## 1nldea2024003 ## Source details **Canonical URL:** [1nldea2024003](https://www.imf.org/-/media/files/publications/cr/2024/english/1nldea2024003.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2024/english/1nldea2024003.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2024/english/1nldea2024003.pdf.json) --- ### Overview and Context - FSAP focus: three cross-cutting themes—housing, non-banks, and climate risks—while carrying out a comprehensive review of financial sector oversight. - Conjunctural challenges examined: - slowing economic growth amid tighter financial conditions; - elevated housing prices; - large and interconnected nonbanks with major pension reforms underway; - shift in securities markets trading from London to Amsterdam since Brexit, raising Amsterdam to systemic importance for the euro area (EA). - Structural challenges examined: - climate physical risks associated with roughly a quarter of the country being below sea level; - nature-related transition risks from an uncertain policy path to bring down nitrogen depositions to contain biodiversity loss and comply with European Union (EU) Directives. ### Systemic Risk Assessment — Key Findings - General finding: - Financial institutions are generally resilient to the adverse macrofinancial scenarios considered, though risks for corporates and some households remain elevated. - Banks: - Significant Institutions (SIs) as a group appear resilient to severe macrofinancial shocks, but some might see capital buffers erode with earnings weakening over time under adverse conditions. - Less Significant Institutions’ (LSIs) corporate borrowers could experience rising default probabilities under severe global macrofinancial conditions, even surpassing levels during the global financial crisis. - Liquidity buffers appear generally sufficient, though close monitoring in case of severe runoffs in foreign currencies would be useful. - Bank solvency stress could potentially spread to other financial institutions via fire sales, and LSIs defaults could generate system-wide losses. - Non-bank Financial Institutions (NBFIs): - Insurance sector solvency: P&C and health insurers appear broadly resilient to the adverse scenario; vulnerabilities exist for some life insurers. - Liquidity risks from margin calls for insurers appear largely contained. - Pension funds: funding ratios improve further with higher interest rates under the adverse scenario; pension funds appear resilient to liquidity risks from margin calls even when access to the repo market is restricted, though close monitoring of market conditions remains crucial. - Corporates and households: - Boom in housing prices has raised vulnerabilities for many borrowers; downside risks to commercial real estate (CRE) increased after the pandemic. - Under an adverse scenario including a sharp correction in housing prices, the youngest and lowest income household borrowers are the most significantly impacted. - The adverse scenario results in a marked increase in the share of non-financial corporations (NFCs) facing debt repayment difficulties or higher borrowing needs. ### Climate Risk Assessment - Physical risk analysis: - Banks and insurers are largely resilient to a wide range of flood events; resilience reflects the Netherlands’ strong existing water management system, which is expected to further improve. - Analysis constrained by lack of access to loan-level data. - Insurance sector does not underwrite primary flood risks; net claims of a non-primary regional flood event—after reinsurance—are limited. - Transition risk analysis: - Complicated by an uncertain policy path. - Some banks face high risks from loans to financially vulnerable firms in high nitrogen-emitting sectors, though overall banks’ exposure to high nitrogen-emitting sectors declined in recent years. ### Stress Test Findings (summary) - Banks: SIs resilient as a group to severe macrofinancial shocks, but some capital buffer erosion possible under adverse scenarios. - LSIs: Corporate borrower default probabilities could rise to levels surpassing the global financial crisis in severe global stress. - Insurers: P&C and health insurers broadly resilient; some life insurers vulnerable. - Pension funds: Funding ratios improve with higher interest rates; resilience to repo market restriction scenarios with continued monitoring advised. - Households/NFCs: Sharp housing price correction materially increases vulnerabilities for younger and lower-income borrowers and raises debt repayment difficulties for NFCs. ### Key Policy Recommendations (high-level) - Macroprudential policies: - Authorities have appropriately strengthened macroprudential buffers, but further adjustments to borrower-based measures are warranted. - Recommendation to gradually reduce the limit on loan-to-value (LTV) ratio and continue efforts to incentivize borrowers to lower exposures to interest-only (IO) mortgages and phase out mortgage interest deductibility (MID). - Ensure a clear legal basis for access to granular data for risk monitoring and analysis. - Supervision and regulation: - Adapt supervisory approaches to a rapidly changing market environment. - Equip supervisory authorities with necessary resources, access to technologies, analytical tools, and granular data. - Review legislative framework to ensure supervisory authorities have sufficient budgetary autonomy, delegated powers, and intervention tools. - Further clarify in law the requirement of independent board members of supervised institutions. - Monitor and proactively manage potential risks of the pension system transition. - Ensure trading venue and equity market resilience. - Climate risk oversight: - Further integrate climate risk into supervision, backed by stronger data, scenario analysis, stress testing and disclosure. - Use an interagency body to discuss policy implications of climate-related issues and coordinate national policy actions with implications for financial stability. - As transition policy becomes clearer, assess its impact on the financial sector. - Financial integrity: - Carry out more comprehensive analysis of risks relating to the misuse of legal entities and conduit structures. - Enhance availability and accuracy of beneficial ownership information. - Crisis management and resolution: - Complete resolution handbooks and operationalize national sources for provision of liquidity in resolution. - Develop and regularly test a national financial crisis management plan. ### Selected Key FSAP Recommendations (high priority and timing preserved) - Cross-Cutting - (1) Establish an interagency body – or facilitate this in an existing platform – to regularly discuss policy implications of climate-related issues, broaden cooperation including data sharing, and coordinate policy actions with implications for financial stability (¶46). Addressee: MoF, AFM and other relevant ministries. Timing: ST. Priority: H. - (2) Adapt supervisory approaches to a rapidly changing market environment and strive for consistent supervisory outcomes across sectors through timely deployment of technologies and analytical tools (¶55, 66). Addressee: DNB, AFM. Timing: ST/MT. Priority: H. - (3) Review legislative framework to ensure the supervisory authorities have sufficient budgetary autonomy, delegated powers, and intervention tools to address risks promptly and efficiently (¶53, 54, 72). Addressee: MoF, AFM, DNB. Timing: ST. Priority: H. - (4) Ensure that authorities have a clear legal basis to access granular transaction/loan-level data on a regular basis for risk monitoring and analysis, including residential and commercial real estate loans (¶48, 59). Addressee: MoF, DNB, AFM. Timing: I. Priority: H. - (5) Further clarify the requirement of independent supervisory board members in law (¶56, 61, 65, 72). Addressee: MoF, MoSA. Timing: MT. Priority: H. - Systemic Risk Analysis and Macroprudential - (7) Develop system-wide stress testing methodologies to assess the contagion effects across banks and NBFIs (¶32). Addressee: DNB. Timing: MT. Priority: M. - (8) Closely monitor pension funds’ repo transactions, amend supervisory reporting where necessary, and perform liquidity stress tests which incorporate a drying-up of repo markets (¶31). Addressee: DNB. Timing: I. Priority: M. - (13) Elevate the Financial Stability Committee (FSC) to a permanent advisory body and vest it with semi-hard powers, or vest DNB with hard powers over the calibration of the borrower-based tools (¶47). Addressee: MoF, DNB. Timing: ST. Priority: H. - (14) Gradually reduce the maximum limit of the LTV ratio to 90 percent by one percentage point per year (¶50). Addressee: MoF, DNB, FSC. Timing: ST. Priority: H. - (16) Gradually remove the mortgage interest deductibility (¶51). Addressee: MoF. Timing: ST. Priority: H. - Regulation and Supervision of Banks, Insurers, and Pension Funds - (17) Introduce a requirement for all mortgage credit providers and their mortgage clients to periodically update information on the clients’ financial situation (¶60). Addressee: DNB, AFM, MoF. Timing: MT. Priority: H. - (18) Expand the number of on-site inspections for insurers in the lowest impact class, as a backstop to the risk-based approach (¶63). Addressee: DNB. Timing: ST. Priority: H. - (19) Closely monitor and proactively manage potential risks of the pension system transition for the authorities related to resources and legal risks (¶67). Addressee: MoSA, DNB, AFM. Timing: C. Priority: H. - Climate Risk Oversight and Analysis - (9) Establish a medium-term plan to develop LSI/insurance climate risk supervision to incorporate climate-related risk perspective across activities of the supervisory process, including bridging data gaps (¶44, 45). Addressee: DNB. Timing: ST. Priority: H. - (11) Develop an approach to assess the impact of policies to reduce nitrogen depositions on the financial sector once the transition path and its implications on the economy become clearer (¶39). Addressee: DNB. Timing: ST. Priority: H. - (12) Deepen collaboration among DNB supervisors and DNB stress testers to inform supervisors of climate stress testing insights and vice versa (¶45). Addressee: DNB. Timing: ST. Priority: H. - Financial Integrity - (22) Produce a comprehensive risk assessment on the cross-border financial crime risks and misuse of legal vehicles, covering the risks stemming from conduit companies and foreign entities with complex legal structures and sufficient links to the Netherlands (¶74). Addressee: MoF, FIU, FEC. Timing: ST. Priority: H. - (23) Ensure completeness of the beneficial ownership registries, including resolving the legacy issues with pre-existing legal persons and liaising closely with the tax authorities concerning legal arrangements such as foreign trusts (¶74). Addressee: MoF, Chamber of Commerce. Timing: ST. Priority: M. - (24) Ensure that the intensity, depth, and scope of the risk-based AML/CFT supervision is informed by the lessons learnt from the remediation cases of the three largest banks, and that the risk-based procedures are aligned with the main risks, including tax risks to financial integrity relevant primarily in the context of the large number of conduit structures, and continue taking action to tackle the issue of illegal trust offices and underground banking (¶74). Addressee: DNB. Timing: I. Priority: H. - Financial Safety Nets and Crisis Management - (25) Operationalize the preferred and fallback resolution strategies for SIs and LSIs, by finalizing the authorities’ relevant handbooks, sharing more non-confidential detail on DNB’s resolution plans with LSIs and regularly testing DNB’s resolution capabilities (¶75, 78, 79). Addressee: DNB, MoF, AFM, Deposit Guarantee Fund (DGF). Timing: I. Priority: H. - (26) Identify and operationalize national sources for the provision of liquidity in resolution, such as by relying on the existing Emergency Liquidity Assistance (ELA) framework and setting up and testing cross-border cooperation arrangements (¶76). Addressee: DNB. Timing: I. Priority: H. - (27) Develop and regularly test a comprehensive financial crisis management plan that sets out authorities’ roles and responsibilities and establishes an inter-authority decision-making body (¶81). Addressee: DNB, DGF. Timing: I. Priority: H. ### Economic and Financial Overview (selected points) - GDP growth: "turned negative in mid-2023" as external demand and consumption growth waned. - Inflation: - Headline inflation has fallen from double digit levels as energy price shocks subsided, with headline inflation "approaching target." - Elevated core inflation has persisted amid a still-tight labor market. - Monetary & macroprudential settings: - DNB increased the Countercyclical Capital Buffer (CCyB) to 2 percent (effective May 2024), a level it considers neutral. - Housing and households: - House prices "Almost doubled between 2013 and 2022, peaking in July 2022." - House prices fell "by 6 percent through mid-2023," before recovering lately. - Households’ debt burden has been declining since 2010, with deleveraging accelerating since 2022. - Households’ large holdings of pension assets