## _cr04312

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### Executive summary: overall assessment
- The Netherlands financial system is dominated by a few internationally active, large complex financial institutions (LCFIs), offering substantial risk diversification but higher sensitivity to global trends and cross-sectoral spillovers.
- Main domestic risks:
  - Large exposures to housing mortgages amid high household debt and rapid house price rises until recently.
  - Continuing exposure of the pensions sector to market risks.
- Risk mitigation and outlook:
  - Generally strong financial system and effective financial policies; near-term vulnerabilities appear low.
  - Authorities restructured financial supervision; pending legislation will formalize changes.
- Medium-term policy challenge:
  - Review government involvement in housing finance, especially phasing out tax deductibility of mortgage interest.

### Key findings from the FSAP analysis
- Mortgage and household sector:
  - Banks’ housing-related exposures mitigated by relatively low average loan-to-value (LTV) ratios overall; high LTVs common at the margin for recent borrowers.
  - Most mortgages are fixed-rate.
  - Government guarantee covers around a quarter of mortgages.
  - Historically low mortgage default rates, even during the last crash.
  - Recent deceleration of housing price rises to moderate levels.
- Corporate sector:
  - Domestic corporate exposures manageable despite rising debt and increased bankruptcies; relatively significant fixed-rate element of loans aids mitigation.
- Cross-border exposures:
  - Cross-border exposures key to growth and profitability; exposure to adverse developments in key countries is significant and rising.
  - FSAP stress tests: global slowdown with sharp U.S. dollar declines has greatest impact on banks’ credit portfolios.
- Banking resilience:
  - Stress tests indicate the system could absorb substantial shocks given strong capital and asset quality, good profitability, diversification, and risk management.
  - Ongoing concern: profitability of domestic operations and inflexible cost structures amid international consolidation.
- Insurance and pensions:
  - Insurance and especially pensions under strain 2000–02; rebuilding stage with exposure to equity price risk.
  - Authorities required pension funds to restore solvency buffers; supervisory regime upgraded.
  - Linkages across pensions, insurance, and banking manageable.
- Supervision and policy framework:
  - High standard of financial supervision, close cooperation with European and foreign supervisors.
  - New supervision law will close technical gaps; cross-sectoral reorganization aims to sharpen objectives and accountability.
  - Continued work needed on crisis management and macroprudential surveillance.

### Macroeconomic environment and housing risks
- Near-term outlook:
  - Local economy expected to recover gradually in 2004 and into 2005 after poor performance over past three years.
  - 2004 growth forecast: about 1 percent, driven by international trade; domestic demand weak and unemployment likely to continue rising.
- Downside risks:
  - Further appreciation of the euro.
  - Sharp correction of property prices, especially with faster than expected global interest rate increases.
  - Euro appreciated more than 30 percent vis-à-vis the U.S. dollar since its trough in 2001.
- Housing market specifics:
  - Between 1997 and 2002, average real house prices rose by more than 50 percent.
  - Since 2002, real price increases slowed and average time to sell increased.
  - A sharper house price decline could have substantial economic impact comparable to the early 1980s correction.

### Institutional structure and systemic size (selected statistics)
- System scale and composition:
  - Total financial institutions’ assets = 450 percent of GDP.
  - Bank assets = 320 percent of GDP.
  - Pension funds = 19 percent; life insurance = 10 percent; general insurance = 1 percent; banks = 70 percent (shares of financial system assets).
- Banking concentration (shares of bank assets):
  - ABN Amro 29 percent, ING 28 percent, Rabobank 21 percent, foreign subsidiaries 12 percent, other LCFIs 8 percent, small banks 2 percent.
- Pension fund scale:
  - ABP civil servant pension fund assets €150 billion in 2003.
- Exposure breakdown (2003, monetary survey basis):
  - Total claims on EU residents: 83 percent; on Non-EU residents: 17 percent.
  - Claims by instrument: Loans 84 percent; Shares & other equity 3 percent; Securities other than shares 13 percent.
  - Claims by sector: Government 11 percent; Private sector 63 percent; Banks 26 percent.
  - Private nonbank lending composition: Mortgages 45 percent; Other consumer lending 6 percent; Non-financial private companies 24 percent; Nonbank financial intermediaries 17 percent; Non-financial public companies 8 percent.
  - Insurance companies’ assets: Shares 29 percent; Securities other than shares 30 percent; Mortgages 2 percent; Non-mortgage loans 3 percent; Others 17 percent.
  - Pension funds’ assets: Shares 46 percent; Securities other than shares 36 percent; Mortgages 12 percent; Others 13 percent.

### Stress testing and scenario findings
- Overall conclusion:
  - Tests show the banking sector can absorb substantial shocks; greatest banking credit impact arises from a global slowdown with sharp U.S. dollar declines.
- Banks (sensitivity results summary):
  - In the most extreme multi-year scenario, average CAR declines from 11.1 to 10.5 percent; individual banks’ CARs remain well above 8 percent.
  - Impact of single-factor shocks on CAR (changes reported):
    - Interest rate: +100 bps → 0.0; -100 bps → 0.2; 50bps steepening → 0.1; 50 bps flattening → 0.0; + 25% in volatility → 0.1
    - Exchange rate: +10% → 0.1; - 10% → 0.0; + 25% in volatility → 0.0
    - Equity: +10% → 0.1; - 10% → 0.0; + 25% in volatility → 0.1
    - Credit spreads: +50 bps → 0.0; - 50 bps → 0.1
    - Domestic crisis: Over 1 year → -0.1; Over 3 years → -0.4
    - Dollar crisis: Over 1 year → -0.3; Over 3 years → -0.6
- Insurance and pension results:
  - Insurance solvency margin declines from 106.9 percent to 99.2 percent in most extreme scenario.
  - Pension funds’ solvency ratios fall below 100 percent in nearly all tests; in most extreme scenario average solvency margin declines from 103.1 percent to 76.4 percent.
  - Impact on solvency margins (changes reported for Insurance Companies / Pension Funds):
    - Interest rate: -0.3 / -3.6
    - Credit Risk: 0.0 / -0.7
    - Equity: -4.2 / -15.2
    - Property: -1.6 / -2.6
    - Commodity: 0.0 / -1.0
    - Currency: -0.5 / -8.4
    - Technical insurance: -0.1 / -1.3
    - Costs: -1.0 / -0.1
    - Correlation = 0: -4.8 / -18.7
    - Correlation = 0.5: -6.4 / -26.8
    - Correlation = 1.0: -7.7 / -26.7

### Main priority recommendations (selected)
- Financial sector supervision:
  - In new supervisory legislation, tie Minister’s final approval for ownership changes in largest banks/insurers to maintaining financial system stability and ensure transparency.
  - Clarify budget approval process for supervisory activities; set out limited Ministry role and grounds for withholding approval; consider multi-year budgeting.
  - Ensure AFM can cooperate fully with foreign securities supervisors even when no “domestic interest”.
  - Pension fund supervisory regime: allow sufficient flexibility in timeframes for making up solvency shortfalls but clarify 15 years is the maximum adjustment period.
- Securities settlement:
  - Increase clarity and fairness of Euroclear access rules; promote delivery versus payment (DVP) links between Euroclear and foreign CSDs.
- Deposit insurance / crisis management:
  - Review deposit guarantee system; consider pre-funding with risk-based premia.
  - Continue international crisis-management cooperation and extend procedures documentation.
  - Ensure “silent receiver” use does not conflict with governance, listing, or contractual requirements.
- Macroprudential surveillance:
  - Develop macroprudential surveillance processes and collect more timely indicators, notably for insurance and pensions, minimizing administrative costs.
- Housing finance:
  - Review stability implications of fiscal/quasi-fiscal housing support; phase out tax deductibility of mortgage interest.
  - Consider eliminating or charging for the mortgage guarantee scheme.

### Real interest rates and macro-financial risk
- Real interest rates rising since early 2002 but remain low by historical standards.
- Risk scenario: faster than expected rises in longer rates globally combined with continuing domestic unemployment uptrend could be problematic given high household and corporate debt.
- Table excerpt (as presented):
  - Standard Deviation
  - Largest Annual Increase
  - Largest Annual Decrease
  - House Prices 93818
  - Equity prices (World) 153734
  - Equity prices (Netherlands) 185042
  - Euro/Dollar 133133
  - Bond yield (percentage points)1.12.23.2

### Household sector: indebtedness and mortgage specifics
- Household indebtedness:
  - Household debt to GDP grew to over 100 percent of GDP in 2002; EU average about 50 percent.
- Mortgage growth drivers:
  - Extensive tax deductibility of interest and government guarantee of a significant number of mortgages.
- Policy changes:
  - Authorities narrowed scope of interest deductibility in recent years, contributing to slowdown in mortgage lending and house prices.
- Mitigating factors:
  - Mortgages usually fixed for relatively long periods; debt service ratio has fallen somewhat recently.
- Remaining concerns:
  - Rising unemployment and personal bankruptcies over last four years.
  - Household assets and net worth quite high by international standards, partly reflecting housing prices.

### Box 2 — Mortgages in the Netherlands (key facts)
- Mortgage debt roughly doubled as a share of GDP over the past decade.
- Common financing practices:
  - Finance transaction costs through the mortgage.
  - LTV for new loans rose sharply, reaching 108 percent on average in 2003 (excluding refinancing and second mortgages).
  - Typical maturity 30 years; interest rates fixed mostly 5 or 10 years.
  - Around one quarter of mortgages covered by the national mortgage guarantee.
- Product composition (2003) — Percent of total / Total debt outstanding / New mortgages:
  - Linear or level repayment 84
  - Interest only 42 35
  - Savings-linked 30 13
  - Investment-linked 19 48
- Only about 8 percent of total mortgage debt outstanding financed through traditional linear or annuity loans.
- Investment-linked mortgages create residual debt risk at maturity if returns fall short; shortfalls typically materialize at maturity or premature termination.

### Corporate sector and governance
- Corporate indebtedness high; fixed-rate business loans provide mitigation against interest spikes.
- 2002: lending to corporates slowed amid recession and rising bankruptcies; commercial real estate depressed.
- 2003: low interest rates and recovery prospects spurred new debt issuance and renewed bank lending; tendency to longer-term loans continued.
- Corporate governance reforms:
  - “Tabaksblat Committee” corporate governance code in force on a “comply or explain” basis beginning 2004.

### International exposures and cross-border patterns
- Total Dutch holdings of foreign securities = 120 percent of GDP in 2002.
- Cross-border claims mostly on banks; about two-third of external claims on Western Europe.
- Exposures to emerging markets declined substantially; exposures to UK, Germany, and the United States each comprised more than 10 percent of external claims.
- For LCFIs, foreign subsidiaries emphasize industrial countries rather than emerging markets.

### Banks — strengths, vulnerabilities, and key indicators
- Performance and profitability:
  - Return on equity for three largest LCFIs in range 10–20 percent.
  - 2003 operating profits rose by more than 40 percent; smaller Dutch banks: ROE (assets) 12.6 (0.5) percent in 2003.
- Efficiency:
  - LCFIs’ ROA and cost-to-income ratios below peer average; factors include cooperative bank presence and less flexible cost structures.
- Capitalization and asset quality:
  - Regulatory capital ratios for LCFIs rose from 10.8 percent in 1998 to about 11.2 percent in 2003.
  - NPLs around 2–3 percent of total loans for LCFIs.
- Liquidity and market risk:
  - Liquid assets cover 50 percent of short-term liabilities consistently since 1998.
  - Market risk (VaR) for three largest banks: about 150–200 million Euro for a 10-day horizon (~0.4 percent of capital).
- Derivatives and off-balance exposure:
  - Total notional value of derivative contracts rose to 8,701 (in billions of U.S. dollar) by 2003 (figure as presented).

### Portfolio quality, mortgage exposures, and supervisory attention
- Portfolio quality benefits from good payment discipline, secured mortgages, and overall average LTV around 50 percent for the stock.
- Recent borrowers more at risk: dual-income reliant, investment-linked or leveraged mortgages, and those serviced by smaller or aggressive lenders.
- Supervisory actions:
  - Immediate attention to institutions extending high LTV mortgages to ensure appropriate loan classification and provisioning.

### Liquidity, markets, and risk mitigation instruments
- Dutch banks use Euro-area interbank, repo and forex markets; currency swaps used for liquidity and FX financing.
- DNB provides fully collateralized liquidity; large amounts of eligible collateral held by Netherlands institutions.
- Securitization and credit-risk-transfer markets developing and expected to facilitate redistribution of credit risks.
- 95 percent of cash settlement occurs in central bank money.

