## cr1793

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### EXECUTIVE SUMMARY — background and purpose
- The global financial crisis (GFC) produced severe strains for financial and household sectors in the Netherlands, resulting in a double-dip recession and protracted deleveraging; recovery began in early 2014.
- The crisis underscored the need for a strong macroprudential policy framework in a currency union like the euro area (EA).
- This Technical Note evaluates the Netherlands’ macroprudential framework: institutional arrangements, systemic risk monitoring, macroprudential instruments, and cross-border collaboration, and provides policy recommendations.

### Institutional framework: mandates, responsibilities, and governance
- Macroprudential policy is a shared competency between national authorities and European agencies.
- Financial Stability Committee (FSC)
  - National macroprudential authority responsible for identifying risks, issuing warnings, and making recommendations (currently without a comply-or-explain mechanism).
  - Established in November 2012 by ministerial decree; required to meet at least twice a year and has met 10 times in the past 4 years.
  - Composition: seven representatives from DNB, MoF, and AFM; chaired by President of the DNB; MoF is a non-voting member; Director of the CPB attends as external observer.
  - Decision rule: strives for consensus; if consensus cannot be reached it decides by a two-thirds majority.
  - Accountability: accountable to Parliament via the Minister of Finance; publishes summaries of meetings and an annual report.
- De Nederlandsche Bank (DNB)
  - NDA and NCA under CRD IV and CRR; amended Bank Act effective on January 2014 gives an explicit financial stability mandate in addition to microprudential supervision.
  - Governing Board: President plus a maximum of five (currently four) Executive Directors; appointed by Royal Decree for seven-year tenures; uses consensus or absolute majority voting (President tie-breaker).
  - DNB governs macro- and microprudential policies and holds decision power regarding CRR and CRD IV instruments.
- Ministry of Finance (MoF) and MOIKR
  - MoF holds powers for setting limits on LTV and DSTI ratios in collaboration with the Ministry of Interior and Kingdom Relations (MOIKR).
  - Primary legislation: Financial Supervision Act (WFT); secondary: Decree on Supervision of Financial Institutions.
- Autoriteit Financiële Markten (AFM)
  - Monitors systemic risk from financial markets, supervises conduct-of-business, examines violations of LTV and DSTI limits, and publishes the ‘prudent’ interest rate for stressed DSTI calculations (currently set at 5 percent).
- European institutions
  - ECB can apply more stringent measures to the Dutch banking system, including higher capital buffers (“topping-up power”).
  - ESRB can issue “comply or explain” recommendations to Member States covering broad financial system segments.
- Key institutional recommendations
  - Strengthen FSC legitimacy and effectiveness by establishing it in primary legislation and vesting it with a semi-hard “comply or explain” mechanism.
  - DNB should consider publishing a summary of Governing Board meetings on macroprudential policy issues to enhance transparency.

### Systemic risk monitoring: capacity, data, and analysis
- DNB Financial Stability Division (FSD)
  - Comprises two departments (Macroprudential Analysis and Policy Department; International Financial Architecture Department) with 36 staff responsible for systemic risk analysis and macroprudential policy preparation.
  - Produces the bi-annual Financial Stability Report (FSR) since December 2004, including a risk map, index of financial market stress, and Annex 1 “Macroprudential indicators” (credit-to-GDP gap; growth in household and corporate lending; LTV and loan-to-income (LTI) ratios; loan-to-deposit ratio).
  - Uses a top-down household stress test model with Income Panel Survey (IPO) loan-level data; assesses systemic importance of banks annually and conducts network analyses using interbank exposures and BIS data hub information.
- AFM and data collaborations
  - AFM monitors market activities via surveys and data from AIFMD, EMIR, and MiFID and cooperates with DNB on fund and investment management risks.
  - DNB increased access to micro datasets with CBS (residential mortgage loan-level data, CRE loan-level data); new mortgage LLD template includes an encrypted personal identification number to link with CBS datasets; expected use by all reporting institutions in the third quarter of 2017.
- Remaining data limitations (findings)
  - Household data: described as "rather comprehensive."
  - Corporate sector data: "rather scarce"; CBS collects NFC balance sheets and P&L for statistical purposes only and is legally forbidden to publish “policymaking” material using the data; important data such as NFC debt by ownership are only partially available.
  - CRE market data: loan-level CRE loans collected by banks, but regional breakdown of CRE prices and transaction data unavailable.
  - Credit Registration Bureau (BKR): established 1964 to share borrower debt burdens; DNB has not used BKR data to date but can request BKR to link mortgage LLD with other household loan data following Bank Act amendment.
- Data recommendations
  - Collect granular CRE information (regional prices, transactions, CRE loans) and improve corporate financial-condition data by combining CBS and other sources.
  - Continue collecting loan-level data from all mortgage lenders; make greater use of BKR data; consider publishing internal LLD reports periodically.
  - OFR should discuss financial interlinkages, periodically examine structural systemic-risk dimensions, and regularly include DNB network analyses.