noted. - System size and composition: - "Total system assets are almost eight times GDP," with banks accounting for "one third of the system as of 2023Q2." - The four largest banks (including one G-SIB) account for 84 percent of the banking system. - 23 LSIs represent about 8 percent of total banking assets. - Occupational pension funds: "142 percent of GDP." - Insurance sector (notably life insurance): "43 percent of GDP." - Investment funds: "81 percent of GDP." - OFI sector: "surpasses banks in size, at 268 percent of GDP." - Post-Brexit market share: Dutch trading platforms’ share of European trading rose to "over 30 percent from 5-10 percent pre-Brexit". ### Liquidity, Funding, and Sector Soundness (selected metrics and findings) - Banking system metrics (select end values reported): - Common Equity Tier 1 (CET1) ratio: 16.5 percent in 2023Q3. - Regulatory Capital to Risk-Weighted Assets: 22.0. - Nonperforming loans to total gross loans: 1.6. - Return on Assets (ROA): 1.1 percent. - Return on Equity (ROE): 12.8 percent. - Liquidity Coverage Ratio: 159.9. - Net Stable Funding Ratio: 135.7. - Spread between reference lending and deposit rates (base points): 3.7. - Customer deposits to total (non interbank) loans: 75.6 percent. - Residential real estate loans to total gross loans: 43.3 percent. - Commercial real estate loans to total gross loans: 9.9 percent. - Liquidity tests: - All banks have regulatory LCRs and NSFRs above the regulatory minimum of 100. - Banks remain liquid up to a 3-month horizon in the severe scenario; funding gaps emerge beyond three months for some banks. - All banks have LCRs above 100 if retail deposit runoff rates are below 0.2; all banks except two will have an LCR below 100 if retail deposit runoff rates are above 0.28 (30-day horizon). - USD funding pressures: some banks have USD LCRs below 100 and could face USD-specific runs. - LSIs and heterogeneity: - LSIs exhibit wider dispersion than SIs in capital, asset quality, liquidity, and profitability; heterogeneity implies differentiated vulnerabilities. - Pension funds, insurers, investment funds: - Pension funds: average funding ratio increases from 115 to 122 percent under an adverse interest rate shock; higher interest rates lower liabilities by 27 percent on average. - Bottom-up DNB analysis: five largest pension funds had to meet a collateral call-in cash of €18.4 billion; collateral calls of €25 billion could be met by tapping different sources even with limited repo access. - Insurance top-down solvency test: aggregate capital shortfall for two life insurers falling below 100 percent amounts to €2.9 billion, equivalent to about 0.3 percent of GDP. - Real estate funds account for 16 percent of total assets under management in "Other" investment funds. ### Stress Testing Framework and Results (selected) - Bank solvency stress test: - Coverage: six SIs representing over 90 percent of banking sector assets. - Scenarios: baseline (April 2023 WEO) and an adverse stagflation scenario with a large housing price correction. - Aggregate result: SIs as a group resilient; one bank would need additional resources to stay above the overall capital requirement (OCR) when accounting for CCyB increase in 2024. - LSIs’ foreign corporate exposure analysis: - Nine banks with about 65 percent of their corporate exposures outside the EA show a sharp increase in credit risk, even surpassing the global financial crisis in default probabilities under stress. - Integrated solvency–liquidity sensitivities: - Two sensitivity analyses show additional liquidity–solvency interactions lead more banks to draw down capital buffers. - Contagion and fire-sale analysis: - Losses from bank solvency stress tests lead to additional losses ranging from 1 to 9 percent of initial equity across institutions; banks are affected first, then other sectors. - No institution’s default leads to defaults of other institutions in the modeled scenarios. - Corporate and household stress results: - Aggregate proportion of high-risk borrowers increases from 6.6 percent in the baseline to 8.2 percent in the adverse scenario. - NFCs: marked increase in firms with ICR < 1 or negative cash balances under stress. ### Climate Risks — Detailed Findings and Recommendations - Physical flood risk: - Total exposure to real estate in 2020: €700 billion. - Share of real estate located in areas vulnerable to flooding: - Banks: 52 percent. - Insurers: 66 percent. - Pension funds: 65 percent. - Bank flood-stress tests: banking sector resilient; no banks expected to fall below capital requirements under all flood scenarios considered; extreme scenarios can reduce capital ratios by 0.3 – 0.6 percentage points in the first year but remain above requirements. - Caveats: lack of loan-level data and potential underestimation of localized collateral damage. - Transition risks (nitrogen): - Banks’ exposure to domestic high nitrogen-emitting sectors: €34 billion (6.5 percent of total loans and 1.5 percent of total assets). - Firms in high nitrogen-emitting sectors often have higher leverage and financial constraints, increasing susceptibility to nitrogen reduction policies. - Recommendation: obtain granular data and clarity on the policy path to reduce nitrogen depositions to mitigate potential losses. - Insurance and weather-related disasters: - Primary flood defenses not insured by private insurers; non-primary defenses insurable and covered by reinsurance. - Repetition of the 2021 Limburg flood with 25 percent higher maximum precipitation would cause net claims around €190m for sampled insurers and a median SCR reduction of less than 5 percentage points. - Recommendation: intensify discussions with P&C insurers on flood risk modeling and integrate insights into supervisory dashboards. ### Regulation, Supervision, and Financial Integrity - Supervisory scope and data: - DNB strengthened LSI supervision, governance, and climate risk oversight since 2017; however, access to regularly reported granular transaction/loan-level data is recommended. - Recommendation: mandate collection of high-quality primary data by credit providers (creditworthiness, collateral valuation). - Governance and independent supervisory boards: - SBs must have at least three members by law; recommendation to further clarify independent SB member requirements in law. - Securities markets and AFM: - AFM should reinforce trading venue resilience, equity market closing auction oversight, and data analytics capabilities; legislative changes suggested to expand AFM tools and powers. - Collective Investment Schemes (CIS): - Liquidity mismatch in real estate funds is less than it appears due to closed-ended structures, indirect exposures, and redemption restrictions; continued monitoring recommended. - Financial integrity and beneficial ownership: - As of 2021, estimated 8,700 conduit companies with a balance sheet total of €4.5 trillion (517 percent of GDP). - Recommendations: deepen National Risk Assessment, resolve legacy beneficial ownership registry issues, strengthen enforcement, and enhance cooperation with tax authorities. - Crisis management and resolution: - Recommendations: complete resolution handbooks, operationalize liquidity in resolution via national sources (including ELA), develop multi-year testing program, and ensure DGF and DNB can repay covered depositors within seven working days. - Note: Single Resolution Fund plus ESM backstop can provide up to approximately €146 billion in support, but access is not guaranteed ex ante. ### Risk Assessment Matrix (selected risks and likelihoods) - Global conjunctural risks: - Abrupt global slowdown or recession. Likelihood: Medium. - Intensification of regional conflict(s). Likelihood: High. - Monetary policy miscalibration by major central banks. Likelihood: Medium. - Systemic financial instability (market dislocations, high interest rates and risk premia). Likelihood: Medium. - Structural risks: - Deepening geo-economic fragmentation. Likelihood: High. - Extreme climate events driven by rising temperatures. Likelihood: Medium. - Efforts to reduce nitrogen depositions may need to be redoubled, with adverse macroeconomic effects. Likelihood: Medium. - Netherlands-specific risks: - A rapid correction of house prices. Likelihood: Medium. - An adverse change in the direction of economic and climate policies in the context of political fragmentation. Likelihood: Medium. *Source: EXECUTIVE SUMMARY and chapters from Kingdom of the Netherlands—The Netherlands, International Monetary Fund.* ### EXECUTIVE SUMMARY _________________________________________________________________________ 7 ### EXECUTIVE SUMMARY ### Overview and Context - FSAP focus: three cross-cutting themes—housing, non-banks, and climate risks—while carrying out a comprehensive review of financial sector oversight. - Conjunctural challenges examined: - slowing economic growth amid tighter financial conditions; - elevated housing prices; - large and interconnected nonbanks with major pension reforms underway; - shift in securities markets trading from London to Amsterdam since Brexit, raising Amsterdam to systemic importance for the euro area (EA). - Structural challenges examined: - climate physical risks associated with roughly a quarter of the country being below sea level; - nature-related transition risks from an uncertain policy path to bring down nitrogen depositions to contain biodiversity loss and comply with European Union (EU) Directives. ### Systemic Risk Assessment — Key Findings - General finding: - Financial institutions are generally resilient to the adverse macrofinancial scenarios considered, though risks for corporates and some households remain elevated. - Banks: - Significant Institutions (SIs) as a group appear resilient to severe macrofinancial shocks, but some might see capital buffers erode with earnings weakening over time under adverse conditions. - Less Significant Institutions’ (LSIs) corporate borrowers could experience rising default probabilities under severe global macrofinancial conditions, even surpassing levels during the global financial crisis. - Liquidity buffers appear generally sufficient, though close monitoring in case of severe runoffs in foreign currencies would be useful. - Bank solvency stress could potentially spread to other financial institutions via fire sales, and LSIs defaults could generate system-wide losses. - Non-bank Financial Institutions (NBFIs): - Insurance sector solvency: P&C and health insurers appear broadly resilient to the adverse scenario; vulnerabilities exist for some life insurers. - Liquidity risks from margin calls for insurers appear largely contained. - Pension funds: funding ratios improve further with higher interest rates under the adverse scenario; pension funds appear resilient to liquidity risks from margin calls even when access to the repo market is restricted, though close monitoring of market conditions remains crucial. - Corporates and households: - Boom in housing prices has raised vulnerabilities for many borrowers; downside risks to commercial real estate (CRE) increased after the pandemic. - Under an adverse scenario including a sharp correction in housing prices, the youngest and lowest income household borrowers are the most significantly impacted. - The adverse scenario results in a marked increase in the share of non-financial corporations (NFCs) facing debt repayment difficulties or higher borrowing needs. ### Climate Risk Assessment - Physical risk analysis: - Banks and insurers are largely resilient to a wide range of flood events; resilience reflects the Netherlands’ strong existing water management system, which is expected to further improve. - Analysis constrained by lack of access to loan-level data. - Insurance sector does not underwrite primary flood risks; net claims of a non-primary regional flood event—after reinsurance—are limited. - Transition risk analysis: - Complicated by an uncertain policy path. - Some banks face high risks from loans to financially vulnerable firms in high nitrogen-emitting sectors, though overall banks’ exposure to high nitrogen-emitting sectors declined in recent years. ### Stress Test Findings (summary) - Banks: SIs resilient as a group to severe macrofinancial shocks, but some capital buffer erosion possible under adverse scenarios. - LSIs: Corporate borrower default probabilities could rise to levels surpassing the global financial crisis in severe global stress. - Insurers: P&C and health insurers broadly resilient; some life insurers vulnerable. - Pension funds: Funding ratios improve with higher interest rates; resilience to repo market restriction scenarios with continued monitoring advised. - Households/NFCs: Sharp housing price correction materially increases vulnerabilities for younger and lower-income borrowers and raises debt repayment difficulties for NFCs. ### Key Policy Recommendations (high-level) - Macroprudential policies: - Authorities have appropriately strengthened macroprudential buffers, but further adjustments to borrower-based measures are warranted. - Recommendation to gradually reduce the limit on loan-to-value (LTV) ratio and