### Insurance companies and pension funds: performance and supervisory response
- Insurance performance mixed; three largest insurers generate 80 percent of income abroad.
- Pension funds suffered large losses in 2000–02; PVK required coverage ratio of at least 105 percent by end-2003 and additional buffers.
- 2003: equity recovery and remedial actions improved average coverage ratios; larger funds attained 105 percent target.
- Stress tests show pensions particularly sensitive to equity, interest rate, and currency risks; potential spillover to banking via markets or macro effects.

### Contagion, interlinkages, and systemic channels
- Large banks’ interbank exposures primarily with foreign banks; domestic bank failure would strain others but not necessarily trigger failures of other large Dutch banks.
- Cross-shareholdings, common ownership in financial conglomerates, and risk transfer arrangements are contagion channels but generally moderate.
- Credit derivatives usage limited relative to major banks’ assets; insurance companies not major players.

### Supervision, legal/regulatory overhaul, and macroprudential surveillance
- Move from sectoral to functionally-oriented, cross-sectoral supervisory system: DNB/PVK for prudential and system stability; AFM for conduct-of-business.
- Main legal/regulatory improvements needed:
  - Transparent delegation of authority where Minister retains final approval; clear budget approval rules; clarify objectives and accountabilities.
  - Banking: extend fit and proper to more senior personnel; monitor/report capital adequacy on a solo basis for non-guaranteed entities.
  - Insurance: improve transparency, actuarial/accounting practices, group supervision, reporting frequency.
  - Securities: strengthen powers to cooperate with foreign supervisors even when no “domestic interest”.
  - Pensions: ensure 15 years is maximum adjustment period; allow flexibility to avoid procyclical reactions.
- Macroprudential surveillance:
  - Small department established in DNB/PVK to integrate research and policy analysis; data improvements needed for insurance and pensions aggregates.

### Safety nets and crisis management
- Liquidity support: DNB can provide special credit facilities fully collateralized; coordination with ECB/other officials required for large institutions.
- Crisis preparedness: DNB uses flexible ‘checklist’ approach and continuity-of-business arrangements; recommends further simulation exercises with foreign supervisors.
- “Silent receiver” power: undisclosed appointment may conflict with listing or governance rules; contingency plans should address potential conflicts.
- Deposit insurance:
  - Current ex post-funded system under review; pre-funding and risk-adjusted premia to be considered.
  - Under current system DNB would finance outlays and recover from remaining banks; recovery after a large bank failure may be unrealistic.

### Tax, quasi-fiscal, and AML/CFT issues
- Tax and housing finance:
  - Extensive tax deductibility of mortgage interest encouraged over-borrowing; phasing out would support financial stability.
  - Review National Mortgage Guarantee Plan; consider phasing out or charging market-related fee.
- AML/CFT framework:
  - Generally sound; ratified almost all conventions, expects to ratify Palermo Convention shortly.
  - Areas for further strengthening:
    - Ensure effective sharing of information by MOT with supervisors.
    - Impose specific duties on financial institutions for training, internal audit, and reporting.
    - Consider consolidation of MOT and other law enforcement resources.
    - Widen scope for administrative sanctions and provide detailed AML/CFT guidance.
  - FATF assessment: Netherlands "complies well with most of the assessable FATF 40+8 Recommendations" with targeted recommended actions (see Table 8 summary in source).

### Onsite / offsite supervision and formal powers
- Onsite examinations risk-based; regular contact with senior management and annual meetings with external auditors.
- DNB has comprehensive risk assessment system; recommendation to communicate overall assessment back to banks.
- Legal powers of DNB wide-ranging; formal measures rarely used; typical measures are persuasive and confidential.
- Cross-border banking supervision:
  - DNB’s consolidated supervision appears comprehensive; uses MOUs and informal arrangements where needed.
  - Recommendation: formalize methodology for assessing overseas supervisory standards.

### Securities markets, SROs, and market infrastructure
- Euronext is main SRO, supervised by AFM but recognition power lies with Minister of Finance; recommended to transfer recognition power to regulator and publish recognition criteria.
- Market transparency issues:
  - About 15 percent of trades by value (1 percent by volume) not reported to market due to block trade rules; review recommended.
- Payments and securities settlement systems:
  - Clearnet and Euroclear Netherlands (ENL) assessed reliable and effective.
  - Settlement: DVP for exchange-cleared transactions; about 70 percent of transactions settled DVP overall.
  - Operational resilience: alternative production/business sites and regular contingency testing; a June 2003 ENL delay was addressed.
  - Recommended actions: promote DVP use, broaden ENL admission rules to include investment firms and supervised non-EEA credit institutions, give direct legal oversight to operators under new Financial Supervision Act.

### FATF findings and key AML/CFT recommended actions (selected)
- Ensure MOT can share specific information with supervisors.
- Make confiscation of criminal proceeds mandatory — recommendation rejected by authorities.
- Strengthen customer identification and record-keeping rules; renew identity when doubts arise.
- Introduce explicit requirements for ongoing training, internal audit, and management-level compliance officers.
- Improve wire transfer originator information consistent with SR VII within FATF timelines.
- Enhance transparency and monitoring of non-profit organizations.

### Stress test coverage and scenario design (appendix extracts)
- Coverage at end-2002: institutions representing about 84 percent of total bank assets, 54 percent of insurance assets, 50 percent of pension assets.
- Banks — single-factor tests (10-day horizon): +/-100 bps parallel shifts, 50 bps steepening/flattening, +/-10 percent exchange rate moves, +/-50 bps credit spread changes, 25 percent volatility increases.
- Insurance/pension — 1-year horizon: larger shocks (e.g., +/-200 bps interest for insurers), equity shocks up to -50 percent for developing country equities, severe exchange rate shocks (-45 / -30 percent).
- Multi-variable bank scenarios:
  - Scenario 1 Domestic crisis: Dutch stock prices slump 45 percent; credit spreads +200 bps; property prices fall 5 percent per quarter for two years to 40 percent lower.
  - Scenario 2 Dollar crisis: U.S. dollar depreciates 30 percent; U.S. equity prices fall 45 percent; euro appreciates 30 percent vs other currencies; global slowdown and tighter euro-area conditions assumed.

### Selected quantitative indicators (1998–2003, as presented)
- Banks (number): 67 61 60 58 59 57
- Bank assets (in billions of Euro): 1,183 1,343 1,573 1,720 1,734 1,850
- LCFIs assets (in billions of Euro): 1,015 1,167 1,383 1,508 1,509 1,655
- Insurance assets (in billions of Euro): 215 244 250 297 284 293
- Pension funds assets (in billions of Euro): 366 436 445 466 435 489
- Residential real estate loans to total loans (percent): 49.4 45.4 43.6 44.2 45.3 48.3
- Total notional derivatives (in billions of U.S. dollar): 3,572 4,651 4,692 5,274 6,614 8,701
- LCFIs return on assets (pre-tax, percent): 0.60 0.80 0.79 0.55 0.47 0.63
- LCFIs return on equity (pre-tax, percent): 15.16 20.37 19.58 14.34 12.76 16.93
- Regulatory capital to risk-weighted assets — LCFIs (percent): 10.80 10.57 10.61 10.75 11.11 11.21
- Household debt to GDP (percent): 79.5 87.2 91.7 95.1 102.1 108.4
- Average cover ratio (pension funds, percent): 133 139 132 118 101

*Source: Executive Summary, _cr04312 - Executive Summary (Netherlands FSAP), IMF.*

### Executive Summary ......................................................................................................

### _cr04312 - Executive Summary

### Executive summary: overall assessment
- The Netherlands financial system is dominated by a few internationally active, large complex financial institutions (LCFIs), creating both stability benefits (substantial risk diversification) and potential risks (greater sensitivity to global economic and financial trends and higher scope for cross-sectoral spillovers).
- Main domestic risks identified:
  - Large exposures to housing mortgages, given the conjunction of high household debt levels and rapid house price rises until recently.
  - Continuing exposure of the pensions sector to market risks.
- Risk mitigation and near-term outlook:
  - The generally strong financial system and effective financial policies mitigate risks; combined with a more favorable international environment, near-term vulnerabilities appear low overall.
  - Authorities have restructured financial supervision and pending legislation will formalize recent organizational changes.
- Medium-term challenge highlighted:
  - The government should review its involvement in support of housing finance, especially with a view to phasing out the (reduced but still-extensive) tax deductibility of mortgage interest.

### Key findings from the FSAP analysis
- Mortgage and household sector:
  - Banks’ sizeable housing-related exposures are mitigated by banks’ relatively low average loan-to-value (LTV) ratios (noting that high ratios have been quite common at the margin for more recent borrowers).
  - Most mortgages are fixed-rate.
  - The government guarantee covers around a quarter of mortgages.
  - Historically low mortgage default rates, even in the last housing market crash.
  - Recent deceleration of housing price rises to moderate levels.
- Corporate sector:
  - Domestic corporate exposures appear manageable despite rising debt levels and an increase in bankruptcies, in part because of the relatively significant fixed rate element of these loans.
- Cross-border and international exposures:
  - Cross-border exposures of Dutch banks have been an important source of growth and profitability.
  - Exposure to adverse developments in key countries is significant and has been increasing.
  - FSAP stress tests indicated that a scenario of global slowdown associated with sharp U.S. dollar declines would have the greatest impact on banks’ credit portfolios.
- Banking system resilience:
  - Stress testing indicated the banking system could absorb substantial shocks without significant problems, given:
    - Strong capital and asset quality.
    - Generally good profitability.
    - Diversification and good risk management processes.
  - A continuing concern: profitability of domestic operations and inflexibility of cost structures as consolidation continues internationally.
- Insurance and pension sectors:
  - Insurance and especially pensions sectors have been under strain in the last couple of years and are in a rebuilding stage.
  - These sectors remain exposed to equity price risk.
  - Authorities took firm action with pension funds to restore solvency buffers over time as part of a significantly upgraded supervisory regime.
  - Linkages between pensions, insurance, and banking sectors appear manageable.
- Supervision and policy framework:
  - The Netherlands enjoys a high standard of financial supervision, effectively dealing with challenges associated with LCFIs, including close cooperation and coordination with European and other foreign supervisors.
  - The new supervision law will close a few technical gaps in specific areas.
  - The new cross-sectoral organizational structure for supervision aims to sharpen supervisory objectives, accountability, and incentives.
  - Continued domestic and international work is needed on crisis management and further developing macroprudential surveillance.

### Macroeconomic environment and housing risks
- Near-term macroeconomic outlook:
  - The local economy is expected to recover gradually in 2004 and into 2005 following poor performance over the past three years.
  - For 2004, growth is forecasted to reach about 1 percent, mainly owing to the upsurge in international trade, while domestic demand is expected to remain weak and unemployment is likely to continue its upward trend.
- Downside macroeconomic risks noted:
  - Further appreciation of the euro.
  - A sharp correction of property prices, especially if accompanied by faster than expected interest rate increases globally.
  - The euro has appreciated more than 30 percent vis-à-vis the U.S. dollar since its trough in 2001, but remains below imputed levels of the mid 1990s.
- Housing market specifics:
  - Between 1997 and 2002, average real house prices rose by more than 50 percent, reaching historically high levels and reducing housing affordability.
  - Since 2002, real price increases have slowed substantially and the average time to sell a house increased.
  - A sharper decline in house prices could have a substantial impact on the domestic economy, comparable to the early 1980s correction.

### Institutional structure and systemic size (selected statistics from figures)
- Asset composition and system scale:
  - Total financial institutions’ assets are equivalent to 450 percent of GDP.
  - Bank assets are equivalent to 320 percent of GDP.
  - Pension funds account for 19 percent of financial system assets; life insurance accounts for 10 percent; general insurance 1 percent; banks 70 percent.
- Concentration of banking sector:
  - ABN Amro 29 percent, ING 28 percent, Rabobank 21 percent, foreign subsidiaries 12 percent, other LCFIs 8 percent, small banks 2 percent (shares of bank assets).
- Pension fund scale example:
  - The ABP civil servant pension fund had assets €150 billion in 2003.
- Exposure breakdown (2003, monetary survey basis):
  - Total claims on EU residents: 83 percent; on Non-EU residents: 17 percent.
  - Claims by instrument: Loans 84 percent; Shares & other equity 3 percent; Securities other than shares 13 percent.
  - Claims by sector: Government 11 percent; Private sector 63 percent; Banks 26 percent.
  - Private nonbank lending composition: Mortgages 45 percent; Other consumer lending 6 percent; Non-financial private companies 24 percent; Nonbank financial intermediaries 17 percent; Non-financial public companies 8 percent.
  - Insurance companies’ assets: Shares 29 percent; Securities other than shares 30 percent; Mortgages 2 percent; Non-mortgage loans 3 percent; Others 17 percent.
  - Pension funds’ assets: Shares 46 percent; Securities other than shares 36 percent; Mortgages 12 percent; Others 13 percent.