### Macroprudential instruments: usage, calibration, and recommendations
- CRR/CRD IV instruments available in the Netherlands (entered into force January 1, 2014): CCB; sectoral capital requirements; G-SII and O-SII buffers; SRB; Pillar 2 requirements; leverage ratio; national flexibility measures; liquidity measures (LCR and NSFR).
- Implementation status and parameters (preserved exactly)
  - Countercyclical capital buffer — Agencies: DNB, ECB — Implementation: January 2016.
  - G-SII buffer — Agencies: DNB, ECB — Implementation: January 2016.
  - O-SII buffer — Agencies: DNB, ECB — Implementation: January 2016.
  - Systemic risk buffer — Agencies: DNB, ECB — Implementation: January 2016.
  - Risk weight for RRE and CRE exposures — Agencies: DNB, ECB — Implementation: January 2014.
  - Loss given default for RRE and CRE exposures — Agencies: DNB, ECB — Implementation: January 2014.
  - Flexibility measures 1/ — Agencies: DNB, ECB — Implementation: January 2014. (Note: The DNB has not activated any flexibility measure yet.)
  - Liquidity coverage ratio — Agencies: DNB, ECB — Implementation: October 2015.
  - Pillar II — Agencies: DNB, ECB — Implementation: January 2014.
  - Limits on LTV ratio — Agency: MoF 2/ — Implementation: January 2013.
  - Limits on DSTI ratio — Agency: MoF 2/ — Implementation: January 2013.
  - Note 2/: The MoF collaborates with MOIKR in setting the LTV and DSTI limits.
- Specific DNB actions and buffer levels
  - Imposed a 1 percent G-SII buffer for ING Bank.
  - Imposed 2 percent O-SII buffer to ING Bank, ABN AMRO, and Rabobank.
  - Imposed 1 percent O-SII buffer to SNS Bank and BNG Bank as of January 2016; phased in from 2016 to 2019 in equal steps of 25 percent.
  - Introduced a 3 percent SRB on the three largest banks, ING Bank, ABN AMRO, and Rabobank.
  - CCB set at zero, considering a large negative credit-to-GDP gap "about -20 percentage points of GDP."
  - LCR requirement: 100 percent from October 2015 with no phase-in.
  - NSFR implementation expected in 2018.
  - Leverage ratio: subject to observation until mid-2016; expected to become binding by 2018 following review and calibration at the European level.
  - DNB requested four systemically important banks (ING Bank, ABN AMRO, Rabobank, and SNS Bank) meet a minimum 4 percent leverage ratio by 2018 (above the current Basel minimum of 3 percent).
- Legal and national LTV/DSTI framework
  - Limits on LTV and DSTI imposed since January 2013 on all mortgages.
  - 2011 Code of Conduct set LTV at 106 percent starting January 2012; Ministerial Decree (entered January 2013) set LTV at 105 percent and scheduled a decline of 1 percentage point per year until reaching 100 percent by 2018.
  - FSC recommended in May 2015 to further reduce maximum LTV limits to 90 percent after 2018 by maintaining at least the current pace of 1 percentage point reduction per year.
  - DSTI cap officially imposed in 2013; lenders must apply ‘stressed’ DSTI caps using AFM’s ‘prudent’ interest rate currently set at 5 percent for mortgages with interest fixes shorter than 10 years.
- Macroprudential policy recommendations on household indebtedness (preserved exactly)
  - Accelerate the phase-out of mortgage interest deductibility (MID), faster than current agreements (recommendation: at least 1 percentage point per year), and reduce the ultimate MID rate further to a tax neutral level.
  - Continue gradually reducing maximum limits on LTV ratio to 90 percent after 2018, by maintaining at least the current pace of 1 percentage point reduction per year.
  - Place prudential ceilings beyond which DSTI limits cannot be relaxed along the credit cycle (i.e., set prudential DSTI ceilings).
  - Address supply shortages of residential rental and owner-occupied housing via targeted measures (e.g., looser zoning regulations and liberalization of rental markets).
  - Introduce prudential ceilings on DSTI limits by income and implement structural measures to address low discretionary savings of young households.
  - AFM and DNB should closely monitor policy leakages while tightening LTV and DSTI limits (e.g., potential arbitrage via unsecured loans) and construct extensive loan-level datasets covering mortgages and other loan types.

### Housing tax treatment and MID reforms
- MID-related facts and timeline
  - Generous tax reliefs contributed to high household indebtedness and incentivized interest-only loans.
  - IMF (2014c) finding: a non-amortizing loan generated a cumulated yield close to 14.5 percent at the highest tax bracket, while a fully amortizing loan in the same condition produced a return about 11.5 percent as of 2014.
  - Since January 2013, newly originated interest-only mortgages are no longer eligible for tax deduction; new mortgage loans eligible for MID only if amortized on at least an annuity basis within 30 years.
  - MID rate has been reduced by 0.5 percentage point per year from 52 percent to 38 percent in 2014.
  - Recommendation: accelerate phasing out MID at least 1 percentage point per year and reduce ultimate deductibility to a tax neutral level.

### Cross-border cooperation, notifications, and ECB decision framework
- Notification and objection procedures (Appendix I)
  - National authority should notify the ECB 10 working days in advance of a decision.
  - ECB can object within 5 working days stating reasons in writing; national authority required to consider ECB’s reasons prior to proceeding.
  - Similar notification requirements apply to ECB decisions to apply higher requirements.
- Cross-border coordination findings
  - Multiple agencies and European-level processes create extensive notifications, especially under Article 458 of the CRR.
  - The CRR/CRD IV notification system described as lengthy, complex, and quite rigid.
  - Implementation of Article 458 can take up to two–three months from national notification to adoption of the draft national measure.
  - Recommendation: streamline the notification system through ESRB, EBA, EU Commission, and Council engagement; enable cases for accelerated approval for urgent measures possibly subject to early review.