continue efforts to incentivize borrowers to lower exposures to interest-only (IO) mortgages and phase out mortgage interest deductibility (MID). - Ensure a clear legal basis for access to granular data for risk monitoring and analysis. - Supervision and regulation: - Adapt supervisory approaches to a rapidly changing market environment. - Equip supervisory authorities with necessary resources, access to technologies, analytical tools, and granular data. - Review legislative framework to ensure supervisory authorities have sufficient budgetary autonomy, delegated powers, and intervention tools. - Further clarify in law the requirement of independent board members of supervised institutions. - Monitor and proactively manage potential risks of the pension system transition. - Ensure trading venue and equity market resilience. - Climate risk oversight: - Further integrate climate risk into supervision, backed by stronger data, scenario analysis, stress testing and disclosure. - Use an interagency body to discuss policy implications of climate-related issues and coordinate national policy actions with implications for financial stability. - As transition policy becomes clearer, assess its impact on the financial sector. - Financial integrity: - Carry out more comprehensive analysis of risks relating to the misuse of legal entities and conduit structures. - Enhance availability and accuracy of beneficial ownership information. - Crisis management and resolution: - Complete resolution handbooks and operationalize national sources for provision of liquidity in resolution. - Develop and regularly test a national financial crisis management plan. ### Selected Key FSAP Recommendations (high priority and timing preserved) - Cross-Cutting - (1) Establish an interagency body – or facilitate this in an existing platform – to regularly discuss policy implications of climate-related issues, broaden cooperation including data sharing, and coordinate policy actions with implications for financial stability (¶46). Addressee: MoF, AFM and other relevant ministries. Timing: ST. Priority: H. - (2) Adapt supervisory approaches to a rapidly changing market environment and strive for consistent supervisory outcomes across sectors through timely deployment of technologies and analytical tools (¶55, 66). Addressee: DNB, AFM. Timing: ST/MT. Priority: H. - (3) Review legislative framework to ensure the supervisory authorities have sufficient budgetary autonomy, delegated powers, and intervention tools to address risks promptly and efficiently (¶53, 54, 72). Addressee: MoF, AFM, DNB. Timing: ST. Priority: H. - (4) Ensure that authorities have a clear legal basis to access granular transaction/loan-level data on a regular basis for risk monitoring and analysis, including residential and commercial real estate loans (¶48, 59). Addressee: MoF, DNB, AFM. Timing: I. Priority: H. - (5) Further clarify the requirement of independent supervisory board members in law (¶56, 61, 65, 72). Addressee: MoF, MoSA. Timing: MT. Priority: H. - Systemic Risk Analysis and Macroprudential - (7) Develop system-wide stress testing methodologies to assess the contagion effects across banks and NBFIs (¶32). Addressee: DNB. Timing: MT. Priority: M. - (8) Closely monitor pension funds’ repo transactions, amend supervisory reporting where necessary, and perform liquidity stress tests which incorporate a drying-up of repo markets (¶31). Addressee: DNB. Timing: I. Priority: M. - (13) Elevate the Financial Stability Committee (FSC) to a permanent advisory body and vest it with semi-hard powers, or vest DNB with hard powers over the calibration of the borrower-based tools (¶47). Addressee: MoF, DNB. Timing: ST. Priority: H. - (14) Gradually reduce the maximum limit of the LTV ratio to 90 percent by one percentage point per year (¶50). Addressee: MoF, DNB, FSC. Timing: ST. Priority: H. - (16) Gradually remove the mortgage interest deductibility (¶51). Addressee: MoF. Timing: ST. Priority: H. - Regulation and Supervision of Banks, Insurers, and Pension Funds - (17) Introduce a requirement for all mortgage credit providers and their mortgage clients to periodically update information on the clients’ financial situation (¶60). Addressee: DNB, AFM, MoF. Timing: MT. Priority: H. - (18) Expand the number of on-site inspections for insurers in the lowest impact class, as a backstop to the risk-based approach (¶63). Addressee: DNB. Timing: ST. Priority: H. - (19) Closely monitor and proactively manage potential risks of the pension system transition for the authorities related to resources and legal risks (¶67). Addressee: MoSA, DNB, AFM. Timing: C. Priority: H. - Climate Risk Oversight and Analysis - (9) Establish a medium-term plan to develop LSI/insurance climate risk supervision to incorporate climate-related risk perspective across activities of the supervisory process, including bridging data gaps (¶44, 45). Addressee: DNB. Timing: ST. Priority: H. - (11) Develop an approach to assess the impact of policies to reduce nitrogen depositions on the financial sector once the transition path and its implications on the economy become clearer (¶39). Addressee: DNB. Timing: ST. Priority: H. - (12) Deepen collaboration among DNB supervisors and DNB stress testers to inform supervisors of climate stress testing insights and vice versa (¶45). Addressee: DNB. Timing: ST. Priority: H. - Financial Integrity - (22) Produce a comprehensive risk assessment on the cross-border financial crime risks and misuse of legal vehicles, covering the risks stemming from conduit companies and foreign entities with complex legal structures and sufficient links to the Netherlands (¶74). Addressee: MoF, FIU, FEC. Timing: ST. Priority: H. - (23) Ensure completeness of the beneficial ownership registries, including resolving the legacy issues with pre-existing legal persons and liaising closely with the tax authorities concerning legal arrangements such as foreign trusts (¶74). Addressee: MoF, Chamber of Commerce. Timing: ST. Priority: M. - (24) Ensure that the intensity, depth, and scope of the risk-based AML/CFT supervision is informed by the lessons learnt from the remediation cases of the three largest banks, and that the risk-based procedures are aligned with the main risks, including tax risks to financial integrity relevant primarily in the context of the large number of conduit structures, and continue taking action to tackle the issue of illegal trust offices and underground banking (¶74). Addressee: DNB. Timing: I. Priority: H. - Financial Safety Nets and Crisis Management - (25) Operationalize the preferred and fallback resolution strategies for SIs and LSIs, by finalizing the authorities’ relevant handbooks, sharing more non-confidential detail on DNB’s resolution plans with LSIs and regularly testing DNB’s resolution capabilities (¶75, 78, 79). Addressee: DNB, MoF, AFM, Deposit Guarantee Fund (DGF). Timing: I. Priority: H. - (26) Identify and operationalize national sources for the provision of liquidity in resolution, such as by relying on the existing Emergency Liquidity Assistance (ELA) framework and setting up and testing cross-border cooperation arrangements (¶76). Addressee: DNB. Timing: I. Priority: H. - (27) Develop and regularly test a comprehensive financial crisis management plan that sets out authorities’ roles and responsibilities and establishes an inter-authority decision-making body (¶81). Addressee: DNB, DGF. Timing: I. Priority: H. *Source: EXECUTIVE SUMMARY, Kingdom of the Netherlands—The Netherlands, International Monetary Fund.* ### 1. The Dutch economy was resilient through a succession of global shocks, but growth ### 1. The Dutch economy was resilient through a succession of global shocks, but growth slowed in 2023 while core inflation remained elevated ### Economic performance and inflation - GDP growth held up to effects of the war in Ukraine after the post-pandemic recovery, but "turned negative in mid-2023" as external demand and consumption growth waned. - Inflation developments: - Headline inflation has fallen from double digit levels as energy price shocks subsided, with headline inflation "approaching target." - Elevated core inflation has persisted amid a still-tight labor market. ### Financial cycle, monetary policy, and macroprudential stance - The financial cycle has turned, with lending growth stalling as financial conditions tightened. - The ECB’s monetary policy tightening has contributed to a reduction in bank lending growth. - De Nederlandsche Bank (DNB) increased the Countercyclical Capital Buffer (CCyB) to 2 percent (effective May 2024), a level it considers neutral. - Financial Conditions Index dynamics: - Loan growth reversed after early-2022 peak. - Recent decline in the financial cyclical indicator attributed to: a drop in property prices; a reduction in new loans to households and corporations; a decrease in household debt; and an increase in the interest rate spread for corporate loans. ### Housing market and household balance sheets - House prices: - "Almost doubled between 2013 and 2022, peaking in July 2022." - Fell "by 6 percent through mid-2023," before recovering lately. - Mortgage market and sales: - Mortgage rates have risen. - Home sales have been stable recently. - DNB imposed a macroprudential floor on risk weights on Dutch mortgages in 2022. - Household debt and assets: - Households’ debt burden has been declining since 2010, with deleveraging accelerating since 2022 driven by strong nominal disposable income growth. - Drivers of deleveraging include: (i) higher voluntary debt repayments thanks to a decline in IO loans and to the tax exemption for gifts used for housing, and (ii) strong nominal income growth. - Despite declines, house price valuations and household debt remain high relative to peers. - Household debt service ratios have come down since 2017, and households have large holdings of pension assets. - Comparative metrics (as reported): - Household debt to gross disposable income: shown for 2017 and 2022 (visuals in source). - Household debt service ratio: 2017Q4 and 2023Q2 comparisons shown in source. - Household financial assets and debt series (billions of euro) through Sep-23 shown in source. ### Nonfinancial corporations (NFCs) - NFC debt trends: - NFC debt levels fell in the wake of the pandemic and rebounded quickly; they declined relative to GDP. - Financial stress indicators: - Firm bankruptcies have increased and are "approaching pre-pandemic levels." - A significant share of NFCs have interest coverage ratios (ICR) below one. - Debt-to-surplus ratio is relatively high compared to peers, suggesting a need to boost profitability. ### Financial sector structure, size, and interconnectedness - System size and concentration: - "Total system assets are almost eight times GDP," with banks accounting for "one third of the system as of 2023Q2." - The four largest banks (including one Global-Systemically Important Bank, G-SIB) account for 84 percent of the banking system. - Some consolidation: five banks partly government owned. - Less-Significant Institutions (LSIs): - 23 LSIs represent about 8 percent of total banking assets. - LSIs have diverse business models: financial conglomerates, universal banks, specialized custodians and payment/securities banks, and subsidiaries of foreign banks serving international clients. - Nonbanks and Other Financial Institutions (OFIs): - Occupational pension funds: "142 percent of GDP." - Pension reform adopted in 2023 moving from defined benefit (D B) toward defined contribution (DC), due for completion by 2028. - Insurance sector (notably life insurance): "43 percent of GDP." - Investment funds assets reduced to "81 percent of GDP" due to higher interest rates reducing valuations; FSAP coverage focused on liquidity risks for funds investing in real estate (¶72). - OFI sector: "surpasses banks in size, at 268 percent of GDP." - Post-Brexit developments: Dutch trading platforms’ share of European trading (including UK) rose to "over 30 percent from 5-10 percent pre-Brexit"; Amsterdam hosts significant fixed income trading venues, including repo trading venues. - Cross-border interconnectedness: - Domestic flows: large financial flows from the pension fund sector to investment funds; deposit-taking corporations’ claims on the central bank; offsetting positions with OFIs. - Financial flows from abroad to OFIs are the largest, partly reflecting flow-through conduit companies. - Dutch banks are active internationally; largest counterparties are advanced economies. - Pension funds hold significant assets abroad; insurers retrenched from external markets. ### Banking system soundness and key financial soundness indicators - System resilience: - The banking system remained stable through successive shocks. - Bank capitalization has improved since 2017. - Core metrics (select end values reported in source): - Common Equity Tier 1 (CET1) ratio: 16.5 percent in 2023Q3. - Regulatory Capital to Risk-Weighted Assets: series reported, latest 22.0 (table shows 22.0 as first listed — full series in source). - Nonperforming loans to total gross loans: series ends