### Stress testing and scenario findings
- The FSAP stress tests point to:
  - The most severe impact on banks’ credit portfolios coming from a global slowdown combined with sharp U.S. dollar declines.
  - Despite such scenarios, overall banking sector capital and asset quality, profitability, diversification, and risk management leave the system able to absorb substantial shocks according to the tests.

### Main priority recommendations (Box 1)
- Financial Sector Supervision:
  - In the new supervisory legislation, clearly tie the Minister’s final approval for ownership changes in the largest banks and insurers to the objective of maintaining financial system stability; ensure the process is fully transparent.
  - Clarify the budget approval process for supervisory activities in the new law, setting down clearly the limited nature of the Ministry’s role and the grounds on which approval can be withheld; consider more explicit multi-year budgeting for the supervisors.
  - Ensure that AFM is able to cooperate fully with foreign securities supervisors, even when there is no “domestic interest”.
  - Ensure the new supervisory regime for pension funds allows sufficient flexibility in the specified timeframe for making up shortfalls in the minimum solvency ratio, but without prolonging adjustment; e.g., legislation should clarify that 15 years is the maximum adjustment period.
- Securities Settlement:
  - Work with relevant counterparts to increase clarity and fairness of Euroclear access rules and to promote use of delivery versus payment arrangements (DVP) between Euroclear and foreign central securities depositories (CSDs).
- Deposit Insurance / Crisis Management:
  - Give priority to completing the review of the deposit guarantee system, based on both Europe-wide and specific Dutch circumstances; consider the possibility of a scheme that is pre-funded to some degree at least, with risk-based premia.
  - Continue working closely with other supervisors internationally on crisis management preparedness (especially for LCFIs) and extend current procedures documentation, as needed, to ensure effectiveness and clarity of key steps.
  - Ensure that the use of a “silent receiver” for a listed institution does not cause an inconsistency with governance-related, listing or contractual requirements, and adjust contingency plans if required.
- Macroprudential surveillance:
  - Continue to develop macroprudential surveillance processes and outputs; collect and disseminate additional or more timely indicators where needed (e.g., insurance and pensions data), within the overall objective of minimizing unnecessary administrative costs for supervised institutions.
- Housing Finance:
  - Review the stability implications of fiscal or quasi-fiscal support for housing finance, especially with a view to phasing out the tax deductibility of mortgage interest.
  - Consider eliminating or at least charging for the mortgage guarantee scheme.

*Source: Executive Summary, _cr04312 - Executive Summary (Netherlands FSAP), IMF.*

### 5.      Substantial further increases in real interest rates would also pose a risk to the

### 5.      Substantial further increases in real interest rates would also pose a risk to the

### Real interest rates and macro-financial risk
- Real interest rates have been on the rise since early 2002, but remain low by historical standards (Figure 4).
- Risk scenario: faster than currently expected rises in longer rates globally combined with a continuing domestic unemployment uptrend could be problematic given high household and corporate debt levels.
- Table excerpt (as presented):
  - Standard Deviation
  - Largest Annual Increase
  - Largest Annual Decrease
  - House Prices 93818
  - Equity prices (World) 153734
  - Equity prices (Netherlands) 185042
  - Euro/Dollar 133133
  - Bond yield (percentage points)1.12.23.2
- Reference to Figure 4: Netherlands: Real Interest Rates (Source: IFS).

### Household sector: indebtedness and vulnerabilities
- Household debt to GDP ratio for the Netherlands has grown to over 100 percent of GDP in 2002; EU average about 50 percent.
- Rapid mortgage growth driven by factors including extensive tax deductibility of interest and a government guarantee of a significant number of mortgages (Box 2).
- Policy changes: over the last couple of years, the authorities have moved to narrow the scope of interest deductibility, which probably contributed somewhat to the recent slowdown in mortgage lending and house prices.
- Mitigating factors:
  - Mortgage rates are usually fixed for relatively long periods in the Netherlands, implying short-term exposure to rate rises is concentrated in certain borrower groups.
  - Households have weathered the economic slowdown relatively well overall; the debt service ratio has fallen somewhat recently.
- Remaining concerns:
  - Unemployment and personal bankruptcies trends have been rising over the last four years, and some further increase is likely before the situation improves.
  - Household assets and net worth are reportedly quite high by international standards, though this partly reflects the effect of housing prices.

### Box 2 — Mortgages in the Netherlands (key facts and risks)
- Over the past decade the amount of mortgage debt in the Netherlands has roughly doubled as a share of GDP.
- Financing practices:
  - Common to finance all expenses related to the home purchase, including transaction costs, through the mortgage loan.
  - LTV-ratios for new loans have risen sharply, reaching 108 percent on average in 2003 (excluding refinancing and second mortgages).
  - Dutch mortgage loans typically have a maturity of 30 years and interest rates are normally fixed for considerable periods of time (mostly 5 or 10 years).
  - Around one quarter of mortgages is covered by a government sponsored ‘national mortgage guarantee plan’ that basically eliminates the default risk for the lender and allows the borrower to secure a lower borrowing cost.
- Product composition and implications:
  - Tax deductibility of mortgage interest payments has contributed to recent increases in property prices and expansion and increasing complexity of the mortgage market; it discourages principal repayments prior to maturity.
  - Only about 8 percent of total mortgage debt outstanding is financed through traditional linear or annuity loans—considerably lower for new loans.
  - Majority of mortgages entail schemes that either require only the payment of interest—or are linked to savings or investment accounts.
  - Savings-linked mortgages: full clearance of the loan at maturity is secured by design.
  - Investment-linked mortgages: accumulated sum depends on actual investment returns; risk of a residual debt at maturity if returns fall short.
  - Investment-linked loans increase borrowing capacity by assuming investment returns higher than mortgage interest; some borrowers use capital gains from previous homes or other leveraged schemes to boost apparent capacity.
  - Mitigation: shortfalls with respect to principal for investment-linked schemes typically only materialize at maturity or on premature termination; generally no contractual interim top-ups if returns lag expectations.
- Mortgage schemes (2003) — table as presented:
  - Netherlands: Mortgage schemes (2003)
  - Percent of total
  - Total debt outstanding
  - New mort gages
  - Linear or level repayment84
  - Interest only4235
  - Savings-linked3013
  - Investment-linked                          1948
  - Source: DNB

### Corporate sector: indebtedness, funding, and governance
- High corporate indebtedness poses a risk if interest rates rise unexpectedly and rapidly; mitigation includes a relatively high proportion of business loans at fixed rates for longer periods.
- Corporate indebtedness increased initially despite pressures to improve profitability and reduce leverage; lending to corporates slowed sharply in 2002 amid recession and rising bankruptcies; commercial real estate has been depressed.
- 2003 developments:
  - Low interest rates and improving recovery prospects encouraged firms to issue new debt in capital markets and bank lending began picking up from the second half of 2003.
  - Tendency toward longer-term loans continued.
  - Market indicators—corporate bond spreads, corporate bond defaults, ratings trends—point to recovery and reduced risk for larger firms; SMEs outlook is less positive.
- Corporate governance reforms:
  - Important reforms following high profile scandals; a new corporate governance code based on the “Tabaksblat Committee” recommendations came into legal force on a “comply or explain” basis at the beginning of 2004, and major Dutch companies have already started to comply.

### International exposures
- Dutch institutions are significantly exposed to external developments through related entities, direct cross-border exposures, and holdings of foreign securities.
  - Total Dutch holdings of foreign securities equivalent to 120 percent of GDP in 2002.
  - Significant direct and indirect stock market exposures are an important transmission channel for external developments.
- Banks’ cross-border exposure patterns:
  - Cross-border claims are mostly on banks; about two-third of external claims are on Western Europe.
  - Exposures to emerging markets have declined substantially; within Europe, preferred borrowers include public sector and supervised European banks.
  - Exposures to the United Kingdom, Germany, and the United States each comprised more than 10 percent of total external claims over the period.
  - For LCFIs, foreign subsidiaries and associates follow a similar pattern emphasizing industrial countries rather than emerging markets.
- With global recovery strengthening, risks associated with international exposures have declined, but significant challenges remain: geopolitical risks, higher oil prices, managing transition to higher interest rates, and large U.S. current account deficits and surpluses elsewhere.

### Banks — strengths and vulnerabilities
- Performance and profitability:
  - Banks in the Netherlands have performed reasonably well over the last five years with return on equity in the range of 10–20 percent for the three largest LCFIs.
  - In 2003, operating profits rose by more than 40 percent despite the weak domestic economy and U.S. dollar depreciation—reflecting rising interest income, falling corporate costs, and declining provisions.
  - Smaller Dutch banks: return on equity (assets) was 12.6 (0.5) percent in 2003.
  - Market sentiment improved with increasing share prices in 2003 and early 2004.
- Efficiency and comparative performance:
  - Dutch LCFIs’ operational efficiency measured by ROA and cost-to-income ratios is below average compared with international peers.
  - Factors behind poorer relative performance may include: (i) presence of a large cooperative bank; (ii) relatively less flexible cost structures (labor); (iii) historically less pressure to maximize shareholder value.
  - Dutch LCFIs have been undertaking cost reduction and restructuring efforts; more may be needed.
- Capitalization and asset quality:
  - Regulatory capital ratios for the LCFIs increased from 10.8 percent in 1998 to about 11.2 percent in 2003; smaller banks and foreign subsidiaries have higher ratios and also increased last year.
  - Non-performing loans (NPLs) have hovered around 2–3 percent of total loans for the LCFIs.
  - Loan loss provisions have more closely followed the economic cycle; smaller banks and foreign subsidiaries increased provisioning more sharply reflecting riskier portfolios.
- Liquidity and risks:
  - Banks appear to have ample liquidity and are well capitalized (Figure 7).
  - Interest rate risk: many bank loans to firms have rates fixed for five or more years; banks hedge interest risk primarily through interest rate swaps and by securitizing and selling mortgages. Ultimately risk is borne by an array of domestic and foreign investors.
- Comparative indicators (selected):
  - Table excerpt (as presented) shows banks’ Total Capital Ratio, Net Interest Margin, Return on Average Equity (ROAE), Return on Average Assets (ROAA), Non-interest expense/Average Assets, Cost to Average Assets (Cost Margin), Impaired Loans/Gross Loans for ABN Amro Holding, ING Bank, Rabobank Netherlands, Average, and Peer Group; percentile rankings vis-à-vis peer group are provided.

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

### 17.      The quality of banks’ portfolios reflects several factors. First is banks own

### 17.      The quality of banks’ portfolios reflects several factors. First is banks own

### Banks’ portfolio quality and diversification
- Banks’ generally good risk management capacity and processes ensure that risks are appropriately managed and controlled.
- Banks’ substantial foreign operations have been an important source of portfolio diversification that has helped minimize risks associated with concentration in one particular sector or geographical region.
- Exposures to mortgages have so far been relatively safe, overall.

### Mortgages and borrower risk
- Mortgages form the largest single share of banks’ portfolio, but risks are mitigated by:
  - A tradition of good payment discipline amongst Dutch households; default rates for mortgages remain low—even during the last crisis.
  - Mortgages are secured borrowing, and the average loan-to-value (LTV) ratio for the stock of mortgages remains relatively low around 50 percent overall—even if LTV ratios on newer mortgages are on average high.
- Mortgage-related risks are more relevant for specific recent borrowers, including:
  - Borrowers that rely on two incomes to finance their mortgage.
  - Borrowers that have taken investment-linked or leveraged mortgages.
  - Risks are also more concentrated in some smaller banks or foreign institutions that have been particularly active in trying to build market share.
- Recent borrowers may be riskier if unemployment increases or the performance linked-investment returns are below expectations, but not necessarily in respect to interest rate rises.
- Recent tax changes should help limit the incentives for borrowing at higher LTVs; it would be desirable to do more in this direction over time.
- Immediate supervisory attention is needed—and is being applied—to institutions most active in extending high LTV mortgages to ensure appropriate loan classification and provisioning.

### Liquidity and market risk of large Dutch financial institutions (LCFIs)
- Liquid assets are able to cover 50 percent of short-term liabilities, a situation maintained consistently since 1998.
- Market risk as measured by the three largest banks’ value at risk seems manageable: about 150–200 million Euro for a 10-day horizon or about 0.4 percent of capital.
- The level of market risk taken by banks is consistent with the market view that Dutch banks take a moderately cautious view with regards to trading risk.