### Key recommendations summary (selected)
- Accelerate phase-out of MID (at least 1 percentage point per year); responsible: MoF, MOIKR; timeframe: NT.
- Continue reducing maximum LTV to 90 percent after 2018 at a pace of at least 1 percentage point per year; responsible: MoF, FSC, MOIKR; timeframe: NT.
- Place prudential ceilings on DSTI limits; responsible: MoF, FSC, MOIKR; timeframe: NT.
- Address housing supply shortages via targeted measures (e.g., looser zoning, rental liberalization); responsible: MoF, MOIKR; timeframe: MT.
- Strengthen legal status of the FSC by upgrading from a Ministerial Decree to primary law; responsible: MoF, FSC; timeframe: NT.
- Vest FSC with a semi-hard “comply or explain” mechanism over macroprudential instruments; responsible: MoF, FSC; timeframe: NT.
- Consider publishing summary of DNB Governing Board meetings on macroprudential policy; responsible: DNB; timeframe: NT.
- Close data gaps on corporate sector and CRE activities; responsible: DNB; timeframe: NT.
- Streamline European notification system through ESRB/EBA/EU engagement; responsible: DNB, FSC, MoF; timeframe: MT.
- Timeframe definitions: NT (near term) = one–two years; MT (medium term) = two–five years.

### Box 2 — International experience on LTV, DSTI, and LTI ratios (key quantitative findings preserved exactly)
- Delinquency and default evidence
  - Delinquency ratio on household loans remained below 1 percent (Korea, into 2012).
  - Mortgage delinquency ratio remained below 1.43 percent (Hong Kong SAR, Sept 1997–Sept 1998 episode).
  - For a given fall in house prices (1 percent), incidence of mortgage default: without LTV limit 1.29 basis points; with LTV tool 0.35 basis points (Wong and others, 2011).
- Effects on prices and credit
  - 10 percentage point increase in maximum LTV associated with a 13 percent increase in nominal house prices (Crowe and others, 2013).
  - 10 percentage point decrease in LTV for first-time buyers associated with a 10 percentage point decline in the house price appreciation rate (Duca and others, 2011).
  - Incremental tightening in DTI ratios associated with a 4 to 7 percentage point deceleration in credit growth over the following year (Kuttner and Shim, 2013).
  - Cap on high-LTV loans correlated with dramatic fall in share of mortgages over an 80 percent LTV ratio since introduction in August 2013 (RBNZ, 2014).
- Institutional roles (Netherlands)
  - MoF: legal power to set LTV and DSTI limits under WFT and Decree on Supervision of Financial Institutions; consults MOIKR.
  - NIBUD: provides input to set DSTI limits and publishes advice since 2015.
  - FSC: recommends recalibration of LTV and DSTI limits but lacks formal comply-or-explain mechanism.
  - DNB: conducts impact analyses using loan-level data and includes macroprudential indicators in the FSR.
  - AFM: examines conduct violations and sets the AFM ‘prudent’ interest rate (currently set at 5 percent).
  - ECB and ESRB: Dutch authorities fully inform them about LTV and DSTI implementation; ECB can suggest national authorities use their powers.

*International Monetary Fund — Technical Note: Netherlands (excerpt provided in content unit cr1793).*

### EXECUTIVE SUMMARY ___________________________________________________________________________ 5

### EXECUTIVE SUMMARY

### Background
- The global financial crisis (GFC) produced severe strains for financial and household sectors in the Netherlands, resulting in a double-dip recession and protracted deleveraging; recovery began in early 2014.
- The crisis underscored the need for a strong macroprudential policy framework, particularly in a currency union like the euro area (EA) where a central monetary stance can produce diverging national credit developments requiring national macroprudential action.
- This Technical Note evaluates the Netherlands’ macroprudential framework, covering institutional arrangements, systemic risk monitoring, macroprudential instruments, and cross-border collaboration, and provides policy recommendations.

### Institutional framework: mandates, responsibilities, and governance
- Macroprudential policy is a shared competency between national authorities and European agencies.
- The Financial Stability Committee (FSC) is the national macroprudential authority responsible for identifying risks, issuing warnings, and making recommendations (currently without a comply-or-explain mechanism).
- De Nederlandsche Bank (DNB) is the National Designated Authority (NDA) and Competent Authority (NCA) under CRD IV and CRR for prudential supervision and conducts macro- and microprudential policies.
- The Ministry of Finance (MoF) holds powers for setting limits on loan-to-value (LTV) and debt-service-to-income (DSTI) ratios in collaboration with the Ministry of Interior and Kingdom Relations (MOIKR).
- Autoriteit Financiële Markten (AFM) monitors systemic risk from financial markets, conducts supervision of conduct-of-business, and examines violations of LTV and DSTI limits by mortgage lenders.
- The European Central Bank (ECB) can apply more stringent measures to the Dutch banking system, including higher capital buffers (the “topping-up power”).
- The European Systemic Risk Board (ESRB) can issue recommendations on a “comply or explain” basis to Member States covering broad financial system segments.

Key institutional observations and assessments:
- The FSC and its members (DNB, AFM, MoF) have a clear financial stability mandate and collaborate; the MoF is a non-voting member.
- The FSC is accountable to Parliament via the Minister of Finance and publishes summaries of meetings, warnings, and recommendations.
- Recommendation: strengthen FSC legitimacy and effectiveness by establishing it in primary legislation and vesting it with a semi-hard “comply or explain” mechanism.
- Recommendation: DNB should consider publishing a summary of the Governing Board meetings on macroprudential policy issues to enhance transparency.

Relevant dates and facts:
- The FSC was established in 2012.
- New EU banking legislation referenced: Council Regulation (EU) No. 1024/2013; CRR: Regulation No. 575/2013; CRD IV: Directive 2013/36/EU.

### Systemic risk monitoring: capacity, data, and analysis
Findings:
- The DNB’s amended Bank Act allows obtaining information from regulated and unregulated entities (excluding households).
- The Financial Stability Division (FSD) at DNB comprises two departments with 36 staff responsible for systemic risk analysis and macroprudential policy preparation.
- The bi-annual Financial Stability Report (FSR) covers macroprudential risks and policies and includes topical assessments (e.g., risks of prolonged low interest rates).
- AFM monitors financial market activities using surveys and data from AIFMD, EMIR, and MiFID and cooperates with DNB on fund and investment management industry risks.
- Data gaps persist: household financial data are comprehensive; corporate sector financial data are partially available; commercial real estate (CRE) market data lack a regional breakdown of prices and transactions.