at 1.6 (percent). - Return on Assets (ROA): last reported 1.1 (percent). - Return on Equity (ROE): last reported 12.8 (percent). - Liquidity Coverage Ratio: 159.9. - Net Stable Funding Ratio: 135.7. - Spread between reference lending and deposit rates (base points): last reported 3.7 (base points). - Customer deposits to total (non interbank) loans: latest 75.6 (percent). - Residential real estate loans to total gross loans: latest 43.3 (percent). - Commercial real estate loans to total gross loans: latest 9.9 (percent). - Additional indicators (large exposures, derivatives positions, etc.) are presented in the source tables and figures. - Comparative assessment: - Capital ratios in Dutch banks are in the mid-to-high range relative to peers. - Asset quality and liquidity are in comfortable ranges relative to peers. - Profitability is in the mid-to-high range relative to peers. ### Risks, vulnerabilities, and policy-relevant observations - Macro-financial risks: - Tight financial conditions and higher interest rates have reduced loan growth and affected the housing market. - NFCs face profitability pressures: rising bankruptcies, a sizeable share with ICR<1, and high debt-to-surplus ratios. - Household and housing valuations remain high relative to peers despite deleveraging. - Structural and operational vulnerabilities: - Large OFI sector and significant cross-border linkages concentrate potential spillovers, especially via conduit companies and trading venues. - Amsterdam’s elevated role in European trading and fixed income venues increases the Netherlands’ relevance for EU-wide market infrastructure. - Political and policy uncertainty: - Ongoing coalition negotiations leave policy direction on climate and nature-related risks unclear. - Nitrogen deposition levels "greatly exceed those set out in EU Directives" and present threats to soil and water quality. *Source: IMF Netherlands Financial Sector Assessment excerpt (figures and tables summarized from the supplied content).* ### 13. System-wide liquidity conditions have been mostly stable but subject to occasional ### 13. System-wide liquidity conditions have been mostly stable but subject to occasional turbulence ### System-wide liquidity and funding - Dutch banks rely mostly on customer deposits for funding. - Authorities observed a bigger impact on liquidity conditions during the March 2020 turbulence than the October 2022 turmoil due to margin calls on UK pension funds pursuing a liability-driven investment strategy. - Dutch SIs hold a high (weighted) share of cash. Sovereign securities account for around 10 percent of financial assets. - Household deposits account for the largest share of liabilities, as also reflected in Available Stable Funding. ### LSIs: performance and vulnerabilities - LSIs have performed stably over time but exhibit wider dispersion than SIs in capital, asset quality, liquidity, and profitability metrics. - Heterogeneous business models imply differentiated risks: - LSIs with large lending portfolios could be more susceptible to credit risk. - LSIs holding large securities portfolios could be substantially affected by market downturns. - Banks that rely significantly on foreign or wholesale funding could be subject to liquidity strains from funding market shocks. ### Pension funds, insurers, and investment funds - Since 2021, rising interest rates have eased pressures on pension funds’ funding ratios as liability values declined. - The DC regime improves long-term sustainability by shifting investment risks to pension fund members and beneficiaries. - Insurers’ Solvency Capital Requirement (SCR) has been stable, and insurers’ SCR is lower than the average for peers in the region. - “Other” investment funds have grown significantly; real estate funds account for 16 percent of total assets under management. ### Real estate and mortgage exposures - Mortgages, mostly fixed-rate and a substantial portion interest-only (IO), constitute around 30 percent of the system’s assets. - Insurers’ mortgages account for 15 percent of their assets. - Banks’ commercial real estate (CRE) loans make up 7 percent of assets. - Investments in CRE account for 7 percent and 8 percent of the balance sheets of pension funds and insurers, respectively. - The stock of IO mortgages has declined but remains high. A large volume of IO mortgages will mature between 2034 and 2039; authorities’ analysis finds no systemic threat. ### Housing market vulnerabilities and borrower characteristics - House price boom has raised vulnerabilities for the most recent borrowers. - Higher house prices have led to a decrease in average LTV ratios, but also increased the proportion of households borrowing at their debt service-to-income (DSTI) limits. - Debt-to-income ratios of new mortgages increased, especially among younger borrowers. - New mortgages with high DSTI: the chart shows households aged <36 versus ≥36, with young new borrowers stretching more. ### Commercial real estate (CRE) downside risks - CRE prices doubled between 2015Q1 and 2022Q2, with significant declines thereafter and seesawing growth. - A CRE price-at-risk analysis shows distributions shifted leftward during the pandemic; while partially reversed as declines moderated, the 2023Q1 distribution indicates that downside risks remain elevated. ### Systemic vulnerabilities and key risk channels (A. Vulnerabilities and Risks) - Main systemic risks stem from an abrupt slowdown in growth combined with persistently high inflation that could lead to further tightening of financial conditions (including higher interest rates) and a severe correction in the housing market, accompanied by lower external demand and financial spillovers affecting liquidity and funding conditions. - Housing: - Banks vulnerable to higher interest rates combined with a severe house price correction, possibly creating macrofinancial feedback effects. - Mitigants: full legal recourse of mortgage lenders and a mortgage guarantee scheme, and currently low default rates. - An increase in interest rates combined with a severe drop in house prices and higher unemployment could increase default rates and banks’ loan losses; lower household wealth could reduce consumer spending and growth, with second-round effects on banks. - NBFIs: - Occupational pension funds and life insurers face market and liquidity risk; P&C insurers face higher inflation risk. - Higher interest rates have exposed vulnerabilities associated with margin calls on interest-rate derivatives. - Pension reform may shift pension funds’ investment strategies, likely gradually during the transition period. - Higher inflation poses risks for insurers, notably claims inflation from higher building costs, wages, and medical costs. - Climate and nature risks: - Banks, insurers, and pension funds are exposed to climate physical risks, especially from floods; insurance penetration is limited, with major flood damages largely borne by affected parties and potentially the government. - Transition risks: financial risks from the transition to a greener economy—including from the “nitrogen crisis”—could be sizeable. Nitrogen depositions currently exceed critical values and need to be reduced drastically by 2030. Measures would target agriculture, transport, and construction, with implications for banks. Policy direction is uncertain amid ongoing coalition negotiations. ### Stress testing framework (B. Stress Tests) - Staff performed a range of stress tests for banks and NBFIs: - Bank stress tests assessed solvency and liquidity positions against main risks; solvency analysis compared scenario-conditional capital ratios with minimum and buffer requirements. - Additional analyses focused on corporate and emerging market LSI banks. - Liquidity exercise assessed resilience against prescribed cash outflows over various horizons and funding market dislocations. - Insurers and pension funds: solvency stress tests and an analysis of liquidity risks from margin calls on interest rate swap portfolios. - Contagion analysis estimated additional losses to the wider financial system triggered by individual losses or failures; interconnectedness analysis examined banks’ cross-border exposures. ### Bank solvency stress test results - Coverage and scenarios: - The solvency stress test covers six SIs, representing over 90 percent of banking sector assets. - The analysis uses a baseline macrofinancial scenario (drawing on the April 2023 WEO) and an adverse scenario featuring stagflation, higher energy prices, de-anchored inflation expectations, further interest rate increases, wider NFC credit spreads, and a large housing price correction; the stress test assumes no policy reactions. - Aggregate resilience: - The SIs as a group appear resilient to severe macrofinancial shocks, though some banks might see their capital buffers erode since earnings weaken over time in the adverse scenario. - Rising interest rates support net interest income, which is offset by higher credit impairment and house price declines affecting risk-weighted assets. - Market shocks do not significantly impact the system overall, but raise concerning results for some banks (possibly due to data reporting issues). - Aside from these cases, all banks meet the minimum capital requirements (Pillar 1 plus Pillar 2 add-ons). - One bank would need additional resources to stay above the overall capital requirement (OCR), taking into account the CCyB increase in 2024, as total comprehensive income weakens in the adverse scenario. ### LSIs’ foreign corporate exposure stress analysis - Focus and findings: - Analysis targeted nine banks with about 65 percent of their corporate exposures outside the EA. - Staff stress-tested the creditworthiness of these foreign corporate borrowers and found a sharp increase in credit risk, even surpassing that during the global financial crisis. - Default probabilities in advanced markets are more responsive to interest rate rises, while those in emerging markets are more sensitive to economic slowdowns and FX rate fluctuations. *Source: IMF staff analysis in the chapter "System-wide liquidity conditions have been mostly stable but subject to occasional turbulence."* ### 24. Banks’ all-currency LCRs and Net Stable Funding Ratios (NSFRs) are strong. All banks ### 1nldea2024003 - 24. Banks’ all-currency LCRs and Net Stable Funding Ratios (NSFRs) are strong. All banks ### Liquidity coverage and NSFR positions - All banks have regulatory LCRs and NSFRs above the regulatory minimum of 100. - These ratios stay above 100 for a wide range of severe but plausible scenarios. - Banks appear resilient to substantial retail deposit outflows: - All banks have LCRs above the regulatory minimum of 100 if retail deposit runoff rates are below 0.2. - All banks except two will have an LCR below 100 if retail deposit runoff rates are above 0.28 (30-day horizon). ### Cash-flow analysis and funding horizon vulnerabilities - Cash-flow analysis confirms strong liquidity positions but reveals potential funding gaps when stress extends beyond three months. - Liquidity horizons: - Banks stay liquid in both the baseline and the severe scenario up to a horizon of three months. - In the severe scenario, one bank becomes illiquid at a horizon of three months or more, and two banks become illiquid at a horizon of nine months or more. - Two banks are unable to close their funding gaps in the severe scenario. ### USD funding pressures and currency-specific vulnerabilities - The LCR and cash-flow analyses reveal potential vulnerabilities to USD funding pressures. - Some banks have USD LCRs below 100. - In the cash-flow analysis, some banks would need to liquidate parts of their non-USD counterbalancing capacity to meet USD funding gaps at short horizons. - Recommendation implied by findings: closely monitor banks’ capacity to handle sudden and severe USD runoffs. ### Stress-test scenarios and calibration - Baseline scenario calibrated to match the scenario described by the regulatory LCR. - Adverse (severe) scenario features more severe run-off rates and drops in asset valuations. - Calibration details referenced in the Annex of the Technical Note on Systemic Risk Analysis. ### Integrated solvency–liquidity sensitivity analyses - Integrated tests and sensitivity analyses show more banks would begin to draw down capital buffers under exacerbated conditions. - Two sensitivity analyses were conducted to integrate liquidity and solvency considerations: - Sensitivity 1: Assumes a shift in depositor behavior motivated by the sight deposit outflow observed in 2022–2023; term deposit and securities issuance increase to counterbalance outflows of sight deposits. Result: interest expense sharply increases, more so for banks with a large sight deposit base. - Sensitivity 2: Considers two additional liquidity–solvency interactions: - Banks failing the cash-flow liquidity stress test sell held-to-maturity securities and realize the associated loss, resulting in an additional capital drawdown. - Imposes even higher funding rates as banks are left with a lower capital ratio from the solvency stress test in the adverse scenario. Result: additional funding cost is observed as the solvency condition worsens. - Outcome: These additional losses require more banks to start drawing down their capital buffers, and in more significant amounts. ### Insurance sector solvency and liquidity - Top-down stress test covered 16 insurers representing more than 80 percent of the sector’s assets. - Scenario aligned with the banking sector’s adverse scenario. - Key findings: - Interest rate effects on assets and liabilities are almost balanced; other asset-side shocks cause a significant decline in own funds. - A few life insurers fall slightly below solvency requirements. - Aggregate capital shortfall for two life insurers falling below the regulatory threshold of 100 percent amounts to €2.9 billion, equivalent to about 0.3 percent of GDP. - Health insurers are very insensitive to market and credit risk shocks; P&C insurers remain largely resilient. - Insurance liquidity stress test (life insurers): - Scenario: interest rates increase by 100 basis points (at t=0), resulting in variation margin calls. - 94 percent of the margin calls would need to be met in cash. - Sampled entities apply heterogeneous strategies and draw on a variety of liquidity sources and would still have sufficient remaining liquidity after t+1 to meet calls in t+2. - Cash collateral calls on Day t+1 could be met mainly by uncommitted repos; on Day t+2 collateral calls are met by remaining liquidity sourced on Day t+1. ### Pension funds: funding and liquidity - Top-down analysis of the ten largest pension funds covering 70 percent of the market in assets used an adverse scenario aligned with the insurance sector. - Interest rate shock effects: - Higher interest rates lower the value of pension fund liabilities by 27 percent on average, which compensates for the decline in asset values. - The average funding ratio increases from 115 to 122 percent. - For some funds, funding ratio improvements exceed 10 percentage points, especially where the duration gap between assets and liabilities is larger. - Bottom-up analysis (DNB and AFM) on liquidity: - In the scenario, the five largest pension funds had to meet a collateral call-in cash of €18.4 billion. - Collateral calls of €25 billion could be met by tapping different sources, even when assuming limited repo market access. - Repo markets remain important sources of liquidity especially for the largest pension funds; close monitoring of market conditions and liquidity risk management practices is crucial. - Smaller pension funds often use bilateral swap transactions allowing settlement in kind, lowering liquidity risks. ### Contagion, interconnectedness, and network spillovers - Fire-sale institution-level systemic stress test findings: - Institutions targeting a constant leverage ratio by selling marketable securities can generate price declines that cause balance-sheet losses in other institutions. - Losses from the bank solvency stress-test exercise lead to additional losses ranging from 1 to 9 percent of initial equity across institutions, affecting banks first and spreading to other sectors in later rounds. - Individual-institution defaults can cause significant losses, but no institution’s default leads to defaults of other institutions. - Banks experience higher losses relative to initial equity than insurers and pension funds. - The securities-issuing institutions causing the five largest losses are not SIs. - Need identified: further develop methodologies to account for additional cross-sectoral contagion channels, such as bilateral loan exposures. - Cross-border spillovers: - Network-based analysis using BIS consolidated cross-border banking statistics suggests the failure of the Dutch banking system does not cause partner countries’ banking systems to fail. - Dutch banking system is susceptible to U.S. and German banking system failures only under very severe assumptions. ### Corporate and household sector vulnerabilities - Nonfinancial corporations (NFCs): - Analysis focused on interest coverage ratio (ICR) and cash balances using publicly available data. - Stressed environment leads to a marked increase in the proportion of firms facing debt repayment difficulties (ICR < 1) or borrowing needs (negative cash balance), driven by sharp contraction in GDP growth and substantial increase in firms’ debt burden. - Households: - High-risk borrowers defined as borrowers whose DSTI ratio is above 90 percent of the National Institute for Family Finance Information (NIBUD) DSTI limit. - Aggregate proportion of high-risk borrowers increases from 6.6 percent in the baseline scenario to 8.2 percent in the adverse scenario. - Heterogeneity: youngest and lowest-income borrowers are most significantly impacted. ### Climate physical-risk assessment (flood risk) - Real estate exposure and flood vulnerability: - Total exposure to real estate in 2020: €700 billion. - Share of real estate located in areas vulnerable to flooding: - Banks: 52 percent. - Insurers: 66 percent. - Pension funds: 65 percent. - While most areas are protected by flood defenses, in the event of dike failure a large portion of real estate could be damaged. - Bank flood-stress tests: - Conducted across diverse regions, climate conditions, and flood protection reinforcement plans with different return periods using granular geographical data and national damage estimation methodology. - Macro approach used due to lack of loan-level data; nation-wide damage rates input into the IMF’s Global Macro-financial Model to generate macro scenarios and estimate bank credit losses over the next three-year horizon. - Result: Banking sector is resilient to flood events; no banks expected to fall below capital requirements under all flood scenarios considered. - Caveats: - The local nature of floods limits overall damage relative to national capital stock but extreme scenarios can cause a nonnegligible bank capital ratio reduction in the first year. - Aggregate resilience masks heterogeneity across banks and institution-level vulnerabilities. - Macro-level approach potentially underestimates damage to collateral at localized and firm levels. - Floods along the Rhine and Meuse River area in Germany and Belgium have minimal spillovers to Dutch banks despite exposures; acquiring more granular flood and collateral data from those countries could improve assessment. *Source: IMF staff calculations and chapter content provided in the source PDF.* ### 38. Although the impact of floods on the banking sector is limited, climate change can ### 1nldea2024003 - 38. Although the impact of floods on the banking sector is limited, climate change can ### Physical climate risks to the banking sector - Floods generate additional capital losses in banks compared to the baseline scenario, and losses increase under future climate conditions. - Under the most extreme scenarios, the bank capital ratio drops by 0.3 – 0.6 percentage points in the first year but remains above the capital requirement. - Additional impacts of floods in Germany and Belgium are not large enough to transmit additional credit risks to Dutch banks. - While climate change has negative impacts on bank capital, the government’s current reinforcement plan can absorb the capital losses from climate change. - Recommendation: Flood scenarios designed with detailed flood maps under future climate conditions would provide a more accurate assessment of both climate change impact and adaptation. ### Transition risks via the credit channel (nitrogen-emitting sectors) - Banks’ exposure to domestic high nitrogen-emitting sectors is estimated at €34 billion (6.5 percent of total loans and 1.5 percent of total assets). - Observed decline in nitrogen emission intensity is likely attributable to policy interventions and economic agents’ efforts to reduce nitrogen. - Firms in high nitrogen-emitting sectors often exhibit higher leverage and financial constraints than those in other sectors, increasing susceptibility to nitrogen reduction policies. - Limitations: Analysis is constrained to aggregate-level sectoral classifications which do not capture intra-sector variation in firms’ emissions. - Recommendation: For banks to mitigate potential losses, analysis of granular data and clarity on the policy path to reducing nitrogen depositions are essential. ### Insurance sector exposures to weather-related disasters - Dutch primary flood defenses are not insured by private insurers; non-primary defenses (especially along rivers) and regional water systems are insurable. - Primary insurers retain limited exposure to events with lower occurrence probabilities and are covered by reinsurance. - Hailstorms are relevant, expected to occur more often, but are difficult to model due to their very local nature. - The net claims effect—after reinsurance—of a non-primary regional flood event on Dutch insurers is limited. - A repetition of the 2021 Limburg flood with 25 percent higher maximum precipitation would cause net claims of around €190m for insurers in the sample, resulting in a rather minor reduction of the SCR ratio of less than 5 percentage points for the median insurer. - Notes on flood types: ‘Type A’ = inundation outside dike areas; ‘Type B’ = breakthrough of primary flood defenses; ‘Type C’ = breakthrough of non-primary flood defenses; ‘Type D’ = inundation from regional water system. - Recommendation: Intensify discussions with P&C insurers on flood risk modeling approaches and relate insights to planned dashboards and climate risk supervision. ### Climate risk oversight and supervisory capability - DNB has reviewed annually banks’ approaches to materiality assessments and topics related to the ECB Guide since 2021; the ECB Guide on climate-related and environmental risks represents a strong framework which can be proportionately applied to LSIs. - For insurers, DNB launched a first pilot self-assessment on climate risk in Spring 2023 covering strategy and business model, governance, risk management, disclosure, and investments. - Existing tools: reviews of insurers’ Own Risk and Solvency Assessments; on-site inspections focused on climate risks have been initiated; a dashboard for the carbon intensity of insurers has been developed. - Gaps and recommendations: - Future self-assessment rounds should request background documentation to challenge insurers’ own views. - Periodically conducted self-assessments need stronger connection with the supervisory process; a medium-term plan with concrete milestones and resource demands is needed. - Suggested milestones include: (i) elaborating additional areas for annual review; (ii) sequentially incorporating climate perspectives into regular supervisory analyses; (iii) developing quantitative dashboards (e.g., physical risk for insurers; closing data gaps); (iv) enhancing onsite examination program by the climate dimension; (v) reflecting supervisory findings in individual risk assessments; (vi) incorporating climate risk supervision across the supervisory process. - These steps might require additional human resources and investments in analytical tools for DNB. ### Data, quantitative frameworks, and interagency coordination - Quantitative frameworks warrant further attention; available approaches, including scenario analysis, need to be further intertwined through supervisory tools with knowledge transfers across DNB’s functional departments and to the industry. - Gaps in available climate data sets should be mapped and initiatives to strengthen datasets explored; financial institutions should be requested to collect their clients’ climate data. - First disclosures should be evaluated and lessons learned discussed with financial institutions and auditors. - Climate-related risks imply pressures on financial stability with cross-cutting impacts and feedback loops, requiring coordinated policy actions across a wide spectrum of authorities. - Recommendation: An interagency body is warranted to regularly discuss policy implications of climate-related issues, facilitate exchange of data, and coordinate policy actions with implications for financial stability while maintaining the independence of supervisory authorities; composition should include both senior management and experts. ### Macroprudential framework, policy calibration, and housing market measures - The FSC’s legal status has been strengthened by establishing it in primary legislation; institutional settings of the AFM and DNB for macroprudential policymaking contain a clear mandate and well-defined objectives. - Current macroprudential settings: - Capital conservation buffer set at 2.5 percent. - Leverage ratio set at 3 percent (with a surcharge for the GSIB). - CCyB framework revised with current setting at a positive neutral rate of 2 percent. - The floor for the risk weighting of Dutch residential mortgage loans was introduced in response to the decline in risk weights from internal models during the house price boom. - Borrower-based tools and recommendations: - The LTV limit was set at 106 percent in 2012 and reduced to 100 percent by 2018; in 2015 the FSC recommended gradual tightening to reach 90 percent but this was