### Stress testing: banks, insurance, and pension funds (Box 3 and Appendix I)
- Banks
  - Banks’ sensitivity to market risk is small reflecting the importance of banking vis-à-vis trading activities. The most adverse shock is an upward shift in the interest rate yield curve, but even such a shock does not have an appreciable impact on banks’ CAR.
  - Banks are able to withstand the two scenarios designed to test the system’s sensitivity to domestic and external macroeconomic shocks. In the most extreme scenario, banks’ CAR declines from 11.1 to 10.5 percent, on average, while the CAR ratios for individual banks remain well above 8 percent.
  - Additional assessments of liquidity, concentration, and contagion risk using supervisory data collected by the DNB indicate liquidity and concentration risks appear to be limited.
  - Interbank contagion assessment confirms the importance of large banks but underscores the global nature of bank exposures: the failure of a large Dutch bank puts pressure on other Dutch banks but does not lead to failure of another large Dutch bank because these banks have most of their exposures with other foreign banks. Conversely, simultaneous losses from abroad would have a negative impact on Dutch banks.
  - Impact of stress shocks on CAR (changes reported):
    - Interest rate: +100 bps → 0.0; -100 bps → 0.2; 50bps steepening → 0.1; 50 bps flattening → 0.0; + 25% in volatility → 0.1
    - Exchange rate: +10% → 0.1; - 10% → 0.0; + 25% in volatility → 0.0
    - Equity: +10% → 0.1; - 10% → 0.0; + 25% in volatility → 0.1
    - Credit spreads: +50 bps → 0.0; - 50 bps → 0.1
    - Domestic crisis: Over 1 year → -0.1; Over 3 years → -0.4
    - Dollar crisis: Over 1 year → -0.3; Over 3 years → -0.6
- Insurance companies and Pension Funds
  - Insurance companies are able to absorb most stress shocks and scenarios except for the most extreme scenario when the solvency margin, on average, declines to 99.2 percent from 106.9 percent. Insurance companies show greater sensitivity to declines in equity and property prices.
  - Pension funds’ solvency ratios fall below 100 percent in nearly all tests. In the most extreme scenario the solvency margin, on average, declines to 76.4 percent from 103.1 percent.
  - Pension funds are more sensitive to market risks because they hold a greater proportion of equity and are more internationally exposed compared to insurance companies; results are more volatile because of longer duration fixed income assets that are marked to market.
  - Results for insurance companies and pension funds are based on conditions at end-2002 and exclude the effect of remedial measures required by the PVK; equity markets have improved since then.
  - Impact of shocks on solvency margins (changes reported):
    - Insurance Companies’ / Pension Funds’ Change in Solvency Margin:
      - Interest rate: -0.3 / -3.6
      - Credit Risk: 0.0 / -0.7
      - Equity: -4.2 / -15.2
      - Property: -1.6 / -2.6
      - Commodity: 0.0 / -1.0
      - Currency: -0.5 / -8.4
      - Technical insurance: -0.1 / -1.3
      - Costs: -1.0 / -0.1
      - Correlation = 0: -4.8 / -18.7
      - Correlation = 0.5: -6.4 / -26.8
      - Correlation = 1.0: -7.7 / -26.7

### Insurance companies and pension funds: performance and supervisory response
- Insurance companies’ performance has been mixed, mirroring equity market performance and exposure to low interest rates and rising reinsurance costs after September 11, 2001; the three largest insurance groups generate 80 percent of their income abroad.
- Asset values and solvency margins declined but improved somewhat in 2003 with equity market recovery; overall performance likely remained rather weak.
- Pension funds recorded substantial losses in 2000–02 causing coverage ratios to plunge, mainly due to the fall of share prices in 2001–02.
  - PVK required all pension funds to attain a coverage ratio of at least 105 percent by the end of 2003 and to form substantial additional buffers depending on portfolio risk over a longer period.
  - In 2003, with recovery in stock markets and initial remedial actions (increasing contribution rates or lowering benefit payments, including reducing the effect of future indexation), average coverage ratios improved somewhat, and all the larger funds attained the 105 percent target.
- The stress tests underscore continued sensitivity of insurance companies and especially pension funds to equity, interest rate, and currency risks, although potential spillover to the banking system seems moderate.
  - Insurance companies could absorb most shocks except the most extreme where solvency margin declines to just under 100 percent.
  - Pension funds would see solvency ratio fall below required levels in nearly all tests.
  - Serious problems in pensions (and to a lesser extent insurance) could feed back to banking through markets or the macro-economy, though Europe-wide/global nature of markets mitigates Dutch-specific risks.
  - Strengthened supervisory arrangements consider avoiding unduly sharp reactions by funds that may have macro implications.

### Contagion risks and interlinkages
- Large Dutch banks have most of their direct interbank exposures with foreign banks; they would be negatively impacted if losses on these exposures occur simultaneously, and are less exposed to each other in the interbank market.
- DNB’s domestic interbank contagion assessment: failure of a major bank would put other banks under important strain but does not cause other large banks to fail.
- Dutch financial institutions are exposed to one another via cross share-holdings, common ownership (financial conglomerates), and risk transfer arrangements—these are potential contagion channels but reflect diverse and international character.
- Cross-shareholdings tend to be interlinked but at fairly moderate levels in general (Table 3 examples of end-2002 cross-holdings preserved in source).
- Major banks also have large insurance operations; banking and insurance activities within the same group may be exposed to similar credit risks.
- Risk transfer arrangements such as credit derivatives are only beginning to be used and currently provide limited volume relative to major banks’ assets.

### Availability and use of markets to mitigate risk
- Dutch banks use Euro-area wide interbank, repo and forex markets for financing liquidity, improving depth and liquidity and eliminating currency risks within the Euro area.
- Banks use currency swaps to finance liquidity in both foreign currencies and Euro; the currency swap market tends to be more resilient than the interbank market in stress, as one leg of the currency works as collateral for the other.
- DNB provides liquidity, at its own initiative, on a fully collateralized basis, subject to close coordination with ECB. Given substantial amounts of eligible collateral held by Netherlands financial institutions, DNB’s standing facilities are expected to meet liquidity needs in most circumstances.
- The domestic securities market role is relatively limited; development of securitization and other credit-risk-transfer markets will likely facilitate redistribution of credit risks from banks to the rest of the financial system and provide insurance and pension sectors with better investment opportunities.
- Dutch government and corporate bond markets are integrated into Euro-wide markets; participants are generally satisfied with the overall size and liquidity of the government market, while the corporate bond market is developing rapidly though still relatively small.
- Capitalization of the Dutch stock market is one of the highest in the Euro currency area, but trade flows through the Dutch stock exchange are relatively low as major banks use internal trading systems and trade net positions on the exchange; some brokers trade Dutch shares in the London Stock Exchange due to commissions and occasional trading system glitches.
- Dutch pension funds and insurance companies act as important risk buffers and sources of liquidity in the local stock market; major Dutch players’ access to European and global capital markets reduces reliance on domestic institutions and mitigates Dutch capital market risks.
- Dutch financial institutions have increasingly used interest rate swaps for asset and liability management (ALM), including life insurers that wish to increase duration of fixed income portfolios.
- Major Dutch banks play important intermediary roles in credit and other derivatives markets but are net buyers of credit protection; originating credit derivatives is relatively limited and overall volume of credit derivative transactions is minimal compared to major banks’ assets. Dutch insurance companies do not appear to be major players in this market.

### Strengths and vulnerabilities: financial stability policy framework
- Dominance by a small number of internationally active LCFIs brings benefits (diversification) and costs (complex supervision, crisis management, moral hazard concerns).
- Authorities’ responses:
  - Ensure particularly close supervision for major LCFIs and close cooperation and coordination with foreign supervisors.
  - Comprehensive overhaul of institutional structure and legal foundation for financial sector supervision scheduled for completion by mid-2005: move from sectoral orientation to functionally-oriented, cross-sectorally integrated supervisory system.
  - All prudential supervision combined with broader system stability and macroprudential surveillance responsibilities of the DNB, in what is now the DNB/PVK; all conduct-of-business supervision allocated to the Authority for Financial Markets (AFM).
- The new framework is well designed, expected to be more efficient and adaptable for cross-sectoral and innovative financial activities, and should improve incentives for effective supervision and surveillance.
- Authorities have considered implementation issues including organizational boundary lines, collaboration between supervisory agencies, and promoting macroprudential surveillance.
- There may be benefit in further clarifying to markets the differences they can expect in enforcement approaches between prudential and conduct-of-business supervisors.

*Source: _cr04312 - 17.      The quality of banks’ portfolios reflects several factors. First is banks own*

### 37.      The intention to further develop macroprudential surveillance is welcome.

### _cr04312 - 37.      The intention to further develop macroprudential surveillance is welcome.

### Macroprudential surveillance and implementation
- A small, focused department has been established within DNB/PVK to integrate research and policy analysis and to take forward macroprudential surveillance in a coordinated fashion.
- Data improvements may be needed in some areas (e.g., insurance and pensions sector aggregates), to be pursued while minimizing unnecessary administrative costs for supervised institutions.

### Legal and regulatory overhaul — main areas needing improvement
- The comprehensive legal and regulatory overhaul is expected to address gaps and to formally establish a new, more active supervisory regime for pension funds.
- Main areas requiring improvement (further detail in the Annex to the report):
  - Making more transparent the delegation of authority to supervisors in a few areas; where the Minister retains final approval power (especially changes of ownership in the largest banks and insurers where they propose to take positions in each other), ensure criteria governing Ministerial decisions are clearly tied to maintaining financial system stability and that the process is fully transparent.
  - Clarifying the budget approval process for supervisory activities:
    - In the new law, the budget proposed by the supervisors’ Supervisory Board will continue to require annual final approval by the government.
    - The new law should formally set out the limited Ministry role and define clearly the grounds on which annual budget approval might be withheld.
    - Consideration could be given to more explicit multi-period budgeting.
  - Clarifying supervisors’ objectives and accountabilities; the new law is expected to address this.
  - Banking supervision:
    - Extend fit and proper assessments to additional senior personnel.
    - Monitor/report capital adequacy on a solo basis for non-guaranteed entities within banking groups.
  - Insurance supervision:
    - Opportunities for improvements in transparency, actuarial and accounting practices, group supervision, market analysis, disclosure, frequency of reporting, and supervision of intermediaries.
  - Securities regulation:
    - Highest priority: strengthen powers to cooperate with foreign supervisors, even when there is no “domestic interest”.
    - Other areas: ensure adequate oversight of accounting standards; strengthen and clarify licensing responsibilities of each regulator; develop contingency plans for failure of a market intermediary.
  - Pensions regulation:
    - A new regulatory regime is being established (see Box 4).
    - Need an appropriate degree of flexibility for making up shortfalls in minimum solvency levels to avoid unduly sharp and potentially procyclical reactions, without unduly prolonging adjustment.
    - Draft legislation specifies an adjustment period of 15 years to make up shortfalls relative to the minimum solvency position; the legislation should be clear that this is a maximum adjustment period—on a case-by-case basis adjustment may often be faster than 15 years.
  - Securities settlement systems:
    - Recommendations: increase clarity and fairness of Euroclear access rules; work with counterparts to promote DVP settlement links between Euroclear and foreign central securities depositories.
    - The new law is expected to provide a stronger legal basis for supervision of such systems and for payments systems more generally.

### Safety nets and crisis management
- Liquidity support:
  - In a liquidity crisis, DNB can provide special credit facilities; for a large institution close coordination with other officials, in Europe and elsewhere, is likely to be required.
  - Emergency credit would be limited by the need for it to be fully collateralized, though eligible collateral is not pre-specified.
  - DNB might consider clarifying general principles it would follow in handling such events and publishing general information on provision of such assistance some time after the event.
- Crisis preparedness and continuity:
  - DNB’s crisis approach emphasizes flexibility, good communications, and ability to reach informed decisions quickly.
  - Plans are based on a flexible ‘checklist’ approach identifying priority information, questions, contact lists, roles, logistical and communications issues.
  - DNB has developed continuity-of-business arrangements for monetary operations and payments and settlements systems.
  - Value exists in participating in further simulation exercises and reviews with foreign supervisors.
- “Silent receiver” power:
  - DNB can appoint an undisclosed “silent receiver” to a troubled financial institution to supervise and direct management in restoring financial health.
  - The undisclosed nature may cause conflicts with listing, governance or contractual arrangements; authorities should review potential conflicts and consider how they would be handled as part of contingency planning.
- Deposit insurance review:
  - The system of ex post-funded deposit guarantees is under review.
  - Key considerations include whether to introduce pre-funding of bank deposit insurance and, if so, the merits of risk-adjusted premia.
  - Under the current system, DNB would provide financing in the event of a bank failure and then recover outlays over time from remaining banks; for a large bank failure recovery from remaining banks might be unrealistic.
  - Pre-funding would reduce, but not eliminate, moral hazard. If smaller banks are more at risk than large banks, premia should reflect such differences.
  - Investor insurance in the securities industry is already partly pre-funded.
  - A thorough analysis should be completed in the near future, in parallel with the overhaul of supervisory laws.

