beneficial owner' including for legal persons and arrangements."
  - "A legislative requirement that entities obtain and hold adequate, accurate and current information on beneficial ownership is expected to enter into force in July 2017."
  - Netherlands adjusted its terrorist financing offence "in line with the revised FATF standard, and the United Nations Security Council Resolution."
- Next steps:
  - Authorities "are at the initial stages of conducting an assessment of the ML/TF risks in Netherlands" and have "designated a government entity to conduct national assessments of ML/TF threats and vulnerabilities."

### Financial safety nets, recovery and resolution for banks
- Institutional changes and responsibilities:
  - Under the SSM, "the ECB is responsible for early intervention and recovery planning for Dutch SIs."
  - The SRB is responsible, under the SRM, "for ensuring effective resolution of SIs (along with another Dutch bank with operations in other EA countries)."
  - "The DNB, as the national resolution authority, is responsible for the resolution of LSIs and for supporting the SRB with respect to SI resolution."
- Challenges and recommendations:
  - The SRB’s decision-making structure "is complex and should be streamlined to ensure timely decision making for resolution of banks within its purview."
  - "The roles of the SRB and ECB in planning for and managing a domestic systemic banking crisis (as opposed to an individual bank failure) are yet to be defined."
  - Recommendation: "Develop a formal coordination framework for crisis management involving the Dutch authorities, the ECB and the SRB" and test these arrangements periodically "with involvement from the SRB and ECB."
  - The patchwork approach to incorporating EU legislation into Dutch law "impedes transparency" and "Overlapping triggers, tools and responsibility for action contribute to a lack of legal certainly as to which rules apply and when."
  - Regarding ELA, "adequate arrangements for the provision of ELA in euro and other currencies by the DNB are in place."
- Recovery and resolution planning progress and impediments:
  - For the largest and most complex banks, "whole bank bail-in may be the preferred resolution strategy."
  - Key impediment across the EU: "the lack of debt that can be feasibly and credibly bailed-in to absorb losses and recapitalize the bank in resolution."
  - Even when solutions emerge, "meeting the minimum requirements for eligible liabilities that can be bailed-in may take years."
  - Implication: "In some banks, this may constitute a transition risk for the execution of a preferred resolution strategy and require a fallback resolution strategy."
  - Alternative strategies may include "the transfer of critical functions to a private purchaser or to a bridge bank."
  - Recommendations and actions:
    - Address potential constraints on the use of transfer powers resulting from the BRRD, including "a legal interpretation that could limit flexibility in the use of deposit insurance funds in resolution and uncertainty over the ability to depart from pari passu treatment of creditors outside of bail-in."
    - "Continue efforts to ensure they can make operational a bridge bank on short notice."
- Note: "The authorities are considering repealing the 'Emergency Rule.'"

*International Monetary Fund — CR1779 chapter text*

### 47.      An ex ante funded deposit guarantee scheme (DGS) was adopted in 2015 and should

### An ex ante funded deposit guarantee scheme (DGS) was adopted in 2015 and should

### Deposit Guarantee Scheme (DGS): findings
- An ex ante funded DGS was adopted in 2015.
- Even when fully funded the target balance of the fund will be insufficient to finance the payout of deposits in some of the larger LSIs.
- Backstop funding arrangements are in place, including:
  - the ability to impose extraordinary premiums on banks; and
  - a documented line of credit from the MoF.
- The seven-day payout period has been incorporated already into Dutch las, to be implemented by 2019.

### Deposit Guarantee Scheme: policy recommendations
- The Dutch authorities should commit publically to their intent of reducing the maximum payout period from 20 to 7 business days by 2019.
- Amend national legislation to allow the DGS to finance deposit transfers in insolvency.