not implemented. - At 100 percent, the LTV limit is ineffective in containing procyclicality and does not provide borrower protection in a price correction. - Staff recommend gradually reducing the LTV limit to 90 percent. - The FSAP recommends either elevating the FSC to a permanent advisory body with semi-hard powers or transferring hard powers over calibration of borrower-based tools (LTV and DSTI limits) from the MoF to DNB, with guardrails such as cost-benefit analyses. - Taxation and other measures: - The maximum rate of the MID has been gradually reduced from 52 percent in 2013 to 36.93 percent in 2023; the MoF should gradually remove the MID. - A differentiated transfer tax was introduced from 2023: a tax rate of 10.4 percent on real estate acquisition not used as a principal residence. This could be integrated into the macroprudential toolkit if carefully calibrated. - Housing affordability concerns call for increases in supply, including through greater efficiency and speed in permitting and investment support for the building process. ### Regulation and supervision — cross-cutting institutional issues - Budgetary process: current practice relies on cooperative budgeting between supervisory authorities and ministries framed by multi-year limits and mid-term objectives but contains limited legally defined safeguards to secure supervisory budgetary independence. - Resourcing: DNB and AFM derive their salary levels from the midpoint of the whole economy; this may disadvantage hiring experts with specialized skill sets. Recommendation: select only positions requiring comparable expertise to financial sector supervisors to inform salary levels. - Supervision should adapt to changing market landscape, technology adoption speed, and growing systemic importance of climate risk by: - Enhancing reported/collected data sets to advance offsite supervision. - Upgrading analytical toolboxes to process large datasets across sub-sectors and allow examiners to focus on complex issues. - Promoting a level playing field across sectors by collecting comparable data, aligning analytical tools and approaches, and connecting information across banks, insurers, investment funds, and other financial institutions. *Source: IMF staff analysis from the provided chapter content.* ### 56. The authorities’ strong practices in requiring independent supervisory board (SB) ### The authorities’ strong practices in requiring independent supervisory board (SB) members could be further enhanced by clarifying this requirement in law ### Banking supervision: LSI supervision, governance, and data - DNB has strengthened supervision of Less Significant Institutions (LSIs) since the 2017 FSAP by: - Unleashing the full potential of the SSM Supervisory Review Process through a thorough risk-by-risk approach to challenge banks’ Internal Capital/Liquidity Adequacy Assessment Process. - Broadening LSI supervision to climate risk and developing notable supervision of governance, behavior, and culture, including assessment of Board decision-making, leadership, and communication. - Continuing intensive supervision of mortgages. - Supervision is described as intrusive and transparent, blending the SSM/EU framework with Dutch elements and close DNB–AFM cooperation. - Efficiency and effectiveness could be improved by restoring access to regularly reported granular data (transaction or LLD) to: - Support microprudential mapping of risk exposures and maintain a level playing field. - Require a clear legal basis mandating supervisory authorities to collect necessary data. - Legal/regulatory gaps identified: - Need to enable regular collection of high-quality primary data by credit providers (creditworthiness of borrowers, value of collateral). - Current voluntary updating of borrower creditworthiness data impedes accurate information. - DNB’s collateral valuation practice is strong; converting supervisory expectations into regulatory requirements or guidance is suggested. - Governance and SB independence: - By law, the SB of a bank must be constituted and consist of at least three SB members. - DNB leverages SBs, including independent members, in supervisory dialogue; independent members were especially valuable in crisis situations. - Recommendation: further legal clarification to ensure consistency of independent SB member requirements across institutions and over time. ### Pensions and insurance: supervision, data, and transition risks - Since 2017, DNB oversaw full implementation of Solvency II for insurance and is preparing for major pension reforms during the transition period. - Supervisory approach for insurers and pension funds is risk-based, intrusive, and transparent; recommendation to: - Regularly review the risk-based supervision methodology. - Add further backstops, including some regular on-site inspections even for the smallest insurers. - Cross-border insurance supervision: - DNB collaborates with foreign supervisors; however, a gap exists in setting up Crisis Management Groups for one Internationally Active Insurance Group—this should not be delayed until implementation of the Insurance Recovery and Resolution Directive. - DNB and EIOPA should explore ways to strengthen supervision of cross-border insurance business and strive for greater supervisory convergence in the EU. - Governance, behavior, and culture frameworks are strengths but could use more data-driven analysis from a conduct perspective. - DNB has leveraged SBs, including independent members, to channel messages to management. - AFM has upgraded supervision by better leveraging data and developing a monitoring dashboard for the non-life sector; FSAP recommends expediting a similar dashboard for life insurance. - Data and vulnerabilities: - Supervision must base decisions on robust and high-quality data. - Vulnerabilities noted: some life insurers in an environment of rising interest rates; pension funds’ dependence on repo markets. - DNB and AFM should intensify collaboration on data sharing, collect granular conduct-related data, apply advanced technologies to connect data sources, and prioritize a data quality assurance process for systemic risk analysis. - Pension transition recommendations: - Closely monitor and proactively manage potential resource and legal risks for authorities. - Align public communication by DNB and AFM during transition to reduce uncertainties and legal risk. - Emphasize pension funds’ internal control functions and use high-quality data by social partners to make transition decisions. ### Securities market: trading venues, supervisory tools, and legislative needs - AFM adapted authorization and supervision resources to a larger, more diverse firm population post-MiFID II and Brexit, building expertise in fixed-income markets and trading functionalities. - Evolving market landscape: - Post-Brexit trading venues are diverging from London; innovations may come directly to the Netherlands requiring prompt Dutch responses. - New entrants with different business models create supervisory challenges that EU rules may not address quickly enough. - Supervisory priorities and gaps: - Reinforce focus on trading venue resilience and equity market closing auctions using better and timelier data analytics. - AFM should work with European counterparts to ensure primary listing venues like Euronext can recover promptly from outages, including timely use of failovers; access to appropriate data and analysis is required. - AFM internal governance and prioritization of data analytics need change. - Strategy and powers: - Reset supervisory strategy to capture learning from venues about new markets/business models; assess corporate governance, risk management, inherent risk, and intra-group outsourcing. - Consider stronger emphasis on the ability to use intrusive powers; define triggers, organizational capacity, and closer relationships with home supervisors. - Legislative changes recommended to enable AFM to: - Respond effectively to emerging risks linked to trading venue supervision and manage financial stability/reputational risks jointly with DNB. - Obtain a broader range of supervisory tools with a firm legal base, including: - Autonomous ability to further specify binding requirements keeping pace with market developments. - A clear basis for requiring appointment of independent non-executive directors. - Enhanced powers to deploy external specialist expertise and recoup associated costs. ### Collective Investment Schemes (CIS): liquidity mismatch and monitoring - FSAP recommends continued focus on liquidity mismatch in CIS and availability of tools to manage it. - Authorities’ analysis found liquidity mismatch in real estate funds is less than it appears because many are: - Closed-ended rather than open-ended; - Investing in equities in the real-estate sector rather than direct physical real estate; and/or - Subject to restrictive conditions on redemption size, frequency, and notice periods. - Investor base skewed toward pension funds reduces run risk. - Recommendation: continue monitoring risks in real estate and corporate bond investments through CIS and ensure appropriate liquidity management tools are available and used where necessary. ### Financial integrity: AML/CFT and beneficial ownership - FSAP builds on the FATF 2022 Mutual Evaluation Report with key recommendations: - Improve national understanding of misuse of legal vehicles and cross-border financial flows risks given exposure to complex international structures, conduit companies, and large transnational flows. - Recommendation: deepen the National Risk Assessment (NRA), including comprehensive analysis of risks from misuse of legal entities and conduit structures, and incorporate tax authority information. - Ensure a common, sufficiently broad understanding of the concept of a conduit company to design a meaningful policy action plan. - Improve completeness and accuracy of beneficial ownership information at the Commercial Register. - Legacy issue: pre-existing legal entities can continue operating and using bank accounts without updated beneficial ownership information. - Strengthen enforcement measures, including potential de-registration where warranted. - Enhance cooperation between the Commercial Register and tax authorities and systematically approach obliged entities (e.g., trust offices) to cover foreign trusts and other legal arrangements. - Continue strengthening DNB’s risk-based supervisory practices by: - Drawing lessons from systemic deficiencies in remediation cases at the three largest banks (customer due diligence). - Considering elevating tax risks to a dedicated risk category alongside existing five categories. - Prioritizing close cooperation between DNB and BTWwft in supervising trust offices and domiciliation providers and tackling underground banking. - Notable statistics cited in the FSAP: - As of 2021, the Netherlands hosts an estimated 8,700 conduit companies, with a balance sheet total of €4.5 trillion (517 percent of GDP). The number could be underestimated due to reporting gaps. ### Financial safety net and crisis management: resolution readiness and payouts - Progress since the previous FSAP is acknowledged; focus now on operational readiness of resolution plans: - DNB should complete resolution handbooks for preferred and fallback resolution strategies and ensure coherence with banks’ playbooks. - Liquidity in resolution: - DNB and the MoF should identify and operationalize possible national sources for liquidity in resolution (e.g., rely on existing ELA framework). - In the Banking Union, the Single Resolution Fund together with the European Stability Mechanism backstop (once in place) can provide support in resolution up to approximately €146 billion, but access is not guaranteed ex ante. - International experience indicates institutions in resolution may require more significant liquidity support than these amounts imply. - Recovery and resolution planning: - Need for agility: banks may be non-systemic ex ante but systemic at failure. - State-owned banks and FMIs with banking licenses pose distinct resolution challenges (allocation of losses, confidence effects, fiscal costs). - For FMIs with banking licenses, DNB should assess identification of critical functions, availability of resolution tools, and treatment of banking vs. non-banking services. - Testing and transparency: - DNB should develop a multi-year program of periodic internal and external testing covering all institution types subject to resolution, progressing from recovery to full end-to-end resolution testing using realistic scenarios. - DNB should enhance transparency by publicly disclosing policy documents (beyond bail-in execution) and non-confidential parts of LSIs’ resolution plans; currently, LSIs receive only a high-level summary. - Payouts: - DNB should ensure repayment of covered depositors within seven working days of a bank’s failure. - Lessons from Amsterdam Trade Bank failure: not all covered depositors could be paid within 7 days. - Recommendations: develop payout system options for non-resident depositors, automate handling of complex cases, test