### Box 4 — Recent changes in pension regulation (key points)
- Timeline and legislative context:
  - December 2003: government agreed on new principles on regulation of financial supervision of pension funds (‘hoofdlijnen voor de regeling van het financiële toezicht op pensioenfondsen in de Pensioenwet’), subsequently modified after consultation with social partners.
  - March 2004: Dutch parliament agreed with the final draft.
  - These principles will be incorporated in the new Pension Act planned for 2006.
  - The agreement in March 2004 implied that PVK can immediately (as of March 2004) take the principles into account.
- Main changes and solvency guidance:
  - Requirement that pension funds hold additional reserves if they index pension entitlements to wage increases, unless they state explicitly that workers are not legally entitled to future indexation.
  - Principles state solvency ratios should be high enough to honor all pension liabilities at the end of the year with a confidence level of 97.5 percent.
    - For many funds this would translate to unrealistically high solvency ratios (near 200 percent) and drastic increases in premium levels (an additional 16 percent of gross wages) to cover nominal pension entitlement plus promised or implied indexation.
  - If indexation is conditional on future decisions of the pension fund management, solvency requirements are less strict:
    - Solvency ratio should be high enough to cover only unconditional entitlements (nominal pension entitlements plus accrued indexation) with a probability of 97.5 percent.
    - For an average pension fund, this implies a solvency rate of around 130 percent.
  - Principles specify criteria determining when indexation promises are regarded as conditional, including transparency about indexation policy and adoption of a disclaimer stating indexation is conditional, there is no legal right to indexation, and long-term indexation is uncertain.

### Tax, quasi-fiscal, and AML/CFT issues
- Tax and housing finance:
  - Tax deductibility of mortgage interest remains extensive; phasing it out over time would support financial stability.
  - Wide-ranging deductibility has encouraged over-borrowing and could increase amplitude of future housing price cycles.
  - Pace and timing of changes need careful consideration to avoid destabilizing effects; planning for gradual phase-out should begin sooner rather than later while the housing market is more subdued.
  - The National Mortgage Guarantee Plan should be reviewed within a systematic examination of the government’s role in supporting housing finance.
    - The subsidized guarantee distorts financial sector efficiency and may exacerbate housing upswings; phasing out or charging a market-related fee for the guarantee should be actively considered.
- AML/CFT framework:
  - The Netherlands has a generally sound AML/CFT framework and has ratified almost all relevant international conventions; it expects to ratify the Palermo Convention shortly.
  - Legislative framework will be further enhanced by the new Acts of Terrorism Act.
  - Areas identified for further strengthening:
    - Ensure effective sharing of information by MOT with supervisory authorities.
    - Reduce reliance on general provisions in regulations relating to organization and control; impose specific duties on financial institutions for ongoing training, internal audit, and procedures for reporting transactions.
    - Consider further consolidation of MOT and other law enforcement authorities in respect of resources and policy control.
    - Widen scope for application of administrative sanctions.
    - Provide detailed AML/CFT guidance to regulated institutions.
    - Review arrangements where supervisory responsibility has been delegated under the Act on the Supervision of the Credit System.
    - Merger and updating of the two most important laws on preventive measures is under active consideration and would be beneficial.

*IMF staff report: mission to the Netherlands (October 27–November 7, 2003; AML/CFT assessment December 1–12, 2003) — annex and sections summarized above.*

### 54.      An effective banking system is one which has some form of both onsite and offsite

### _cr04312 - 54.      An effective banking system is one which has some form of both onsite and offsite

### Onsite and offsite banking supervision (Netherlands)
- Onsite examinations occur in line with the risked-based assessment of the bank.
- Contact with senior management:
  - Occurs on a regular basis both during onsite examinations and when appropriate on an ad hoc basis to cover specific policy issues.
- Annual meetings with the banks’ external auditors are held.
- The DNB has a comprehensive risk assessment system.
- Mission observation: the risk process would benefit from the overall assessment being communicated back to the bank in question.
- Offsite supervision:
  - Information received on a consolidated basis was comprehensive and thorough.
  - A robust independent validation process appeared to be in place.

### Formal powers of supervisors
- Legal powers given to the DNB are wide ranging and would appear to cover almost all (if not all) eventualities.
- Formalized measures are rarely used in practice, but established procedures exist on how to implement such measures if called for.
- Typical measures tend to be persuasive and confidential, including the use of the ‘silent receiver’ in cases of substantial concern.
- The system appears to work effectively and reflects the overall culture of the DNB.
- Potential issues going forward:
  - Introduction of new legislation which will involve a greater degree of transparency may require the authorities to reconsider their approach.
  - It may be worthwhile for the DNB to ensure that the powers they use when appointing a ‘silent receiver’ are consistent with the relevant stock exchange disclosure requirements when the bank concerned is a publicly quoted company.
  - It can be questioned whether ‘penalties’ can be applied to management rather than just members of the Supervisory and Executive boards.

### Cross-border banking
- DNB’s approach to global consolidated supervision:
  - Appears to be comprehensive and effective.
  - Teams dealing with the larger global groups seem to have the appropriate mix of resources to assess the risks.
  - Consolidated prudential returns are received regularly.
  - Risk model is sufficiently flexible to accommodate both group and single entity assessments.
  - DNB supervisory staff visit overseas parts of groups on a regular basis and place a degree of reliance on overseas regulators.
  - Approach to sharing information with overseas supervisors seemed open and cooperative and where possible is supported by an MOU; where not possible informal arrangements seem satisfactory.
- Application of supervision:
  - Banking supervision in the Netherlands is applied to the same standard for ‘foreign’ banks as it is to the domestic sector.
  - DNB preference: subsidiaries rather than branches of non-EEA banks; agreement of the home supervisor is obtained before authorization is granted.
- Assessment of overseas supervisory standards:
  - DNB tries to deter banks from countries who do not have ‘equivalent standards of supervision,’ preferring subsidiaries.
  - There does not seem to be a formalized way of assessing equivalent standards of supervision.
  - Recommendation: DNB may wish to consider strengthening its methodology for assessing overseas regulators for reliance in respect of overseas banks in the Netherlands and Dutch banks operating on a global basis.

### Authorities’ responses (banking)
- The Netherlands authorities agree with the main findings of the assessment, which they consider to be fair and comprehensive.
- Authorities are satisfied with the overall judgment that banking supervision in the Netherlands complies to a very high degree with the Basel Core Principles.
- Many recommendations will be addressed in the bill on financial supervision due to come into effect in 2005.
- Other recommendations will be considered seriously; examples:
  - Intention to require banks to designate a senior-level money laundering reporting officer.
  - Potential benefits of some measures will need to be weighed against potential costs, especially administrative burdens on supervised institutions.

### Table 4 — Recommended Action in the Area of Banking Supervision (selected items)
- Objectives CP 1(1)
  - New law to set out clearly the responsibilities of the various supervisory authorities, to require that objectives are explicit and indicate how accountability will be measured.
- Independence CP 1(2)
  - New law to improve the transparency of the system and improve the independence and transparency of the supervisory authorities.
- Legal Framework CP 1(3)
  - New law to ensure that explicit legal powers exist to set prudential rules in respect of integrity.
- Licensing criteria CP 3; Remedial measures CP 22
  - A review of the adequacy of the fitness and propriety requirements to be undertaken to ensure they capture all personnel in key senior management positions. This should be extended to the powers needed to take remedial action.
- Investment criteria CP 5
  - New law to ensure that there is transparency about who is the authorizing (licensing) body. The law also needs to give the supervisory body exclusive powers to approve or reject the transfer of significant ownership.
- Off-site supervision CP 18
  - Prudential reporting to be extended to capture institutions at the solo as well as the consolidated level. All prudential ratios (such as connected lending and lending to closely related counterparties) to be monitored at the solo level for entities within a banking group that are not fully guaranteed.
- Internal control and audit CP 14; CP 15
  - The requirements for an audit committee to be both strengthened and wider to cover all but the smallest institutions.
  - The DNB to require banks to have a designated ‘money laundering reporting officer’ who has senior status within the organization.
- On-site and off-site supervision CP 16
  - DNB’s risk assessment process would benefit from a slightly more structured approach. It is recommended that an initial assessment of high level controls and group risks is made before more detailed aspects are considered, and that the overall assessment is communicated back to the bank.
- Supervision of foreign banks CP 25
  - DNB to consider formalizing its approach to peer assessment of overseas supervisors both in respect of those countries which have foreign banks established in the Netherlands and those countries where their domestic banks are operating.

### IAIS Insurance Core Principles — Main findings (summary)
- High level of observance of the ICP in the Netherlands.
- Recommendations for enhancement mostly relate to the need for more complete and explicit guidance to industry regarding supervisory expectations (including supervisory guidance and professional standards, e.g., for the actuarial profession).
- Greater transparency by the supervisor in several areas (e.g., stages of supervisory intervention) has been recommended.
- Implementation of the proposed financial assessment framework, along with its new risk-based supervisory methodology, should place the PVK solidly among the international leaders in insurance supervision.

### Conditions and supervisory system (insurance)
- Netherlands meets the conditions necessary for effective insurance supervision.
- Restructuring process underway presents an opportunity to clarify and formalize objectives and responsibilities of supervisory authorities.
- PVK is working on codifying and publishing its policies and procedures; recommendation to expand this initiative for greater transparency.
- PVK actively exchanges information with other EU/EAA supervisors; recommendation to extend practices to other regions.

### Supervised entities and ongoing supervision (insurance)
- Both reinsurers and some very small insurers are unlicensed; steps should be taken to license or at least require registration.
- More explicit guidance on corporate governance and internal control, and legislative changes to ensure flow of information from external auditor and actuary, would improve observance.
- PVK’s new MARS methodology is consistent with international best practices; adequate resources are important for successful implementation.
- Recommendation: increase information available to supervisors (e.g., active market analysis and quarterly financial returns) to facilitate dynamic off-site monitoring.

### Prudential requirements, markets, AML (insurance)
- Improve ability to assess financial condition of insurers by narrowing range of acceptable actuarial and accounting practices.
- PVK relying on international developments, e.g., IFRS, and involved in international standard setting.
- FTK project, when completed, should result in a forward-looking, risk-sensitive solvency regime.
- Supervisory weakness: supervision of insurance intermediaries and certain aspects of consumer protection; draft legislation and expansion of AFM responsibilities expected to increase observance.
- Recommendation: issue guidance to emphasize need for foreign branches and subsidiaries of Netherlands insurers to observe AML/CFT measures.

### Table 5 — Recommended Actions in the Area of Insurance Supervision (selected items)
- Supervisory system CP 2–5
  - Principal objectives of insurance supervision should be explicitly defined in legislation.
  - Responsibilities of the PVK and the AFM for various tasks should be clarified.
  - Continue to publish more information about policies and procedures; expand to include stages of intervention, interpretations, and risk assessment criteria.
  - PVK’s industry consultation process should be documented, published and observed.
  - PVK should exchange information with relevant supervisors outside of the EU/EEA during licensing and to enhance supervision of groups.
- Supervisory system CP 6–10
  - Require reinsurers (other than those supervised elsewhere in the EU/EEA) be licensed by the PVK.
  - Enact legislation to require all insurers operating in the Netherlands, regardless of size and nature, be registered with or licensed by the PVK; PVK should publish lists and explain supervision differences.
  - Establish specific criteria to assess fitness and propriety of auditors and actuaries.
  - Provide more explicit guidance on governance practices and internal controls; require documentation of significant policies, procedures and responsibilities.
  - Enact legislation to enable PVK to obtain information from actuary or external auditor on a confidential basis and provide strong legal protection against potential liability; legislation should provide for direct access to the board by the actuary.
- On-going supervision CP 11–17
  - Assign responsibility for gathering quantitative and qualitative market information, analyzing it, and communicating results within the PVK.
  - Consider requiring basic supervisory returns quarterly.
  - Publish on PVK website key financial information contained in supervisory returns that are open to public inspection.
  - Reassess staff resources required to implement MARS and seek additional resources as necessary.
- Prudential requirements CP 18–23
  - Issue more detailed guidance including strategic underwriting, pricing and reinsurance policies; main elements of an investment policy; expectations regarding investment risk management systems, controls and contingency plans; expectations regarding vetting of models and independent verification of price for derivatives.
  - If IFRS for insurance contracts is delayed, PVK should reduce the range of actuarial and accounting practices and ensure complex actuarial issues are adequately dealt with.
  - Finalize design of FTK and implement according to current timetable; if delayed consider establishing and communicating a solvency control level.
- Markets and consumers CP 24–27
  - Enact legislation to provide stronger basis for supervision of insurance intermediaries.
  - Enact legislation or guidance to require consumer disclosure about potential conflicts of interest, policies on fair treatment, and information gathering to assess insurance needs.
  - Issue guidance to promote improved disclosure of risk exposures, risk management practices, and governance issues.
- Anti-money laundering CP 28
  - Issue guidance to emphasize need for foreign branches and subsidiaries of Dutch insurers to observe AML/CFT measures.