### Banking system: key financial soundness indicators (selected, latest available / 2015)
- Regulatory Capital to Risk-Weighted Assets: 20.1 (end-2015, Table 3 series shows 20.1 for 2015A1/2015Q4).
- Regulatory Tier 1 Capital to Risk-Weighted Assets: 16.2 (2015A1/2015Q4).
- Non-performing Loans to Total Gross Loans: 2.7 (2015 series entries show 2.7).
- Return on Assets (ROA): 0.6 (2015A1/2015Q4 entries show 0.6).
- Return on Equity (ROE): 10.9 (2015A1/2015Q4 entries show 10.9).
- Liquid Assets to Total Assets (Liquid Asset Ratio): 22.8 (2015 series shows 22.8).
- Liquid Assets to Short Term Liabilities: 169.7 (2015 series shows 169.7).

### Macro outlook and fiscal stance (selected projections, 2015–17)
- Real GDP growth:
  - 2015: 2.0
  - 2016: 1.7
  - 2017: 1.6
- Private consumption:
  - 2015: 1.8
  - 2016: 1.9
  - 2017: 1.9
- Unemployment rate:
  - 2015: 6.9
  - 2016: 6.6
  - 2017: 6.4
- Consumer price index (HICP):
  - 2015: 0.2
  - 2016: 0.2
  - 2017: 0.9
- Current account balance (percent of GDP):
  - 2015: 10.1
  - 2016: 9.5
  - 2017: 9.2
- General government gross debt:
  - 2015: 67.7
  - 2016: 68.2
  - 2017: 65.3
- Fiscal balance (net lending/borrowing, percent of GDP):
  - 2015: -2.4
  - 2016: -2.4
  - 2017: -1.8
- Primary balance:
  - 2015: -0.9
  - 2016: -0.9
  - 2017: -0.5

### Stress-test scenarios: baseline and adverse (selected paths, 2015–18)
- Real GDP growth (Baseline):
  - 2015: 2.0
  - 2016: 1.7
  - 2017: 1.6
  - 2018: 1.9
- Real GDP growth (Adverse IMF):
  - 2015: 2.0
  - 2016: 0.1
  - 2017: -3.7
  - 2018: 0.2
- Unemployment rate (Baseline / Adverse IMF):
  - Baseline 2015: 6.9; 2016: 6.6; 2017: 6.4; 2018: 6.1
  - Adverse IMF 2015: 6.9; 2016: 7.2; 2017: 8.8; 2018: 8.6
- Consumer price inflation (Adverse IMF):
  - 2015: 0.2
  - 2016: 0.0
  - 2017: -1.4
  - 2018: -2.5
- Interest rate on corporate loans (Adverse IMF):
  - 2015: 1.7
  - 2016: 1.5
  - 2017: 1.9
  - 2018: 2.0

### Stress-test findings (summary)
- Capital ratios deteriorate in the stress scenarios mainly due to a combination of higher credit losses and lower net interest income (Figure 12).
- Concentration tests indicate vulnerability to default of multiple large borrowers if a 50% collateral haircut is used (Figure 12).
- Introducing a floor to mortgage RWA increases RWA overall and leads to reduction in capital ratios (Figure 12).

*Source: IMF staff report (Netherlands): selected excerpts from the supplied content unit.*