home-host cooperation for branches, and improve Single Customer View files and systems. - Crisis management planning: - National plan needed assigning crisis preparedness/management functions to an inter-authority committee. - Conduct regular intra- and inter-authority financial crisis simulation exercises to test and enhance operational preparedness. ### Authorities’ views - Authorities welcomed most FSAP recommendations and recognized supervisory leadership on climate; they agree climate risk needs further integration into day-to-day supervision and that nature risk warrants international work. - On macroprudential policy, authorities view current institutional settings for calibrating borrower-based tools as adequate, balancing consumer protection, financial stability, and access to homeownership. - On AFM powers for securities markets, authorities acknowledged post-Brexit landscape changes and called for balancing national and EU authority vesting. - For financial integrity, authorities are implementing recommendations following FATF review; a new NRA to be published soon may address FSAP issues and feed into the European Supra National Risk Assessment. - On the financial safety net, authorities noted the Single Resolution Mechanism Regulation limits sharing of non-confidential details on resolution plans with LSIs and suggested focusing on provision of liquidity after resolution. ### Selected financial soundness indicators (Table 3) — SIs and LSIs (percent) - Return on equity - SI: 2018 8.71; 2019 7.62; 2020 3.27; 2021 8.35; 2022 8.00 - LSI: 2018 4.63; 2019 9.08; 2020 1.97; 2021 8.24; 2022 5.80 - Return on assets - SI: 2018 0.52; 2019 0.46; 2020 0.19; 2021 0.49; 2022 0.48 - LSI: 2018 0.54; 2019 0.93; 2020 0.22; 2021 0.92; 2022 0.63 - Net interest margin - SI: 2018 1.44; 2019 1.42; 2020 1.28; 2021 1.23; 2022 1.34 - LSI: 2018 1.26; 2019 1.15; 2020 1.05; 2021 0.96; 2022 1.08 - Cost-to-income ratio - SI: 2018 53.70; 2019 50.32; 2020 49.39; 2021 49.74; 2022 49.12 - LSI: 2018 53.57; 2019 49.51; 2020 58.03; 2021 48.38; 2022 52.41 - CET1 to RWA - SI: 2018 16.45; 2019 16.48; 2020 17.03; 2021 16.97; 2022 15.68 - LSI: 2018 21.36; 2019 20.08; 2020 25.20; 2021 24.99; 2022 23.35 - Leverage ratio - SI: 2018 4.61; 2019 4.88; 2020 5.23; 2021 6.54; 2022 5.80 - LSI: 2018 9.87; 2019 8.53; 2020 10.25; 2021 10.34; 2022 9.18 - NPL ratio - SI: 2018 1.95; 2019 1.86; 2020 2.24; 2021 1.73; 2022 1.60 - LSI: 2018 1.88; 2019 1.63; 2020 2.29; 2021 1.98; 2022 1.80 - RWA density - SI: 2018 30.46; 2019 31.19; 2020 28.68; 2021 29.76; 2022 33.23 - LSI: 2018 48.06; 2019 44.30; 2020 38.79; 2021 38.99; 2022 40.16 - Loan to deposit ratio - SI: 2018 123.45; 2019 124.52; 2020 106.46; 2021 104.01; 2022 108.04 - LSI: 2018 104.27; 2019 102.76; 2020 97.46; 2021 94.09; 2022 95.04 *Source: IMF staff summary of the content unit.* ### Appendix I. Risk Assessment Matrix ### Appendix I. Risk Assessment Matrix ### Global conjunctural risks - Abrupt global slowdown or recession. - Likelihood of Realization in Next 1-3 years: Medium - Expected Impact on Financial Stability if Threat is Realized: - A sharp drop in economic activity, as well as domestic and external demand. - Energy dependence on Russia and direct trade and financial links with Russia and Ukraine are limited. However, indirect links and spillovers are important; depressed activity in key trading partners (e.g., Germany) would have spillover effects to the Netherlands and exacerbate credit risks. - Intensification of regional conflict(s) (e.g., Gaza and Israel, Russia’s war in Ukraine). - Likelihood: High - Expected Impact: - Disrupt trade (e.g., energy, food, tourism, supply chains), remittances, foreign direct investment (FDI) and financial flows, payment systems, and increase refugee flows. - Monetary policy miscalibration by major central banks. - Likelihood: Medium - Expected Impact: - Miscalibration may require a reversal, i.e., a resumption in policy tightening, possibly leading to demand cooling, house price declines and pressures on borrowers, given elevated private debt. This would exacerbate credit risks. - Tightened conditions could also reduce the value of marked-to-market securities. - Systemic financial instability (market dislocations, high interest rates and risk premia). - Likelihood: Medium - Expected Impact: - Sharp swings in asset prices and risk premia driven by global systemic instability could affect capital positions of institutions holding similar asset classes. - Individual banks/NBFIs may fail as a result. Fire sales may ensue and worsen the downward price spiral. ### Structural risks - Deepening geo-economic fragmentation. - Likelihood: High - Expected Impact: - Less efficient configuration of trade and FDI, supply disruptions, protectionism, technological and payments systems fragmentation, rising input costs, financial instability, fracturing of international monetary and financial systems, and lower growth. - The Netherlands is vulnerable to supply disruptions and weaker investor confidence, due to strong cross-border real and financial linkages and the presence of large multi-national corporations and financial institutions. Such disruptions could impact both bank asset quality and non-bank investment asset valuations. - Extreme climate events driven by rising temperatures. - Likelihood: Medium - Expected Impact: - Most physical infrastructure would be at risk from flooding if sea levels rise or other weather events overwhelm existing coping mechanisms. - The Netherlands is vulnerable to sea level rise, particularly over the longer term. - Forceful actions to curtail nitrogen depositions to meet EU commitments could disrupt economic activity, including in agriculture and construction. - Droughts would also threaten housing infrastructure. - Efforts to reduce nitrogen depositions may need to be redoubled, with adverse macroeconomic effects. - Likelihood: Medium - Expected Impact: - Could disrupt economic activity and exacerbate the impacts noted above. ### The Netherlands–specific risks - A rapid correction of house prices. - Likelihood: Medium - Expected Impact: - Dutch banks are highly exposed to highly indebted households, and vulnerable to a downward correction in the housing market. - Continued high inflation and a cooling economy could impact borrowers’ ability to repay, worsening asset quality. - Second-round effects on growth through households cutting consumption to service their debts would be likely. - An adverse change in the direction of economic and climate policies in the context of political fragmentation. - Likelihood: Medium - Expected Impact: - Economic and climate policy uncertainties (including nitrogen policies) raise the risk of supply disruptions, stranded assets, affecting investment and growth. *Notes on RAM interpretation: “low” indicates probability below 10 percent, “medium” between 10 and 30 percent, and “high” between 30 and 50 percent. Conjunctural shocks and scenarios highlight risks that may materialize over a shorter horizon (between 12 to 18 months). Structural risks are likely to remain salient over a longer horizon.* ### Bank stress testing approach (Appendix II) - Institutional perimeter: - 6 significant institutions—over 90 percent of the banking system. - Methodology and risk drivers: - Scenario-conditional simulation of various drivers of profits and losses: credit risk (credit impairment), interest rate risk (interest income and expense), market risk (mark-to-market revaluation of marketable securities). - Credit risk model linking macrofinancial shocks with default probabilities of loan portfolios by country of exposure. - Interest rate models linking risk free rates to lending and borrowing rates. - Marked-to-market valuation linking sensitivity factors (“delta”) with shocks to interest rate, spread, FX rate, equity, and commodity prices. - Scenarios: - Baseline scenario aligned with April 2023 IMF WEO. - Bespoke adverse scenarios based on RAM (Appendix I). - Sensitivity analyses: - Alternative interest rate paths: simulation on bank capital through interest income and expense as interest rates follow different paths, assuming sight deposits move to term accounts and flow out of the banking system. - Liquidation of Hold To Maturity securities: estimation of losses when banks are forced to liquidate held-to-maturity securities to cover cash shortfalls. - LSI analysis: - Credit risk analysis on foreign credit exposures of corporate and emerging market banks using publicly available default probabilities as proxy to stress test creditworthiness of foreign corporate exposures against macrofinancial scenarios of 40 economies. - Bank liquidity stress test: - Institutional perimeter: 6 significant institutions—over 90 percent of the banking system. - Methodology: - Regulatory liquidity stress test (evaluation of LCRs and NSFRs). - Cash-flow-based liquidity stress test evaluating the ability to withstand a sequence of liquidity shocks across maturities. - Sensitivity analysis exploring assumptions. - Interconnectedness and contagion analysis: - Institutional perimeter: 14 banks, 27 insurers, 47 pension funds, 3,590 different marketable securities making up more than 50 percent of total assets for the median institution. - Methodology: institution-level contagion analysis based on a fire-sale channel. - Banking sector climate risk analysis: - Institutional perimeter: the six Dutch banks designated as systemically important. - Methodology and risk drivers: - Physical risk from floods mapped into economic damage. - Flood damages impact banks’ credit risk (domestic and international loans). - Macro approach mapping climate scenarios into macrofinancial scenarios; standard stress testing methodologies to assess implications for banking system resiliency. - Scenarios: - Multiple flood scenarios considering various regions, different climate conditions under different return periods. - Extreme flood scenarios and floods in both unembanked and embanked areas. - Macrofinancial scenarios including impact on Dutch economy and neighboring countries (Belgium and Germany). ### Insurers stress testing approach (Appendix III) - Insurers Solvency Stress Test (Top-down): - Institutional perimeter: - 5 life insurers; 5 P&C insurers; 6 health insurers. - Market share: Life: 93 percent; P&C: around 70 percent; Health: around 70 percent. - Consolidation level: Unconsolidated. - Data: Statutory returns. - Reference Date: June 30, 2023. - Channels of risk propagation / Methodology: - Investment assets: market value changes after price shocks. - Liabilities: valuation change due to interest rate shock. - Impact on available capital (net assets = stressed assets − liabilities). - Recalculation of the solvency capital requirement. - Time horizon: Instantaneous shock. - Adverse (tail) scenario specifics: - Risk-free rate: full Solvency II term structure incl. extrapolation towards the ultimate forward rate, EUR +147 bps (1y) and +158 bps (10y); USD +5 bps (1y) and +203 bps (10y). - Equity shocks: -40.7 percent (The Netherlands), -42.4 percent (Euro Area), -42.1 percent (United States), -41.2 percent (other advanced economies). - Property shocks: -13.0 percent (domestic RRE), -15.0 percent (domestic CRE), -10.0 percent (foreign RRE), -12.0 percent (foreign CRE). - Sovereign bond spreads: +55 bps (The Netherlands), +60 bps (Euro Area, United States). - Corporate bond spreads: ranging from +45 bps (AAA, non-financials) and +50 bps (AAA, financials) to 400 bps (CCC and lower). - Mortgage loan spreads: +45 bps. - Currency: -10.7 percent depreciation of the EUR external value. - Sensitivity analysis: - Parallel decline of the EUR interest term structure: -100 bps. - Appreciation of the EUR external value: +10 percent. - Default of largest banking counterparty. - Risk factors assessed: Market risks (equity, property); Interest rate risks; Credit risks (bond spreads, (mortgage) loan spreads, default of largest banking counterparty). - Regulatory/accounting standards: Solvency II, National GAAP. - Reporting formats for results: - Change in valuation of assets and liabilities; Solvency ratios; Aggregated capital shortfall; Dispersion across companies; Contribution of individual shocks. - Insurers: Liquidity Stress Test (Bottom-up and Top-down): - Institutional perimeter: - 5 life insurers; Market share Life: 93 percent; Consolidation level: Unconsolidated. - Data: Company submissions and statutory returns. - Reference date: June 30, 2023. - Channels of risk propagation / Methodology: - Variation margin call on interest rate swap positions after a sudden increase in interest rate. - Time horizon: Two days. - Scenario: Increase in short-term EUR interest rates by 100 bps. - Risk factors assessed: Liquidity risks. - Regulatory/accounting standards: Solvency II, National GAAP. - Reporting formats for results: - Amount of margin call (per day); Share of margin calls which could be met in kind; Liquid assets; Sources of liquidity to meet margin calls. ### Pension funds stress testing approach (Appendix IV) - Pension funds: Solvency Stress Test (Top-down): - Institutional perimeter: - Number of institutions: 10 occupational pension