### Authorities’ responses (insurance)
- Netherlands authorities agree with the main findings, consider the assessment fair and comprehensive.
- Authorities concur that insurance supervision in the Netherlands is  ́largely compliant ́ with the revised Insurance Core Principles of the IAIS, dated October 2003.
- Many suggestions for improvement are already being addressed, including points in the bill on financial supervision due to come into effect in 2005 and other legislation or EU-level actions.
- Authorities welcome recommendations on:
  - Close international cooperation and information sharing (ICP 5, 6, 17).
  - Supervision of small insurers and transparency of supervisory arrangements (ICP 6).
  - Increasing frequency of filing of insurers’ supervisory returns (ICP 12).
  - Resourcing of on-site supervision (ICP 13).
  - Increased public disclosure by insurers (ICP 26).
- Some recommendations will be implemented; in other areas benefits will be weighed against other considerations or costs.

_Italic line: Source: _cr04312 - 54.      An effective banking system is one which has some form of both onsite and offsite_

### 78.      Euronext is the main SRO. It is supervised by the AFM but responsibility for

### _cr04312 - 78.      Euronext is the main SRO. It is supervised by the AFM but responsibility for

### Self-Regulation; Recognition
- Euronext is the main SRO. It is supervised by the AFM but responsibility for recognition lies with the Minister of Finance. This is a historical legacy which the authorities should change in the new law.
- Recommended actions (selected):
  - Develop and publish in greater detail the criteria the Minister would adopt for a recognition decision and therefore the standards against which Euronext is assessed.
  - Give the power to recognize SROs to the regulator with oversight.
  - The AFM and Euronext are recommended to reach a common and explicit understanding as to the role of AFM in approving or commenting on Euronext rule changes.
  - Finalize the Contribution model for Euronext as soon as possible consistent with Euronext’s position as a pan-European exchange.

### Principles for Enforcement (Principles 8–10)
- Risk-based approaches:
  - AFM uses a “contribution” self assessment questionnaire as the foundation of its risk-based approach. Technique is being developed; inviting regulated entities to comment on identified weaknesses could improve effectiveness.
- Enforcement styles:
  - DNB tends to operate informally with little use of formal sanctions.
  - AFM uses informal methods and has deployed sanctions more frequently.
  - Both approaches are considered valid in context for prudential (DNB) and conduct of business (AFM) regulation respectively.
  - Industry concerns about AFM sanctions should be allayed—possibly via a public awareness campaign highlighting international regulator practices and AFM safeguards.
- Legal powers and gaps:
  - Broad and effective powers exist, but expansion/clarification recommended, including:
    - Expansion of the list of entities from which information can be obtained.
    - An explicit requirement that information supplied be accurate.
  - Recommended actions (selected):
    - Give AFM and DNB the power to obtain information from anyone they reasonably believed had the information required, and ensure the accuracy of information provided by regulated entities to the AFM or DNB.
    - Consider ensuring regulators can require a person to make a statement, and consider expanding the range of sanctions to include public statements.
    - Promote public awareness of international standards requiring effective enforcement powers and emphasize AFM safeguards.
    - Consider an explicit provision to allow regulators to apply to the court to appoint a manager of a regulated institution in substitution for existing management.
    - Consider inviting each regulated entity explicitly to assess the significance of any compliance weaknesses they identify.

### Principles Relating to Co-operation (Principles 11–13)
- High commitment to co-operation both domestically and internationally.
- Current limitation: regulators are unable to investigate on behalf of a foreign regulator where there is no domestic interest.
- Legislation to remedy this is in prospect and should be implemented as soon as possible; without it, The Netherlands cannot sign the IOSCO multilateral Memorandum of Understanding.
- Recommended action:
  - Introduce legislation as soon as possible to allow AFM and DNB to exercise investigative powers on behalf of a foreign regulator even where there is no domestic interest.

### Principles Relating to Issuers (Principles 14–16)
- The Netherlands have comprehensive requirements relating to issuers specified in the Civil Code and the 1995 Act on the supervision of the Securities Trade.
- AFM will take on responsibility for accounting and auditing standards and will become the listing responsibility. These changes aim to enhance regime effectiveness.
- Recommended action:
  - Limit the extent to which exemptions from prospectus requirements apply when an offer is made to a large number of people.

### Principles Relating to Collective Investment Schemes
- Responsibility for CIS regulation has recently passed from DNB to AFM.
- AFM approach is more principle than rule-based; uses policy statements and relies on fitness and properness propositions for enforcement.
- Absence of major problems suggests effectiveness to date, but AFM may need more directly enforceable powers under new legislation.
- Identified gap:
  - The Netherlands do not require a CIS to entrust assets to an independent third party custodian when the CIS is itself a company.
- Recommended actions (selected):
  - Extend regulatory requirements to cover all those providing functions for CISs.
  - Ensure new legislation provides powers to make specific rules on conflicts of interest and record-keeping that are adequately enforceable.
  - Introduce specific requirements for maintenance of books and records in relation to transactions involving CIS assets and all transactions in CIS shares or units or interest.

### Principles Relating to Market Intermediaries (Principles 21–24)
- Current licensing arrangements result in DNB being the licensing authority for many entities important to securities business.
- Covenant between DNB and AFM demands consultation on licensing decisions, but securities businesses are more likely to raise conduct of business issues.
- Preferred change: licensing decisions permitting securities business should be subject to the explicit consent of the AFM.
- Recommended actions (selected):
  - Make publicly available the names of the senior management of regulated entities.
  - Ensure licensing decisions for each area of activity are taken with the consent of the regulator with primary responsibility for that area.
  - Require regulated entities to notify the regulator of any matter which would materially affect a licensing decision; add specific matters to notify (litigation, significant investigations, disciplinary action by other regulators, changes in indemnity insurance, decisions by foreign regulators to refuse a license).
  - Require credit institutions to notify AFM of breaches in conduct of business regulations.
  - Make all persons able to control or materially influence a license applicant subject to checks by AFM and DNB.
  - Introduce a legal requirement that legal and regulatory obligations should be met and that the intermediary should act with honesty and integrity and observe high standards.
  - Establish a clear plan for AFM and DNB to deal with the eventuality of a firm’s failure that includes appropriate disclosure to the market.
  - Recommended: develop a clear plan for dealing with the failure of an intermediary that includes actions by all regulatory authorities.

### Principles Relating to Secondary Markets (Principles 25–29)
- Euronext Amsterdam: order-driven screen-based exchange trading cash and derivative products; part of the Euronext group. Current and proposed trading engines based on French system (cash) and British system (derivatives).
- AFM intervention powers are limited to matters relating to the rules and therefore technically unable to intervene on IT matters; remedy via specifying recognition criteria/performance objectives and giving AFM power to intervene in furtherance of these objectives.
- Transparency issue:
  - Some 15 percent of trades by value (but only 1 percent by volume) are not reported to the market because of rules applying to trades outside certain price and volume limits. These arrangements should be reviewed to enhance transparency to the market.
- Regulatory harmonization:
  - The MOU with other Euronext regulators covers harmonized matters.
  - National supervision of an international exchange creates regulatory burden and delay that puts Euronext at a competitive disadvantage vis-à-vis London and Frankfurt.
  - Increased harmonization of regulation, or joint regulation, would improve matters.
- Recommended actions (selected):
  - The AFM should seek to expand the MOU amongst the five regulators so as to encompass all harmonized matters (to the extent that it is not already).
  - The AFM and Euronext should review the rule relating to block trades with a view to enhancing market transparency.

### Table 6 — Recommended Actions (high-level summary of selections)
- Governance and independence:
  - Provide for budget approval over a longer period—such as 3, or preferably 5 years.
  - Provide for regulatory bodies to build up reserves to meet contingencies.
  - Increase transparency on regulator proposals for legislation and Further Regulations and MOF comments.
  - Require any general direction made by the Minister to the regulatory bodies to be public.
  - Give investor representatives the opportunity to comment on the regulatory authority budget along with the industry market panel.
- Legislation and transitional arrangements:
  - Finalize and publish the practical division of responsibilities between AFM and DNB; enhance industry awareness and clarify how to deal with regulatory overlaps.
  - Develop an explicit plan and timetable for the takeover of responsibilities so AFM/DNB and Euronext understand roles during transition of listing and other responsibilities.
  - Consider publishing criteria for determining exemptions from regulatory requirements where the power is reserved to the Minister.
  - Review the balance between the level of detail in the Act, Decrees and Further Regulation in light of experience and industry comments.
  - Consider an explicit legal requirement that the Minister consult regulatory bodies before exercising retained powers related to financial service regulation.
  - Consider allowing AFM to seek restitution in court or have direct restitution powers, subject to proper procedures.

### Authorities’ responses
- Netherlands authorities are pleased with the positive assessment of Netherlands’ observance of the IOSCO-principles and broadly agree with IMF conclusions.
- Several IMF recommendations will be taken into consideration in completing legislation.
- Specific authority comments:
  - On budget process: authorities believe substantial safeguards already exist to protect supervisory independence from Ministry of Finance.
  - Clarification of DNB-AFM responsibilities, including licensing, addressing industry concerns, and enhancing industry understanding of AFM role are being addressed via review of DNB-AFM Covenant, publications, and meetings with market participants.
  - Issues regarding recognition of exchanges (P 6–7) and supervision of Euronext (P 25–29) will be evaluated in the context of the bill on financial supervision.
  - Authorities recognize need to review supervision of Collective Investment Schemes and develop clear plans for intermediary failure; steps are being taken.

### PAYMENTS AND SECURITIES SETTLEMENT SYSTEMS — CPSS/IOSCO RSSS: General and Scope
- Assessment focus: securities settlement systems for government bonds, corporate bonds, stocks and derivatives traded on markets organised by Euronext Amsterdam N.V. and subsidiaries.
- Clearing and settlement chain:
  - Securities are cleared through Clearnet and settled through Euroclear Netherlands (ENL) or Euroclear NIEC (NIEC).
  - Scope extended to OTC transactions settled by ENL or NIEC but not cleared by Clearnet.
- Market concentration:
  - Dutch securities settlement market is dominated by five banks—ABN AMRO, ING, Rabobank, Fortis and KAS Bank.

### Main findings
- Overall assessment: systems used for clearing and settlement of securities, Clearnet and Euroclear Netherlands respectively, are reliable and effective.

### Legal risk
- Relevant laws and regulations publicly available; most important: Bankruptcy Act and the Securities Giro Act.
- Clearing done under French law; French legislation relevant.
- Rules of Clearnet, ENL and NIEC publicly available and generally clear.
- Legal framework supports enforcement of transactions, protection of customer assets, immobilization and dematerialization, netting, securities lending and delivery versus payment.
- Adequate rules for participant default including effective use of collateral; rules can be legally enforced.
- The “zero-hour” rule is generally applied in relation to bankruptcy.

### Pre-settlement risk
- Electronic confirmation:
  - Direct market participants electronically confirm transactions on trading day.
  - Indirect participants: timing depends on contractual arrangements.
- Settlement cycle:
  - Settlement takes place within a three day cycle.
- For exchange-traded securities:
  - Timely settlement guaranteed through central counterparty, Clearnet.
  - Clearnet risk controls include initial margin and daily settlement of variation margin.
  - Clearing members contribute to a clearing fund.
  - Margin and clearing fund are sufficient to cover for a default by the clearing member with the largest exposure. In addition there are other financial resources available.
  - Securities lending is available and legally supported.

### Settlement risk
- Securities custody and finality:
  - Securities mainly kept in book-entry form, though only a minor part is dematerialized.
  - Beneficial owner has co-ownership in securities held in book-entry form.
  - No registration of securities transfers outside the CSD.
  - All settlements are made with delivery against payment, DVP, with the delivering party’s securities being reserved while cash settlement takes place.
  - However, only about 70 percent of the transactions are settled DVP, partly due to settlement over FOP cross-border links.
  - Finality of the cash leg is achieved at the moment of the cash transfer, and finality of the securities leg follows immediately after this cash transfer.
- OTC and exchange settlement models:
  - OTC-transactions are settled gross, i.e., DVP model 1.
  - Settlement of OTC-transactions takes place every thirty minutes (the cash leg) during day-time and once during the evening; hence final settlement can be achieved intraday for OTC-traded securities.
  - Settlement of exchange-traded securities cleared through Clearnet are settled net once a day, i.e., DVP model 3.
- Cash settlement medium:
  - The CSD does not provide credit in any form, and there is no net settlement as such in the CSD.
  - Net settlement exists within the CCP, but risk controls are sufficient.
  - Ninety-five percent of all cash settlement takes place in central bank money.
  - The remainder, settlement in foreign currency, is settled in KAS Bank, a supervised bank.