Recommendations:
- DNB could publish an internal quarterly summary of mortgage loan-level data (an LLD report).
- The FSR should further analyze domestic and cross-border financial interlinkages regularly.
- Improve data coverage on corporate sector financial conditions and CRE activities.

### Macroprudential instruments: usage and recommended tightening
Findings on existing use:
- Limits on LTV and DSTI ratios for residential mortgages were made legally binding in 2013.
- DNB has used G-SII, O-SII, and systemic risk buffers (SRBs) to address interconnectedness and concentration in the banking system.
- Authorities plan to impose a stricter leverage ratio of 4 percent (higher than the Basel minimum) with compliance required by 2018.

Policy recommendations to mitigate household indebtedness and system vulnerabilities:
- Accelerate the phase-out of mortgage interest deductibility (MID), faster than current agreements (at least 1 percentage point per year), and reduce the ultimate MID rate further to a tax neutral level.
- Continue gradually reducing maximum limits on LTV ratio to 90 percent after 2018, by maintaining at least the current pace of 1 percentage point reduction per year.
- Place prudential ceilings beyond which DSTI limits cannot be relaxed along the credit cycle (i.e., set prudential DSTI ceilings).
- Address supply shortages of residential rental and owner-occupied housing via targeted measures (e.g., looser zoning regulations and liberalization of rental markets).
- Introduce prudential ceilings on DSTI limits by income and implement structural measures to address low discretionary savings of young households.

### Cross-border cooperation and notifications
Findings:
- Multiple agencies are involved in macroprudential decision-making domestically and at the European level, leading to extensive notifications, notably for Article 458 of the CRR.
- A central challenge is handling notifications efficiently and effectively to enable timely macroprudential actions while considering cross-border issues.

Recommendation:
- Work through ESRB, EBA, EU Commission, and Council membership to streamline the notification system at the European level to support timely macroprudential policy action while allowing adequate consideration of cross-border issues.

### Key recommendations table (summary)
- Accelerate phase-out of MID (at least 1 percentage point per year); responsible: MoF, MOIKR; timeframe: NT.
- Continue reducing maximum LTV to 90 percent after 2018 at a pace of at least 1 percentage point per year; responsible: MoF, FSC, MOIKR; timeframe: NT.
- Place prudential ceilings on DSTI limits; responsible: MoF, FSC, MOIKR; timeframe: NT.
- Address housing supply shortages via targeted measures; responsible: MoF, MOIKR; timeframe: MT.
- Strengthen legal status of the FSC by upgrading from a Ministerial Decree to primary law; responsible: MoF, FSC; timeframe: NT.
- Vest FSC with a semi-hard “comply or explain” mechanism over macroprudential instruments; responsible: MoF, FSC; timeframe: NT.
- Consider publishing summary of DNB Governing Board meetings on macroprudential policy; responsible: DNB; timeframe: NT.
- Close data gaps on corporate sector and CRE activities; responsible: DNB; timeframe: NT.
- Streamline European notification system through ESRB/EBA/EU engagement; responsible: DNB, FSC, MoF; timeframe: MT.

Notes on timeframes:
- NT (near term): one–two years.
- MT (medium term): two–five years.

*International Monetary Fund — Technical Note: Netherlands, Executive Summary.*

### Appendix I for the decision-making framework in the ECB.

### Appendix I for the decision-making framework in the ECB

### Notification and objection procedures
- When a measure is intended to be undertaken by a national authority, the ECB should be notified 10 working days in advance of the relevant decision.
- The ECB can object to the proposed measure within 5 working days stating its reasons for the objection in writing.
- Where the ECB objects, the national authority is required to consider the ECB’s reasons prior to proceeding with the decision as appropriate.
- Similar notification requirements apply to the ECB decision to apply higher requirements (Appendix I).

### Institutional mandates and collaboration
- The DNB, AFM, and MoF have a clear financial stability mandate and collaborate towards this objective.
  - Under the amended Bank Act effective on January 2014, the DNB has an explicit mandate for financial stability in addition to microprudential supervision.
  - The AFM’s mandate includes contributing to financial stability by ensuring the proper functioning of financial markets and proper conduct by financial institutions towards clients.
  - The MoF is politically responsible for the overall functioning of the financial system, and makes rules to ensure a stable financial system, including limits on LTV and DSTI ratios.
- The DNB is the National Designated Authority (NDA) and the National Competent Authority (NCA) for prudential policies.
  - The Governing Board is the highest decision-making body in the DNB, consists of the President and a maximum of five, currently four, Executive Directors, appointed by Royal Decree for seven-year tenures.
  - The Governing Board holds decision power regarding policy instruments in the CRR and CRD IV.
  - The Governing Board passes resolutions by consensus; if objection arises a vote is taken and a resolution is adopted by an absolute majority of votes cast; in the event of a tie, the vote of the President is decisive.