funds (DB). - Market share: 70 percent of assets. - Data: Statutory returns. - Reference date: June 30, 2023. - Methodology: - Investment assets: market value changes after price shocks. - Liabilities: valuation change due to interest rate shock. - Impact on own funds (net assets = stressed assets − liabilities). - Time horizon: Instantaneous shock. - Adverse scenario specifications (aligned with macrofinancial scenario): - Risk-free rate: full Solvency II term structure incl. extrapolation towards the ultimate forward rate, EUR +147 bps (1y) and +158 bps (10y); USD +5 bps (1y) and +203 bps (10y). - Equity: -40.7 percent (The Netherlands), -42.4 percent (EA), -42.1 percent (U.S.), -41.2 percent (other advanced economies). - Property: -13.0 percent (domestic RRE), -15.0 percent (domestic CRE), -10.0 percent (foreign RRE), -12.0 percent (foreign CRE). - Sovereign bond spreads: +55 bps (The Netherlands), +60 bps (Euro Area, U.S.). - Corporate bond spreads: ranging from +45 bps (AAA, non-financials) and +50 bps (AAA, financials) to 400 bps (CCC and lower). - Mortgage loan spreads: +45 bps. - Currency: -10.7 percent depreciation of the EUR external value. - Sensitivity analysis: - Parallel decline of the EUR interest term structure: -100 bps. - Appreciation of the EUR external value: +10 percent. - Default of largest banking counterparty. - Risk factors assessed: Market risks (equity, property); Interest rate risks; Credit risks (bond spreads, (mortgage) loan spreads, default of largest banking counterparty). - Regulatory/accounting standards: National GAAP. - Reporting formats for results: Change in values of assets and liabilities; Funding ratios; Dispersion across companies; Contribution of individual shocks. - Pension funds: Liquidity Risk (Bottom-up, conducted by DNB): - Institutional perimeter: - Number of institutions: 5 occupational pension funds (DB). - Market share: ~60 percent of assets. - Data: Statutory returns. - Reference date: December 31, 2022. - Methodology: - Combination of interest rate (EA, U.S., UK, JP) and FX shocks (USD, GBP, JPY) leading to margin calls on pension funds’ derivative positions. - Time horizon: Two days. - Scenario analysis — Four adverse scenarios: 1. Parallel interest rate shock between 17 and 38 bps; EUR appreciation between 2.2 and 3.8 percent. 2. As scenario 1, with limited access to the repo market. 3. Parallel interest rate shock between 33 and 77 bps; EUR appreciation between 4.4 and 7.5 percent. 4. As scenario 3, with limited access to the repo market. - Risk factors assessed: Liquidity risks. - Regulatory/accounting standards: National GAAP. - Reporting formats for results: Aggregated margin calls (absolute amount, relative to liquid assets); Cashflows and liquidity position; Dispersion across companies. ### Status of key recommendations from the 2017 FSAP (Appendix V) - Enforce an industry-wide approach to informing IO mortgagors of estimated repayment shortfalls. - Status: Done. AFM and SSM (DNB/ECB) established an industry-wide program. The program has concluded. - Continue to build capital buffers to ensure all banks remain above minimum leverage ratio thresholds in the case of severe adverse events. - Status: Done. The Dutch authorities require G-SIBs to hold a leverage ratio buffer beyond the binding 3 percent. They also remain supportive of an Other Systemically Important Institution leverage ratio buffer and note that the Basel 3.5 standards, the activation of a 1 percent CCyB, now increased to 2 percent by May 2024 and the extension of the floor on risk weights for Dutch mortgages will also contribute to higher leverage ratios of certain Dutch Systemically Important Financial Institutions. - Strengthen the FSC by establishing it under primary law and vest it with “comply-or-explain” powers. - Status: Partially Done. A Bill has been approved by Parliament giving the FSC a legal basis after an amended legislative proposal was submitted to Parliament in early summer 2022. The FSC is now legally embedded in the Bank Act 1998 as of July 1, 2023. As a ‘comply or explain mechanism’ does not fit in with the Dutch constitutional system, it was not implemented. - Accelerate the phase-out of MID and reduce the final tax rate to a neutral level. - Status: Partially Done. The phasing down of the MID was accelerated from *Source: Appendix I. Risk Assessment Matrix* ### 0.5 to 3 percentage points annually starting in 2020 until the base tax ### 0.5 to 3 percentage points annually starting in 2020 until the base tax rate level of 37 percent was reached in 2023 ### Housing taxation, LTV, and DSTI - Tax treatment of owner-occupied housing remains favorable compared to other forms of investment. - Recommendation: 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. - Status: Not Done. The maximum LTV ratio for new mortgages was reduced to 100 percent in 2018, as planned at the time the cap was introduced in 2012, but no further reduction has been undertaken. No changes have been made in how DSTI limits are set. ### Cross-cutting supervisory issues - Recommendation: Enhance DNB and AFM powers to introduce technical regulations (consistent with the SSM) and to conduct examinations using outside expertise. - Status: Not Done. The powers of DNB and AFM to introduce technical regulations have not been enhanced. No actions to do so are currently foreseen. DNB and AFM already have the power to adopt non-legally binding policy rules and will consider suggested policy rules when exercising the relevant supervisory powers in future. The current practice is largely effective; non-legally binding policy rules are supervised and enforced. DNB and AFM can also involve outside expertise in conducting their supervisory examinations. - Recommendation: Exclude DNB and AFM from the proposed salary cap, and provide them with greater autonomy in setting their supervisory budgets. - Status: Not Done. The Ministry of Finance has not provided DNB and AFM with greater autonomy in setting their supervisory budgets. No actions to do so are foreseen. The recommendation was revisited, and a new recommendation formulated. - Recommendation: DNB and AFM to undertake a cross-sectoral review of credit underwriting standards of mortgages. - Status: Done. Several on-site examinations in financial institutions’ mortgage portfolios have been carried out in the recent past. - Recommendation: Ensure that reliable and complete data is available on a timely basis to support off-site supervision. - Status: Done. DNB and AFM are actively investigating and applying supervision techniques involving data-driven analytical approaches. In collaboration with the Ministry of Finance, the AFM is exploring an additional legal basis for periodic data requests. ### Data and supervision—sector specifics - Insurers and pension funds: DNB conducts rigorous checks on the quality, consistency, and plausibility of the data it receives from insurers and pension funds, including on-site examinations. AFM is investigating the possibility of a yearly inquiry into complaints about pension funds. - Banks: DNB has implemented new information products for supervisors, including rigorous checks on consistency and plausibility of data, a system of standards and norms on the quality of regulatory reporting (for LSIs), and participation in the ECB’s thematic review on data aggregation, confirming additional investment needs into information technology (IT) infrastructure. DNB initiatives for Data Driven Supervision have been implemented. AFM has developed tools to monitor IO mortgages with coverage to be expanded to other mortgage products. - Collective investment schemes: Several actions have been taken by DNB and AFM to ensure reliable and complete data is available on a timely basis. ### Banking supervision and regulation - Recommendation: Further enhance supervisory oversight of loan classification and strengthen internal model validation by providing Joint Supervisory Teams more support from risk specialist divisions. - Status: Done. - Supervisory oversight of loan classification: Since the last FSAP, several policy measures have been introduced at the EU/EA level focusing on adequate provisioning and clarifying classification rules. The MoF admits the discussion on binding requirements on impairment charges. In line with European Commission guidance, DNB encourages the application of article 104 Credit Requirement Directive where appropriate, including through supervisory manuals. - Internal model validation: The ECB upgraded processes across Joint Supervisory Teams on model validations, including ongoing model monitoring, requiring substantial support from division specialists. The project of Targeted Review of Internal Models (TRIM) has been launched, channeling additional expertise into internal model validation. - Recommendation: Encourage a more active role of the Supervisory Board of Dutch banks via ongoing engagement. - Status: Done. Engaging the Supervisory Board (SB) is part of ongoing supervision through periodic interviews and the annual SB self-assessment. In 2022 DNB observed the meetings of the SBs of several SIs to assess their effectiveness and conducted an on-site inspection combining a focus on governance with behavioral and cultural elements. DNB discusses outcomes of the annual Supervisory Review and Evaluation Process with the SBs of all LSIs and intends to communicate outcomes of the TRIM project. ### Insurance and pension supervision and regulation - Recommendation: Monitor closely and take a series of well-defined actions, under Pillar 2, at different levels of the Volatility Adjustment (VA) and impact of the ultimate forward rate (UFR) on insurers’ solvency position. - Status: Done. DNB implemented a new forward-looking approach in late 2021 that takes a step away from the current SCR ratio ex VA and UFR approach. It analyzes solvency levels and probability distributions around them to assess the sustainability of the future statutory solvency and the capacity to compensate for the UFR shortfall. It will support a dialogue with insurers at risk to take measures to improve the sustainability of the solvency position. - Recommendation: Harmonize the relevant laws on the quality of advice and suitability of products and provide authority for group supervision in the pension law. - Status: Not Done. No mechanisms have been introduced to ensure pension participants receive financial advice. A new pension system is being implemented in 2023-28, yet supervisory powers for group supervision are not foreseen because of the pension fund structure in the Netherlands. ### Securities supervision and regulation - Recommendation: Broaden the supervisory authority of the AFM with regard to loan-based crowd-funding platforms. - Status: Done. - Recommendation: Require prompt public disclosure of auditor changes or resignations. - Status: Not done. Authorities consider this already sufficiently covered by existing rules and regulations. ### Financial market infrastructure - Recommendation: Augment the supervisory resources devoted to the oversight of European Central Counterparty (EuroCCP). - Status: Done. The staff resources devoted to EuroCCP supervision have been expanded, including resources for quantitative risk management and for IT/OPS. The department head of the FMI Oversight Department attends the supervisory meetings with the chairperson of the SB of EuroCCP. - Recommendation: EuroCCP to strengthen its review of its stress testing and margin models methodology and develop a comprehensive recovery plan. - Status: Done. Reverse stress testing approach broadened, margin models methodology improved, and sensitivity analyses developed. A comprehensive recovery plan was developed and updated annually to bring it in line with the requirements of the EU Recovery and Resolution Regulation. ### Crisis management and bank resolution - Recommendation: Develop adequate arrangements for systemic crisis management and make legacy frameworks for managing failing banks complementary to the new SRM framework and more transparent. - Status: Partly done. Domestically, DNB has updated its crisis management manual, aligning it with the SRB’s. DNB, AFM, and other relevant institutions have defined their roles and responsibilities in resolution and have updated the tripartite Memorandum of Understanding enabling information sharing and delineating responsibilities for crisis management. At the European level, the role and responsibilities of SRB, ECB, and Dutch authorities in managing a systemic crisis are formalized in the SRB and DNB crisis management manuals, the Cooperation Framework and horizontal policy guidance. - Recommendation: Allow the deposit guarantee scheme to finance deposit transfers in resolution and insolvency. - Status: Partly done. Starting in 2017, it is possible to finance the gross amount of deposits that are transferred in resolution, albeit with a cap of 50 percent of the size of the deposit guarantee fund. *Source: KINGDOM OF THE NETHERLANDS—THE NETHERLANDS, INTERNATIONAL MONETARY FUND* --- _Source: https://www.imf.org/-/media/files/publications/cr/2024/english/1nldea2024003.pdf_