### Appendix I. Status of Key Recommendations of the 2011 FSAP Update

### Appendix I. Status of Key Recommendations of the 2011 FSAP Update

### Macroprudential Management
- Assign priority to developing macroprudential instruments.
  - Status: Fully implemented.
  - The CRR and CRD IV, which entered into force on January 1, 2014, provide the DNB (and the ECB) with instruments: countercyclical capital buffer, sectoral capital requirements (e.g., risk weights, minimum loss given default (LGD) floors), G-SII and O-SII buffer, systemic risk buffer, Pillar 2 requirements, leverage ratio, and national flexibility measures.
  - Liquidity measures such as the liquidity coverage ratio (LCR) and the net stable funding ratio are incorporated in the CRR, as part of flexibility measures, and are subject to an observation period.
  - The WFT, the Decree on Conduct of Business Supervision of Financial Undertakings, and a Ministerial Degree also allow the government to implement limits on LTV and DSTI ratios.
- Announce maximum loan-to-value (LTV) ratios for new lending, and consider linking higher LTVs to higher capital ratios.
  - Status: Fully implemented.
  - The 2011 Code of Conduct set official limits on LTV ratio of residential mortgage loans at 106 percent (including costs such as stamp duties), which has been reducing by 1 percent per year until it reaches 100 percent by 2018.
  - In May 2015, the FSC recommended further reduction of the LTV limits to 90 percent after 2018, by keeping up the current pace of 1 percentage point decrease per year.
  - Cap on DSTI ratio was officially imposed on mortgage loans in 2013. Before 2013, the cap was part of a ‘voluntary’ Mortgage Code of Conduct.
  - Higher risk weights are linked to higher LTV ratios in the CRR.
- Provide supervisors with powers to vary the level of designated macroprudential instruments in response to developments.
  - Status: Fully implemented.
  - A range of macroprudential instruments is available to Dutch authorities with powers to calibrate them according to systemic risk levels. Limits on LTV and DSTI ratios can be changed via a Ministerial Decree.
- Announce plans to reduce mortgage interest deductibility over the medium–term.
  - Status: Fully implemented.
  - From January 2014, households taking out new mortgage loans will only be eligible for the mortgage interest deductibility (MID) only if they amortize mortgage loans within 30 years.
  - The MID rate has been reduced by 0.5 percentage point per year from 52 percent to 38 percent in 2042.
  - Note: The incentive to borrow the maximum mortgage amount has not disappeared with this policy measure.

### Twin Peaks
- Provide the DNB and AFM greater discretion to put in place enforceable rules.
  - Status: Not implemented.
  - The DNB and AFM derive rule making authority from regulation determined by government (parliament). There is a structured and transparent process for DNB/AFM to request legislative changes; the MoF plays a dominant role. Increasingly, supervisory rules are determined by directly applicable European regulation (CRR or binding technical standards by EBA).
  - (Link reference in source omitted per overlay rules.)
- Afford legal protection to the DNB and the AFM as institutions, for their official actions, except in cases of gross negligence or willful misconduct.
  - Status: Fully implemented.
  - Since July 1, 2012, new legislation limits the liability of the DNB and the AFM and affords protection to members of governing boards and staff.
- Continue integration of the DNB staff across banking, insurance, and pensions functions to draw synergies of a single regulator.
  - Status: Fully implemented.
  - New organizational structure with a cross-sectional Division containing expertise centers and a separate risk management department.
  - Governance changes effective February 16, 2012: President responsible for central bank tasks and a Chairman of Supervision primarily responsible for prudential supervision.
  - Creation of a Supervisory Council chaired by the Chairman of supervision including all Division Directors.
  - Board renewed Mission Statement (project Polaris) emphasizing strengthened synergy within the DNB; initiatives to assign cross-sectoral responsibilities and promote job-shifting between Divisions.

### Microprudential Bank and Insurance Supervision
- Establish routine reporting requirements to strengthen monitoring and risk modeling.
  - Status: Partially Implemented.
  - Internal project (Cesar) set up to strengthen data management within the DNB.
  - The Ministry of Finance has introduced a draft legislative proposal to strengthen DNB powers to collect and use data needed for financial stability tasks.
- Intensify supervision of large international financial institutions, with greater emphasis on group supervision and soundness of business models; greater international cooperation warranted.
  - Status: Fully implemented.
  - With the creation of the Banking Union, primary responsibility for large, significant institutions is transferred to the ECB which is expected to intensify supervision; DNB continues supervision for other banks.
  - The DNB’s Vision on Supervision (published every four years) sets strategic orientation; Vision 2010–2014 shifted focus to macro-approach of supervision and inclusion of business models, strategy, behavior and culture.
  - In 2012, new supervisory approach (“Focus!”) introduced broader scope of supervision including qualitative elements and two risk drivers: (i) business models and strategy; and (ii) behavior, culture and governance. Emphasizes risk-based ex-ante classification and multi-disciplined sector-wide thematic supervision.
- Adopt more proactive and decisive approach, including timely off-site inspection and corrective actions that rely less on moral suasion.
  - Status: Fully implemented.
  - In August 2010, an action plan to make DNB supervision more comprehensive and intrusive was announced.
  - Organizational changes include creation of a separate Intervention Department to coordinate supervisory approach for troubled institutions and advise on formal measures, and a dedicated risk management department.