### Financial Stability Committee (FSC)
- The FSC was established in November 2012 by ministerial decree following the De Wit Committee recommendations.
- Composition and operations:
  - The FSC includes seven representatives from the DNB, the MoF and the AFM, and is chaired by the President of the DNB.
  - The MoF is a non-voting member.
  - The Director of the CPB attends FSC meetings as an external observer.
  - The FSC is required to meet at least twice a year, and has met 10 times in the past 4 years.
  - The committee’s secretariat is assigned to the DNB; the Director of the DNB FSD currently serves as head of the secretariat.
  - The FSC strives for consensus; if consensus cannot be reached it makes decisions by a two-thirds majority.
- Responsibilities:
  - Identifying potential risks to financial stability in the Netherlands and making recommendations to mitigate the risks.
  - Exchanging information and analyses to identify systemic risks; discussing mitigation and instrument strengthening; issuing warnings and recommendations publicly; monitoring implementation of ESRB recommendations.
  - The FSC may decide not to disclose warnings and recommendations if warranted not to jeopardize financial stability; so far there has been no such case.
- Accountability and communication:
  - The FSC is accountable to the Parliament via the Minister of Finance and publishes a summary of its meeting on the website (not legally required) with secretariat striving to publish within a week.
  - When the FSC issues warnings and recommendations, the Minister of Finance passes them on to the Parliament.
  - The FSC publishes an annual report for the MoF; the Minister provides the Parliament a copy of the report.

### Coordination, information sharing, and safeguards against group-thinking
- Coordination mechanisms:
  - MOU on information sharing regarding financial stability exists between the DNB and the AFM and MoF.
  - FSC discussions are prepared by a joint DNB/AFM project team.
  - The DNB uses the Coordination Group in Financial Stability chaired by the Director of the FSD to discuss macroprudential topics.
- Internal DNB arrangements to mitigate group-thinking:
  - Integrated supervision structure facilitates coordination of micro- and macroprudential policy.
  - The Supervisory Council (mainly responsible for microprudential policy) also discusses macroprudential instruments and provides input on Governing Board decisions.
  - Risk Management and Strategy Department provides an external check on macroprudential policy decisions.
  - Two intranet IT platforms (micro-macro register and macro-micro register) are used to share information across divisions.
- External outreach:
  - The DNB seeks views via consultation papers, discussion of the FSR with financial sector representatives after publication and press conference, presentations to the MoF and AFM, and ad-hoc meetings with experts and academics.

### Powers, instruments, and data collection
- The amended Bank Act gives the DNB powers to obtain information and adapt to evolving systemic risk, including the power to request data directly from regulated entities and more powers to collect information from unregulated entities (excluding households) where necessary.
  - New data requests must first check whether the information is already available in other public agencies.
  - This procedure has been applied recently to collect data from banks on their real estate exposures.
- Macroprudential instruments and responsibilities:
  - The DNB has been calibrating and publishing the CCB rate for the Netherlands since 2016.
  - The DNB can designate individual financial institutions as systemically important and require additional capital buffers.
  - All macroprudential instruments under the CRR and CRD IV have been explicitly assigned to the DNB.
  - The MoF remains responsible for limits on LTV and DSTI ratios; recalibration and perimeter adjustment of these limits can be made by the MoF in collaboration with the MOIKR.

### Cross-border coordination and notification challenges
- European-level oversight and cooperation:
  - The ESRB may issue recommendations on specific policy measures to a specific EU member state or institution on a “comply or explain” basis covering banks and nonbanks.
  - The DNB and AFM actively share information with European bodies and participate in joint ESRB projects (e.g., ESRB risk dashboard, ESRB strategy paper on macroprudential policy beyond banking, EU Shadow Banking Monitor).
  - AFM and DNB participate in ESRB and FSB working groups and contribute input to ESRB risk assessments.
- Notification system concerns:
  - Coordination at the European level involves extensive notifications and consultation requirements on the use of macroprudential tools, with requirements varying across instruments.
  - The system established under the CRR and CRD IV is described as lengthy, complex, and quite rigid.
  - The implementation process of Article 458 (flexibility measures) can take up to two–three months under the CRR from the time of national authorities’ notification to adoption of the draft national measure.
  - The national authorities must consider other CRR and CRD IV measures before using Article 458; meanwhile systemic risks can be significant and may require imminent actions.
  - It remains to be seen how efficiently the notification and response system will work in practice.

### Recommendations
- Institutional strengthening:
  - Upgrade the legal basis of the FSC from a Ministerial Decree to a primary law.
  - Vest the FSC with a comply-or-explain mechanism, established in primary law, to make recommendations over macroprudential instruments.
    - Rationale: enhance legitimacy of the FSC’s decisions, reduce risk of delayed action due to political considerations, and strengthen independence and accountability of the Committee.
    - To enhance accountability, the FSC could be required to directly send its annual report to the Parliament.
- Transparency:
  - The DNB should consider publishing a summary of the Governing Board meetings regarding macroprudential policy issues, excluding confidential information, to enhance transparency and public support.
- Notification process reform:
  - A more streamlined notification system could more efficiently support timely macroprudential policy action while still allowing adequate consideration of cross-border issues.
  - Authorities should be able to make the case for accelerating approval for urgent measures, possibly subject to early review.
  - The current review of the EU macroprudential policy framework provides an opportunity to revise and streamline the notification system.

### Systemic risk monitoring
- DNB Financial Stability Department (FSD) and capacity:
  - The FSD consists of two departments (Macroprudential Analysis and Policy Department and International Financial Architecture Department).
  - The FSD has 36 staffs altogether involved in systemic risk analyses and macroprudential policy discussions.
  - The DNB has published a number of research and policy papers and produces the bi-annual FSR covering macroprudential risks and policies in the Netherlands.
- Analytical tools and outputs:
  - The FSR includes a risk map and index of financial market stress, Annex 1 “Macroprudential indicators” with early warning indicators (e.g., credit-to-GDP gap, growth in household and corporate lending, LTV and loan-to-income (LTI) ratios, loan-to-deposit ratio).
  - Top-down stress test model for households uses the Income Panel Survey (IPO) data to conduct granular stress tests for mortgages with detailed loan-level data.
  - Systemic importance of banks is assessed annually and network analyses are carried out using interbank exposures and BIS data hub information.