### Operational risk
- Resilience and contingency:
  - ENL/NIEC systems are operated by Euroclear Bank, Brussels under a Service Level Agreement.
  - Euroclear Bank has an alternative production site available with mirrored information.
  - ENL/NIEC has an alternative business site available in Amsterdam.
  - Clearnet’s Clearing21 system is operated out of Paris by an affiliate to the Euronext Group and has an alternative production site.
  - Both institutions regularly test their contingency plans.
  - The settlement at ENL was delayed in June 2003 due to a mistake by the service provider; appropriate measures to prevent recurrence have been taken.

### Custody risk
- Book-entry securities held in custody under the Securities Giro Act are protected by law.
- For other securities, supervisory laws require separation of assets and that customer securities be kept with a separate specialized custodian.
- Holdings of securities are to be reconciled at least monthly.

### Other issues
- Access rules:
  - In some cases, not all entity types are treated equally in ENL access rules.
  - Credit institutions from outside the EEA (the European Union, Iceland, Liechtenstein and Norway) are not allowed participation.
  - Participation is also not possible for investment firms (securities firms), whether Dutch or foreign.
  - There are examples where access rules are not completely clear.

*IMF staff report content as provided.*

### 105.     Both ENL and Clearnet are regarded as effective by the users. They both monitor and

### _cr04312 - 105.     Both ENL and Clearnet are regarded as effective by the users. They both monitor and

### Securities clearing and settlement systems — assessment
- ENL and Clearnet are regarded as effective by users and both monitor and benchmark their cost levels.
- The CSD uses SWIFT communication standards.
- Generally ENL and Clearnet are transparent with regard to risks, rules and procedures except for a few minor exceptions.
- Both ENL and Clearnet have close cooperation with users through Market Advisory Committees and other user forums.
- Both institutions have close cooperation with DNB and the AFM, through which the public interest is channeled.
- The CSD has a number of links, but none of these links support settlement with delivery versus payment (DVP). The links as such do not impose risks to the users.

### Oversight and supervisory arrangements
- DNB and the AFM oversee ENL, NIEC and Clearnet in an efficient way.
- DNB’s tasks include promotion of a smoothly functioning payment system, with an implicit legal basis for oversight of securities clearing and settlement systems.
- DNB and the AFM have developed a supervisory framework for clearing and settlement.
- The prudential supervisor for Clearnet is the relevant French authority.
- The AFM is formally the supervisor of ENL as a book-entry system.
- Because there is no formal direct legal foundation for supervision of securities clearing and settlement, an indirect approach was used: oversight and supervision of clearing and settlement were made conditions for granting Euronext license as an exchange.

### Recommended actions in securities settlement systems (Table 7 — selected)
- Recommendation 7
  - The AFM and DNB should generally promote the use of DVP for settlement, and support any changes that could enhance the possibility of achieving DVP.
  - With regard to settlement through cross-border links, DNB and the AFM should consider the recommended actions for Recommendation 19.
- Recommendation 14
  - The AFM and DNB should approve a proposal from ENL to admit investment firms as participants.
  - The AFM and DNB should suggest to ENL, and when applicable NIEC, to review their Admission Regulation so they become open and fair.
  - The review should consider allowing supervised non-EEA credit institutions to participate.
  - The review should ensure that the Admission Regulation is fully consistent with the practice used and include the requirement for foreign CSDs to be supervised.
- Recommendation 18
  - The MoF should finalise the project for a Financial Supervision Act as soon as possible, ensuring that operators of clearing and settlement systems are subject to direct supervision.
  - The roles of the AFM and DNB should be clear and unnecessary overlapping should be avoided.
- Recommendation 19
  - The AFM and DNB should support the Euroclear initiatives to develop cross-border DVP links, and they should further promote that system participants require such links in order to reduce risk.
  - The Dutch authorities are dependent on participation by authorities in other countries to achieve such cross-border solutions.

### Authorities’ responses (selected)
- Authorities broadly agree with the assessment of securities clearing and settlement systems and of payment systems.
- Part of the recommendations will be addressed with the enactment of the Financial Supervision bill, which will give explicit legal oversight powers to DNB and AFM (i.e., recommendation 18).
- Admission rules of Euroclear Netherlands are under review to broaden access to include non-EEA credit institutions (recommendation 14).
- Authorities endorse supporting Euroclear initiatives for cross-border DVP-links and the view that system participants should require such links to reduce risk (recommendation 19). They note that solving barriers for cross-border links is primarily a European rather than national dimension.

### FATF assessment — scope and methodology
- Report prepared by a team of Fund staff and an expert not under the supervision of Fund staff.
- Assessment covers FATF 40 Recommendations for Anti-Money Laundering and 8 Special Recommendations for Combating the Financing of Terrorism.
- Assessment is based primarily on information available at the time it was completed on December 12, 2003.
- Expert reviewed criminal law enforcement capacity and non-prudentially regulated financial activities (including casinos).

### Main findings — Criminal justice measures and international cooperation
- Criminalization of ML and FT
  - The Netherlands has ratified and implemented all international conventions directly relevant for AML/CFT, except for the Palermo Convention which it expects to ratify shortly.
  - Criminal money laundering offenses follow international standards (Vienna, Strasbourg, and Palermo Conventions).
  - Predicate offenses are all offenses penalized with a maximum of six months imprisonment or more.
  - Self-laundering is covered; there is liability for legal persons.
  - ML and FT offenses apply to persons who knowingly engage in prohibited activities; for some ML offenses, a reasonable suspicion standard also applies.
  - Recent criminal ML provisions should be evaluated based upon case outcomes; whether foreign crimes may serve as predicate offenses is not explicit in legal provisions and has not been tested.
  - Penalties for ML are quite low and should be reviewed.
- FT criminalization
  - FT is criminalized primarily through participation in a criminal organization and preparation offenses; amendments made or in process ensure comprehensive coverage.
  - An explicit provision that support to a terrorist organization or its members constitutes participation is expected soon.

- Confiscation of proceeds
  - Confiscation addressed through both property and value-based provisions, applies to economic benefits from any criminal offense.
  - Although regularly imposed, confiscation is not mandatory.
  - Proceeds from conduct other than the offense of conviction may be confiscated.
  - Specific provisions address protection of bona fide third parties; recent amendments ensure that assets an offender transfers to third party legal entities may be confiscated.

- Freezing and provisional measures
  - Laws provide for provisional measures including freezing of funds of terrorists and those who finance terrorism.
  - Assets have been frozen quickly through judicial orders; freezing powers for the FIU have not been needed.
  - Refinements to powers to identify and trace and to secure customer identification orders should be made as planned.
  - Authorities may share confiscated assets with jurisdictions requesting assistance; sharing possibilities should be considered for domestic cases where foreign authorities have assisted.

- Statistics, training, and resources
  - Statistics are maintained but not sufficient to fully assess AML/CFT effectiveness because of lack of data by offense type.
  - Training is available for police and prosecutors but is not mandatory and seems limited.

### FIU (MOT) and information flows
- MOT is an administrative body within the Ministry of Justice that serves as the Dutch FIU; it receives, analyzes and disseminates ML and FT-related disclosures.
- MOT has access to a wide range of public and non-public databases and full powers to require additional information.
- MOT may share all information with police authorities, and general information (but not specifics such as reports) with supervisory authorities. Legislative changes are expected in 2004 to permit enhanced sharing with supervisory authorities.
- MOT may share information with foreign FIUs and does so regularly.
- MOT keeps statistics on most relevant data, broken down into categories, but neither MOT nor others track the number of STRs/UTRs that result in investigations or prosecutions.
- MOT appears adequately funded; assignment of additional investigators should be considered.

### Law enforcement, prosecutorial structure, and international cooperation
- FIU and law enforcement have adequate powers to require production of records; investigative techniques are available as needed.
- AML/CFT resources and expertise are spread over multiple regional and national bodies, causing resource allocation and structural inefficiency issues.
- Further consolidation of resources within national police and prosecutorial units, policy control at the national level and dedicated regional resources answerable to national units should be considered.
- Additional prosecutorial resources at the national level for confiscation matters and ML investigations are advisable.
- Removal of the Parliamentary prohibition on the use of criminal-civilian informants would greatly enhance investigative ability.
- The Netherlands has comprehensive bilateral and multilateral treaties for mutual legal assistance and extradition in ML and FT matters; assistance without a treaty is limited to specified measures not requiring coercion.
- Authorities might consider legislation permitting a wider range of assistance in the absence of a treaty.
- Dutch laws and procedures generally permit recognition of foreign confiscation and forfeiture judgments; recent legislation provides for enforcement of non-conviction based foreign forfeiture orders.
- Netherlands provides timely and effective follow-up to mutual legal assistance requests and maintains an extensive database system planned to be updated to include predicate offense information.
- Assistance provided in confiscation matters, particularly for non-conviction based forfeiture, has had mixed results.
- Netherlands protects against providing safe haven for terrorists through new immigration laws, extradition procedures, and ability to prosecute persons located in the Netherlands for acts of terror committed abroad.

### Preventive measures for financial institutions (FI)
- A highly developed set of laws and regulations address preventive measures, adjusted and updated regularly.
- A merger of the Identification of Services Act (ISA) and Disclosure of Unusual Transactions Act (DUTA) with updating of provisions, as currently under consideration, would provide a more efficient framework for AML/CFT.
- Suggested changes include enhancing possibilities for imposing administrative sanctions by an ability to impose fines specifically for non-compliance with DUTA or ISA.
- Adjustments should be made to ensure MOT can share additional information with supervisors and that supervisors can share more effectively with law enforcement.
- Specific requirements should be put in place for ongoing training, internal audit and reporting procedures rather than relying on general provisions.
- Explicit requirements should ensure institutions maintain post-account opening materials and records regarding matters considered for reporting but not reported.
- An enhanced tipping-off provision and, at least within the SR VII timeframe, a formal requirement for comprehensive information to accompany wire transfers is recommended.
- The Netherlands is addressing many of these issues with legislative and regulatory changes occurring post-mission.

### Prudentially regulated sectors — oversight and guidance
- Oversight responsibility for AML/CFT compliance lies with financial sector regulators:
  - DNB for credit institutions,
  - PVK for insurance companies and pension funds,
  - AFM for securities and investment firms.
- Regulators have developed risk analysis tools to assess institutions’ internal risk management and control environments; these tools inform supervisory programs including on-site visits.
- DNB has developed the most robust program to provide guidance and assesses compliance.
- June 2002: DNB with bankers association issued the Basle Committee CDD paper to credit institutions recommending standards to observe.
  - Credit institutions were asked to benchmark current practices against the paper; majority of banks undertook gap analysis.
  - May 2003: DNB issued an explanatory memorandum on the CDD paper.
  - DNB is reviewing results and will later develop CDD risk profiles of credit institutions.
- At time of assessment PVK and AFM had not issued guidance, but on January 1, 2004 regulations were issued under Decree on Integrity (issued December 1, 2003) including Basle CDD guidance and applicable to institutions regulated by PVK and AFM.
- By April 2004 there will be a merger of the DNB and PVK, offering opportunity to extend DNB’s approach to insurance firms.
- The Basle CDD paper was not designed as comprehensive guidance, leaving certain gaps.

### Sector vulnerabilities and specific issues
- Insurance and securities sectors are considered to have relatively low vulnerability to ML and FT, but industry perception of no vulnerability likely contributes to very low rate of reporting of UTRs.
- Fit and proper tests for supervisory and executive boards are undertaken by DNB, PVK and AFM; DNB delegated this supervision to central organization of a cooperative bank in one case, producing less robust fit and proper oversight for that cooperative bank.
- Bearer shares can be issued in the Netherlands. A DNB circular of June 2001 deals with instances where a bank handles bearer shares but does not provide guidance for institutions dealing with corporate customers that issue bearer shares. CDD guidance advises extra care but offers limited specific guidance.