### Securities Market
- Strengthen the AFM’s ability to enforce issuers’ compliance with financial reporting standards.
  - Status: Partially implemented.
  - Amendments to the Act on financial reporting: (i) removed limitations on AFM when requesting information from issuers to assess accuracy of financial statements (effective January 1, 2014); and (ii) removed Chinese walls preventing information sharing between AFM departments (effective January 1, 2013).
  - The AFM still may not take action directly against issuers for breach of accounting standards and must go to an outside tribunal for enforcement.
- Strengthen the regulatory and supervisory framework for management companies of CIS.
  - Status: Partially implemented.
  - The EU Alternative Investment Fund Managers Directive (AIFMD) was implemented in Dutch legislation as of July 22, 2013; imposes extensive regulatory framework applicable to managers of funds other than those subject to the Undertakings for Collective Investment in Transferable Securities Directive.
  - Additional attention to ongoing oversight, particularly via on-site examinations, is needed.

### Pensions
- Develop a communication plan on recent and prospective changes in payouts to stakeholders.
  - Status: Fully implemented.
  - Communication with stakeholders about changes in benefits is the responsibility of pension funds.
  - New communication legislation for pension adopted by Parliament in March 2015 requiring pension information to enable adequate financial planning for retirement; information must be accurate, clear and balanced.
  - Pension funds and insurance companies required to inform individual participants on pension income in average, good and bad economic scenarios. Ministry of Social Affairs is working on implementation with AFM, DNB, and industry organizations.
- Require incorporation of professional Board members for pension funds beyond a minimum size, and provide legal authority for direct supervision of core pension activities independently of the entity performing them.
  - Status: Fully implemented.
  - In August 2013, new legislation strengthened pension fund governance. Several governance models possible, including a board fully consisting of professionals or adding up to two external professionals to a joint board.
  - Through the board of pension funds, the DNB has powers to supervise all core pension activities, even when outsourced.

### Crisis Management and Bank Resolution
- Reform the Deposit Guarantee Scheme (DGS) so that it is: (i) ex ante funded; (ii) authorized to fund bank resolution operations; and (iii) enjoys depositor preference.
  - Status: Partially Implemented.
  - The Dutch DGS was launched by the DNB on November 26, 2015. It is authorized to contribute to resolution funding and depositors enjoy preference in liquidation and other resolution mechanisms.
  - The BRRD introduced depositor preference in the EU.
  - Constraints on the ability of the DGS to finance resolution remain.
- Strengthen the institutional framework for crisis management by: (i) shifting decision-making power from the Judiciary to the DNB in the context of bank resolution; and (ii) specifying more clearly the respective roles of the MoF and DNB in bank resolution.
  - Status: Partially implemented.
  - The Intervention Act, entered into force in June 2012 with retroactive effect as of January 20, 2012, included powers for the DNB to transfer to a third party part or whole of a bank or insurer experiencing serious financial problems.
  - The Minister of Finance has powers to intervene in financial institutions or expropriate assets/liabilities if necessary to safeguard financial stability.
  - The Intervention Act was amended to implement the BRRD in 2015; however, the intersection between Minister powers under the Intervention Act and Single Resolution Mechanism powers of the SRB and the DNB is unclear.
- Improve the framework for official financial support by establishing a standing budgetary authorization for the Government to fund solvency support in a manner that avoids risk of moral hazard.
  - Status: Not implemented.
  - There is no standing budgetary authorization procedure for the Government to fund solvency support, given reforms to address too big to fail.
- Improve the framework for bank resolution by establishing a single regime for resolving banks under official control; such regime should set appropriate objectives (including financial stability), as well as tasks and powers for the official administrators.
  - Status: Partially implemented.
  - Implementation of the Single Resolution Mechanism substantially strengthened the resolution framework, but no single regime exists because legacy powers of the Minister under the Intervention Act and other court-based resolution powers of the DNB (i.e., the “Emergency Rule” under the Wft) coexist with the new regime.
  - Plans are in place to repeal the Emergency Rule.