*Source: Appendix I for the decision-making framework in the ECB.*

### 29.      The DNB has put efforts into filling data gaps especially related to household financial

### cr1793 - 29.      The DNB has put efforts into filling data gaps especially related to household financial

### Data gaps and recent data development efforts
- The DNB increased access to micro datasets in collaboration with other public agencies (residential mortgage loan-level data, Statistics Netherlands (CBS) data, and CRE loan-level data).
- The DNB and the CBS have closely collaborated in the setup of the new template for the mortgage loan-level data:
  - The new template is an extension of the previous template and will include an encrypted version of a personal identification number (e.g., social security number) to build linkages between the loan-level data with other datasets of the CBS.
  - It will allow the authorities to answer many more questions related to the financial position of households.
  - In the third quarter of 2017, the new template is expected to be used by all reporting institutions.
- The DNB started to publish the FSR since December 2004.

### Remaining data limitations (findings)
- Household data:
  - Data on household financial conditions are "rather comprehensive."
- Corporate sector data:
  - Data on corporate sector are "rather scarce."
  - The CBS collects balance sheets and P&L statements from nonfinancial corporations (NFC) for statistical purposes only; it is legally forbidden for the CBS to publish any “policymaking” material using the data.
  - The DNB uses CBS’ data regularly and collects NFCs’ cross-border transaction information to compile Balance of Payments statistics, but important data to assess NFCs’ financial soundness are only partially available (example: NFC debt by ownership (domestic vs. foreign-owned firms)).
  - The macroprudential authorities (the FSC and its members) have not published an in-depth analysis on corporate vulnerabilities with micro-level data.
- Commercial real estate (CRE) market data:
  - Information on CRE market developments is partial.
  - Although loan-level data on CRE loans are collected from commercial banks, a regional breakdown of CRE prices and transaction data is unavailable.
  - Detailed analyses on CRE markets will be necessary; further data improvements would be useful to analyze demand and supply misalignment and changes in banks’ exposures to the segment.
- Credit Registration Bureau (BKR):
  - The BKR was established in 1964 to share information about overall debt burden of borrowers.
  - So far, the DNB has not used the BKR data.
  - Following an amendment on the Bank Act, the DNB can ask the BKR to provide information to link mortgage loan-level data with other types of household loan data.
  - This will allow the DNB to calculate the debt-service-to-income ratio more accurately per household.

### Recommendations — data collection and analysis
- Enhance data collection and allocate sufficient resources for CRE market and corporate sector analyses:
  - Collect granular CRE information, such as regional prices, transactions, and CRE loans.
  - Consider collecting more data on corporate financial conditions; build comprehensive data by combining financial data with other data from the CBS, and conduct comprehensive vulnerability assessment.
- Continue to collect loan-level data from all mortgage lenders for systemic risk assessment and macroprudential implementation:
  - Make more use of the BKR data.
  - The loan-level data is crucial to evaluate impacts of limits on LTV and DSTI ratios; recent setup of the new template with encrypted personal identification information is welcome.
  - The DNB may consider publishing the internal loan-level data report periodically.
- OFR (Ongoing Financial Report) recommendations:
  - The OFR should discuss financial interlinkages in the Netherlands.
  - Periodically examine structural dimensions of systemic risks and present findings in the OFR.
  - Include the DNB’s network analyses regularly to describe direct and indirect interlinkages in the financial system.

### Macroprudential framework and instruments (findings)
- CRR and CRD IV (entered into force on January 1, 2014) provide instruments including:
  - Countercyclical capital buffer (CCB)
  - Sectoral capital requirements (risk weights and minimum LGD floors)
  - G-SII and O-SII buffer
  - SRB
  - Pillar 2 requirements
  - Leverage ratio
  - National flexibility measures (e.g., risk weights to target bubbles in real estate markets)
  - Liquidity measures (LCR and NSFR) incorporated in the CRR as part of flexibility measures
- Netherlands: implementation notes (as presented)
  - Countercyclical capital buffer — Agencies: DNB, ECB — Implementation: January 2016
  - G-SII buffer — Agencies: DNB, ECB — Implementation: January 2016
  - O-SII buffer — Agencies: DNB, ECB — Implementation: January 2016
  - Systemic risk buffer — Agencies: DNB, ECB — Implementation: January 2016
  - Risk weight for RRE and CRE exposures — Agencies: DNB, ECB — Implementation: January 2014
  - Loss given default for RRE and CRE exposures — Agencies: DNB, ECB — Implementation: January 2014
  - Flexibility measures 1/ — Agencies: DNB, ECB — Implementation: January 2014
  - Liquidity coverage ratio — Agencies: DNB, ECB — Implementation: October 2015
  - Pillar II — Agencies: DNB, ECB — Implementation: January 2014
  - Limits on LTV ratio — Agency: MoF 2/ — Implementation: January 2013
  - Limits on DSTI ratio — Agency: MoF 2/ — Implementation: January 2013
  - Notes:
    - 1/ The DNB has not activated any flexibility measure yet.
    - 2/ The MoF collaborates with MOIKR in setting the LTV and DSTI limits.
- Specific policy actions by DNB (implementation status and parameters):
  - Imposed a 1 percent G-SII buffer for ING Bank.
  - Imposed 2 percent O-SII buffer to ING Bank, ABN AMRO, and Rabobank.
  - Imposed 1 percent O-SII buffer to SNS Bank and BNG Bank as of January 2016; phased in from 2016 to 2019 in equal steps of 25 percent.
  - Introduced a 3 percent SRB on the three largest banks, ING Bank, ABN AMRO, and Rabobank.
  - In practice, the highest percentage of capital buffer requirements applies at a consolidated level (3 percent SRB applied to the three largest banks; 1 percent O-SII buffer on SNS and BNG).
  - Countercyclical capital buffer (CCB) has been set at the rate of zero, considering a large negative credit-to-GDP gap ("about -20 percentage points of GDP").
  - LCR came into force in October 2015; commercial banks must satisfy the 100 percent LCR requirement immediately without a phase-in period.
  - NSFR will be implemented in 2018.
  - Leverage ratio subject to observation until mid-2016; expected to become a binding requirement by 2018 following review and calibration at the European level.
  - DNB requested four systemically important banks (ING Bank, ABN AMRO, Rabobank, and SNS Bank) meet a minimum 4 percent leverage ratio by 2018 (above the current Basel minimum of 3 percent).

### National law, LTV/DSTI framework and findings
- Legal framework:
  - MoF has the power to implement limits on LTV and DSTI ratios in collaboration with the MOIKR.
  - Primary legislation: Financial Supervision Act (WFT)
  - Secondary legislation: Decree on Supervision of Financial Institutions
  - Ministerial Decree allows government to set methodological details to implement limits.
- Timeline and parameters:
  - Limits on LTV and DSTI ratios imposed since January 2013 on all mortgages provided by any financial institutions in the Netherlands.
  - The 2011 Code of Conduct set limits on LTV at 106 percent starting January 2012.
  - Ministerial Decree (entered into force January 2013) set the LTV limit at 105 percent.
  - The LTV limit is set to decline by 1 percentage point per year until it reaches 100 percent by 2018.
  - In May 2015, the FSC recommended further reduction of LTV limits to 90 percent after 2018 by keeping up at least the current pace of 1 percentage point decrease per year.
  - A cap on the DSTI ratio was officially imposed in 2013.
  - Mortgage lenders required to apply ‘stressed’ DSTI caps with a ‘prudent’ interest rate determined and published by the AFM:
    - This rate is currently set at 5 percent for mortgage loans that have interest rates fixed for a period shorter than 10 years.
- Observations on effectiveness and caveats:
  - The affordability (DSTI) ratio had been procyclical leading up to the crisis, reducing its effectiveness as an automatic stabilizer.
  - Existing underwater mortgages are exempt, as well as mortgage financing up to €27.000 used for energy-saving home improvements (for higher-income groups only).

### Housing tax treatment and MID reforms
- As part of Housing Market Reform Agenda, government introduced in September 2013 a path for reduction of the MID rate.
- Key MID-related findings:
  - Generous tax reliefs contributed to high household indebtedness and incentivized interest-only loans.
  - According to IMF (2014c):
    - A non-amortizing loan generated a cumulated yield close to 14.5 percent at the highest tax bracket, while a fully amortizing loan in the same condition produced a return about 11.5 percent as of 2014.
  - Since January 2013, newly originated interest-only mortgages are no longer eligible for tax deduction; new mortgage loans are eligible for the MID only if amortized on at least an annuity basis within 30 years.
  - The MID rate has been reduced by 0.5 percentage point per year from 52 percent to 38 percent in 2014.
  - Tax-neutral treatment of owner-occupied housing would mean reducing the MID rate further with home assets taxed like financial assets in Tax Box 3 (Parlevliet and Kooiman, 2015).

### Recommendations — macroprudential and fiscal policy on household indebtedness
- The FSAP recommends a holistic approach addressing household indebtedness:
  - Accelerate phasing out of MID faster than the current arrangement (recommendation: at least 1 percentage point per year) and reduce the ultimate tax deductibility rate to a tax neutral level.
  - Following the FSC’s recommendation, the MoF should continue to gradually reduce the maximum LTV limit to 90 percent after 2018 by keeping up at least the current pace of 1 percentage point per year.
  - Explore other measures to address low discretionary savings by young households.
  - Establish prudential ceilings beyond which DSTI caps by income cannot be relaxed across the credit cycle to enable the automatic stabilizing function of the caps and decrease probability of household defaults against interest rate and income shocks.
  - AFM and DNB should closely monitor policy leakages while tightening LTV and DSTI limits:
    - Potential arbitrage (for example, use of unsecured loans to compensate for lower mortgage credit availability) should be monitored.
    - Authorities should actively use BKR information and construct an extensive loan-level dataset covering mortgages and other loan types (consumer loans, auto loans, and student loans).
  - Recognize that financial regulations alone do not address supply shortages and demand-supply mismatches in housing:
    - Address bottlenecks via targeted policies such as looser zoning regulations and liberalization of rental markets.

*Source: IMF staff report text as provided in the supplied content unit.*

### Box 2. International Experience of Limits on LTV, DSTI, and LTI Ratios

### Box 2. International Experience of Limits on LTV, DSTI, and LTI Ratios

### Evidence on resilience and default outcomes
- Lee (2012): house prices in Korea fell from 2008, but the delinquency ratio on household loans remained below 1 percent well into 2012; interpreted as strict implementation of limits on LTV and DSTI ratios preventing household defaults and reducing financial institution losses.
- Financial Services Authority (2009): finds correlation between higher LTV ratios and higher default rates during 2008 in the United Kingdom.
- Hallissey and others (2014): loan-level data in Ireland show:
  - default rate was higher for loans with higher LTV and LTI levels at origination;
  - relationship is stronger for loans issued at the peak of the housing boom;
  - positive relationship between LGD and LTV for loans with an LTV greater than 50 percent;
  - sharp increase in losses of defaulted loans at LTVs greater than 85 percent.
- Wong and others (2011): cross-country evidence that for a given fall in house prices (1 percent), the incidence of mortgage default is higher for countries without an LTV ratio limit (1.29 basis points) than for those with such a tool (0.35 basis points).
- Hong Kong SAR example (Wong and others, 2011): property prices dropped by more than 40 percent from September 1997 to September 1998, but mortgage delinquency ratio remained below 1.43 percent, suggesting limits on LTV reduced probability of defaults faced by lenders.