### Appendix II. Risk Assessment Matrix — Key Risks, Likelihood, and Impact
- Economic fallout from political fragmentation
  - Relative Likelihood: High
  - Impact: Medium
  - Overview:
    - Rise in populism and nationalism in large economies could reverse international integration and policy coordination, weighing on global growth and exacerbating financial market volatility.
    - Protracted uncertainty associated with negotiating post-Brexit arrangements could weigh on confidence and investment more than expected—most prominently in the U.K. and the rest of Europe with possible knock-on effects elsewhere.
    - Increased barriers could damp longer-run economic performance of affected countries more than expected.
  - Domestic effects:
    - Slower-than-anticipated external demand would negatively affect net exports, business confidence, and investment in the Netherlands; lower domestic growth would exacerbate credit risks.
    - A depreciation of the Euro could negatively impact solvency in un-hedged financial and nonfinancial institutions; could improve financial strength of nonfinancial corporates (NFCs).
- Tighter or more volatile global financial conditions
  - Relative Likelihood: Medium
  - Impact: Medium
  - Overview:
    - Sharp rise in risk premia with flight to safety; reassessment of risks, unanticipated Fed tightening, or increases in U.S. term premia, with poor market liquidity amplifying volatility.
    - Surge in safe haven currencies—especially the U.S. dollar—creates balance sheet strains for FX debtors.
  - Domestic effects:
    - A drop in stock and bond prices would affect solvency of insurers and reduce coverage ratios in the pension sector; 28 percent of banks’ assets are in securities, so banks’ capital ratios would be affected.
    - Could trigger redemptions in investment funds.
    - Renewed stress in global wholesale funding markets would increase funding costs for Dutch banks relying on wholesale funding, adversely affecting profitability and solvency and potentially causing funding liquidity strains.
- Weaker-than-expected global growth
  - Relative Likelihood: High/Medium
  - Impact: Medium
  - Overview:
    - Structurally weak growth in key advanced and emerging economies, weak demand, low productivity growth, and persistently low inflation from failure to fully address crisis legacies and undertake structural reforms lead to lower medium-term potential growth and exacerbate financial imbalances.
    - Significant China slowdown (low short-term likelihood, medium thereafter) and significant slowdown in other large EMs/frontier economies (low/medium likelihood).
  - Domestic effects:
    - Close to 70 percent of exports are to European countries and the Netherlands’ AEX stock market index is the third most EM-exposed stock market in Europe.
    - Weakness in EU or EMs could reduce demand for Dutch exports, affecting profitability and solvency of NFCs and deteriorating banks’ asset quality.
    - Deflation could exacerbate real debt, compounding household debt overhang and high NFC indebtedness.
    - Continued low interest rates and low returns in equity markets could threaten solvency of insurance companies and prolong pension sector stress.
- Lower-than-expected domestic growth
  - Relative Likelihood: Low
  - Impact: Medium
  - Overview:
    - Renewed weaknesses in housing markets: a reversal of the recent recovery in house prices could weaken household balance sheets and dampen domestic demand.
  - Domestic effects:
    - Dutch banks are highly exposed to households and NFCs; a halt or reversal of domestic recovery will impact borrowers’ ability to service loans, worsening banks’ asset quality and affecting economic growth via lower consumption.

*Source: Appendix I and Appendix II of the provided IMF country report content.*

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_Source: https://www.imf.org/-/media/files/publications/cr/2017/cr1779.pdf_