### Effects on credit growth, house prices, and financial accelerators
- Limits on LTV and DSTI ratios target financial accelerator mechanisms linking credit growth and house price inflation.
- Lim and others (2011): credit growth declines after limits on LTV and DTI ratios are introduced; LTV limits substantially reduce procyclicality of credit growth.
- Igan and Kang (2011): limits on LTV ratios curb speculative incentives among existing house owners, validating the expectation channel.
- Crowe and others (2013): using state-level U.S. data, a 10 percentage point increase in the maximum LTV ratio is associated with a 13 percent increase in nominal house prices.
- Duca and others (2011): estimate that a 10 percentage point decrease in LTV ratio of mortgage loans for first-time buyers is associated with a 10 percentage point decline in the house price appreciation rate.
- Krznar and Morsink (2014): four measures to tighten macroprudential instruments (LTVs, in particular) in Canada were associated with lower mortgage credit and house price growth.
- IMF (2011): lower LTV ratios reduce the transmission of real GDP growth shocks and shocks to population growth to house prices.
- Kuttner and Shim (2013): an incremental tightening in the DTI ratios is associated with a 4 to 7 percentage point deceleration in credit growth over the following year.
- RBNZ (2014): a cap on the share of high-LTV loans was effective, showing a dramatic fall in the share of mortgages over an 80 percent LTV ratio since the introduction in August 2013.
- Ahuja and Nabar (2011): limits on LTV ratios in Hong Kong SAR reduced house prices and transaction volumes, albeit with a lag.

### Adoption and calibration practices
- Since the financial crisis, many countries have newly adopted these instruments; limits on LTV ratios are below 80 percent in more than half of 28 sample countries (as reported in the source).
- FSC recommendation (May 2015): recommended future governments further reduction of the LTV limits to 90 percent after 2018, by keeping up the current pace of 1 percentage point decrease per year to promote financial stability while suggesting other policy measures to mitigate potential social costs.
- AFM role: determines and publishes a ‘prudent’ interest rate for calculating ‘stressed’ DSTI ratios for mortgages with interest rate fixes shorter than 10 years; this rate is currently set at 5 percent.
- RBNZ experience: introduction in August 2013 correlated with dramatic fall in share of mortgages over an 80 percent LTV ratio.

### Institutional roles and decision-making (Netherlands)
- Ministry of Finance (MoF):
  - has the power to implement limits on LTV and DSTI ratios under primary legislation (WFT) and the Decree on Supervision of Financial Institutions;
  - a Ministerial Degree allows the MoF to set methodological details to implement these limits.
- MOIKR: consulted by the MoF before setting LTV and DSTI limits; plays key role in housing and rental market policies and participated in FSC meetings as external expert.
- NIBUD: independent institution providing input to set DSTI limits; calculates maximum percentage of disposable income to service mortgage payments in consultation with DNB, AFM, MoF, Ministry of Housing, and commercial banks; since 2015 its advice is made public and sent to Parliament.
- Financial Stability Committee (FSC):
  - national macroprudential authority that discusses systemic risk in the financial system as a whole and can recommend recalibration of LTV and DSTI limits;
  - use of these tools remains responsibility of the MoF;
  - FSC recommended the LTV path described above (90 percent after 2018, 1 percentage point decrease per year), but its recommendations carry no formal comply-or-explain mechanism.
- De Nederlandsche Bank (DNB):
  - conducts impact analyses based on loan-level bank data to support FSC;
  - publishes analytical reports on LTV impacts and includes macroprudential indicators in the bi-annual FSR (credit-to-GDP gap, growth in household and corporate lending, LTV and LTI ratios, etc.).
- Authority for the Financial Markets (AFM): responsible for examining violations of regulations on conduct of business and sets the ‘prudent’ interest rate for stressed DSTI calculations (currently 5 percent).
- ECB and ESRB:
  - Dutch authorities fully inform the ECB and the ESRB about implementation of LTV and DSTI limits;
  - ECB can suggest national authorities to use their powers over these instruments (no instance to date).

### Key quantitative findings and policy-relevant magnitudes (preserved exactly)
- delinquency ratio on household loans remained below 1 percent (Korea, into 2012).
- mortgage delinquency ratio remained below 1.43 percent (Hong Kong SAR, Sept 1997–Sept 1998 episode).
- for a given fall in house prices (1 percent), incidence of mortgage default: without LTV limit 1.29 basis points; with LTV tool 0.35 basis points (Wong and others, 2011).
- 10 percentage point increase in maximum LTV associated with a 13 percent increase in nominal house prices (Crowe and others, 2013).
- 10 percentage point decrease in LTV for first-time buyers associated with a 10 percentage point decline in house price appreciation rate (Duca and others, 2011).
- incremental tightening in DTI ratios associated with a 4 to 7 percentage point deceleration in credit growth over the following year (Kuttner and Shim, 2013).
- cap on high-LTV loans correlated with dramatic fall in share of mortgages over an 80 percent LTV ratio since introduction in August 2013 (RBNZ, 2014).
- FSC recommendation: reduce LTV limits to 90 percent after 2018, by keeping up pace of 1 percentage point decrease per year.
- AFM ‘prudent’ interest rate for stressed DSTI calculations currently set at 5 percent.

*Box 2. International Experience of Limits on LTV, DSTI, and LTI Ratios.*

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_Source: https://www.imf.org/-/media/files/publications/cr/2017/cr1793.pdf_