### Non-prudentially regulated, macrorelevant sectors
- Trusts as known in common law countries are not generally used in the Netherlands; “trust” usually refers to a person providing company management services.
- The Netherlands is implementing a regime for regulation of this activity.
  - Under legislation which came into force in March 2004, trust offices must have up-to-date information on ultimate beneficial ownership of all entities under management and the purchaser of any entity being sold.
  - Records must show the trust office has knowledge of (a) the source and destination of funds of the object company; (b) relevant parts of the group structure; and (c) the objective for which the structure was set up.
  - If the trust office acts as a trustee, it must know who the settlor of the trust is.
- Casinos are tightly monitored for ML and file STRs/UTRs on a regular basis:
  - Risk that casinos will serve as an entry point for criminal proceeds is low due to a government run casino monopoly, full identification and registration of gamblers, and restrictions on conversion of winnings to non-cash forms.

*Source: _cr04312 - 105.*

### 137.     The Netherlands complies well with most of the assessable FATF 40+8

### _cr04312 - 137.     The Netherlands complies well with most of the assessable FATF 40+8

### Overall assessment
- The Netherlands "complies well with most of the assessable FATF 40+8 Recommendations."
- Areas requiring attention are set out in Table 8 ("Recommended Action Plan to Improve Compliance with the FATF Recommendations").
- Table 8 also lists technical and general suggestions to further strengthen aspects where the Netherlands already meets the appropriate standard.

### Table 8 — Key recommended actions (FATF 40 Recommendations for AML)
- General framework of the Recommendations (FATF 1-3)
  - "As planned, ensure MOT is able to share specific information with supervisors, in addition to the general information that already may be shared."
- Provisional measures and confiscation (FATF 7)
  - "Make confiscation of criminal proceeds for ML/FT mandatory."
- Customer identification and record-keeping rules (FATF 10-13)
  - "Address more specifically as planned a requirement that there be renewal of identity if in the course of a business relationship doubts occur regarding the identity of a client."
  - "Incorporate specific recordkeeping requirements for account relationship materials (post account opening) and transaction records as authorities adopt revisions to ISA/DUTA."
  - "DNB should provide more specific guidance to licensees on measures that should be adopted to minimize the risk inherent in dealing with bearer shares."
- Increased diligence of financial institutions (FATF 14-19)
  - "As is occurring, introduce an explicit requirement for internal procedures regarding ongoing training, and amend laws/regulations to address an internal audit function for any sector for which it is not explicit."
  - "Amend laws/regulations to require management level compliance officers."
  - "Expand scope of tipping off prohibition to cover those who come into contact with information regarding the reporting or consideration of a decision to report."
  - "Ensure in all sectors that institutions are required to maintain records of transactions considered for reporting but not reported and that these records are available for supervisory review."
- Implementation & role of regulatory and other administrative authorities (FATF 26-29)
  - "Extend integrity testing by supervisors in practice to a wider range of senior management outside of the Executive Board."
  - "Rectify the deficiency identified in the role played by the central organization of the cooperative bank in undertaking fit and proper examinations."
- Special recommendations on terrorist financing (8 SRs)
  - VII. Wire transfers
    - "Within the two-year period referred to by FATF, amend relevant laws to require that accurate and meaningful originator information (name, address and account number) on funds transfers remain with the transfer throughout the payment chain."
    - "Impose an obligation, consistent with SR VII, on FSPs to give enhanced scrutiny to wire transfers that do not contain complete originator information and provide guidance that encourages compliance on an immediate basis."
  - VIII. Non-profit organizations
    - "The direction given to financial institutions in respect of their dealings with non-profit organizations should be expanded."
    - "The working group on non-profits in the Netherlands should come up with reasonable measures to improve the transparency and monitoring of foundations and associations in general as well as with measures to improve the registration, regulation and monitoring of charities."

### Authorities’ general response
- Acknowledgement and intent
  - "The Netherlands wishes to thank the members of the IMF assessment team for all the work that had to be done to produce this fair and balanced report."
  - "Many of the recommendations made by the assessment team will be implemented as planned in the course of a revision of the two most important AML laws (DUTA and ISA)."
  - "Other recommendations have already been implemented since the mission was completed. This relates to new integrity regulations for the banking and insurance sector."
- Legislative and organizational measures announced (April 2004 letter to Parliament)
  - "Merger of MOT and BLOM."
  - "Promulgation of a directive on money laundering prosecutions for the public prosecution service."
  - "Close cooperation of the fiscal investigation service (FIOD-ECD) and the National Investigation Service (Nationale Recherche) in complex money laundering cases."
  - These last two measures were taken to "centralize and coordinate the fight against money laundering and terrorist financing on a more national level."

### Authorities’ specific comments on recommended action plan
- DUTA/ISA and information sharing
  - Authorities "welcome the support of the assessment team for the change in the Disclosure of Unusual Transaction Act (DUTA) that will enable the MOT (FIU) to share specific information with supervisors."
- Confiscation mandatory recommendation
  - Rejected: "The recommendation to make the confiscation of criminal proceeds for ML/FT cases mandatory affects the autonomy and discretion of the public prosecution service... Therefore, this recommendation will not be implemented."
- Customer identification and record-keeping
  - Support for planned ISA change clarifying renewal of identity when doubts arise.
  - DNB/PVK has issued, post mission, the "Regulation on CDD for credit institutions and insurers" addressing this recommendation.
- Bearer shares
  - Authorities note "almost all trade in bearer shares has been dematerialized and that misuse of bearer shares for money laundering purposes has actually never been reported."
  - "DNB will continuously amend guidance whenever necessary."
- Increased diligence (training, internal audit, records of considered-but-not-reported transactions)
  - DNB/PVK has issued post-mission:
    - "Regulation on CDD for credit institutions and insurers"
    - "Regulation preventing the conflict of interest and controlling the integrity risks of insurers."
  - Authorities plan to address remaining deficiencies in the revision of ISA and DUTA.
- Management-level compliance officers
  - "Regulation on organization and control" and "Regulation preventing the conflict of interest and controlling the integrity risks of insurers" mention that a compliance officer should be independent from the Board of Directors.
  - Authorities "will however further assess your recommendations."
- Tipping off prohibition
  - Authorities believe current DUTA "covers anyone who comes into contact with information regarding the (possible) reporting of transactions," but will "consider changing the language" in the merger of ISA and DUTA to clarify the provision.
- Integrity testing and fit & proper scope
  - Netherlands is amending the Act on Financial Supervision (due to come into effect in 2005); recommendations "shall be taken into consideration" when assessing scope of persons to be tested.
  - Authorities emphasize supervised institutions' responsibility to implement internal integrity testing of employees in sensitive positions.
- Full implementation of the 8 special recommendations on terrorist financing
  - "An ongoing process" and "Implementation of special recommendation VII... is one of the main targets for the current Netherlands EU Presidency."
- Non-profit organizations
  - "The Netherlands Authorities thank the assessment team for their recommendations concerning non-profit organizations, which they endorse."

### Other recommendations and authorities’ comments (selected)
- Palermo Convention
  - "The Netherlands will ratify the Palermo Convention as soon as possible. The ratification has been sent to Parliament, adoption is expected very soon."
- Foreign predicate offences
  - Authorities consider explicit statutory text unnecessary; "in practice, there are no problems with respect to this point."
- Acts of Terrorism Act
  - Adopted by Parliament in June 2004: "Law of 24 June 2004, Stb. 2004/290" and "will enter into force on September 1, 2004."
- Quick scan evaluation of new ML criminalization
  - Conducted post-mission by the Ministry of Justice and the Public Prosecutor for AML/CFT; "preliminary results show that close to 80 percent of prosecutions are successful in first instance."
- Penalties for money laundering
  - "The maximum penalties in the Netherlands for various money laundering offences meet international standards and are in line with (for example) the EU Council Framework Decision on ML."
  - Authorities "see at present no reason for increasing the penalties for money laundering offences."
- Border currency reporting
  - Authorities "endorse the recommendation to enact border currency reporting requirements" but note that within the Schengen Area/EU a national requirement would be "primarily symbolical."
  - The Netherlands aims for "an EU regulation on border currency reporting requirements" as an important aim of the Netherlands EU Presidency.
  - If unattainable, "the Netherlands will consider new legislation" as a second best solution.
- Asset sharing and mutual recognition
  - Asset sharing can take place under existing MLA instruments; introduction of asset sharing for assisting states "is not envisaged."
  - Upcoming "EU Council Framework Decision on the mutual recognition of confiscation orders" is expected to provide mutual recognition and an explicit basis for asset sharing.
- Act on powers to trace and identify Financial Records
  - "Has entered into force on June 1, 2004."
- Asset forfeiture statistics and tracking
  - Authorities will consider whether inclusion of offence type references in asset forfeiture statistics and improved tracking of non-article 36 confiscations is "technically and practically possible."
- Training for prosecutors and police
  - Basic financial investigation training is already mandatory for all police investigators.
  - Follow-up training is needs-based; "all 19 regional public prosecutors offices have appointed specialized public prosecutors for confiscation."
- FIU powers and immobilization of assets
  - No awareness of structural problems with FIU power to order immediate immobilization; national public prosecutor attached to BLOM is "duly equipped" to respond swiftly.
  - Authorities agree that recommended solutions "may be considered" if structural problems arise.
- Tracking UTRs/STRs to investigations/prosecutions
  - Current inability to comprehensively track UTRs and STRs that result in investigations/prosecutions is "of concern."
  - Improvements should be placed in context of harmonizing investigative information registration and police IT systems.
- Staffing
  - "Both MOT and BLOM have recently been assigned more personnel. At present there are no indications that more investigators or non-investigative staff is needed."
- Use of informants and infiltrators
  - "The use of criminal-civilian informants in Dutch investigations is not prohibited... the use of criminal civilian infiltrators is prohibited in the Netherlands."
  - Prohibition concerns long term/deep cover infiltration involving participation in criminal activities; it does not prohibit short-term sting operations or use of criminals for active information gathering where they do not commit criminal offences.
- Centralization of prosecution/investigation
  - Financing of terrorism cases "are already dealt with in the ‘centralized model’ jointly by the LP (National Prosecutors Office) and the FP (Functional Prosecutors Office)."
  - On centralization of money laundering investigations, government emphasizes need to deal with cases "on all different levels of investigation" but endorses centralization "as far as it concerns the determination of money laundering policies."
  - Post-mission promulgation: instruction on money laundering prosecutions for the public prosecution service by the Board of Procurers-Generals.
- Mutual legal assistance (MLA)
  - Recommendation that MLA be possible on a discretionary basis in absence of a treaty "is endorsed" and "already possible."
  - "Only requests requiring coercive measures need to be treaty based" in the Netherlands.
- Act on Financial Supervision and communication
  - Authorities agree the new Act on Financial Supervision should "lay down clear lines of responsibility and that this should be communicated to all industry participants."
- Merger of ISA and DUTA; administrative sanctions
  - Authorities "welcome the recommendation to go ahead with a merger of ISA and DUTA and to introduce administrative sanctions for violations of DUTA and ISA."
  - "The forthcoming amendment of DUTA and ISA will include such administrative sanctions."
- AML/CFT guidance and benchmarking
  - "DNB/PVK is currently, in conjunction with the bankers association and the insurers association, developing more detailed and comprehensive AML/CFT guidance."
  - DNB/PVK is "taking into consideration how to most effectively implement" benchmarking of insurers’ practices against the CDD paper.
- Reporting procedures and communication to personnel
  - "DUTA and the Regulation on CDD, applicable for credit institutions and insurers, together cover the mentioned recommendation concerning that institutions should have procedures in place for reporting transactions and that these procedures should be communicate to all personnel."

*IMF staff report extract: Annex recommendations and authorities’ responses on FATF 40+8 compliance (Netherlands).*

### 142.     Stress tests were performed to assess sensitivity to various exceptional but plausible

### _cr04312 - 142.     Stress tests were performed to assess sensitivity to various exceptional but plausible

### A. Single-Factor Shocks
- Coverage for main tests: institutions covering about 84 percent of total bank assets, 54 percent of insurance company assets, and 50 percent of pension fund assets at end-2002.
- Two test forms: single factor sensitivity tests; multi-variable scenarios designed to simulate internally consistent movements in the relevant macro variables.

- Banks — horizon: 10-day
  - Interest rate:
    - +/- 100 bps parallel shift in yield curves
    - 50 bps steepening/flattening of yield curves
  - Exchange rate:
    - +/- 10 percent change in Euro vis-à-vis other currencies
  - Credit:
    - +/- 50 bps change in credit spreads
  - Volatility:
    - 25 percent increase in volatilities related to interest and exchange rates and equity
  - Other risks:
    - None

- Insurance companies and pension funds — horizon: 1 year
  - Interest rate:
    - +/- 200 bps parallel shift in yield curves (insurance companies)
    - +/- 100 bps parallel shift in yield curves (pension funds)
    - estimated changes in the redemption yield
  - Exchange rate:
    - -45 and -30 percent change in Euro vis-à-vis other currencies
  - Equity:
    - +/- 15 percent change in all relevant stock indices (insurance companies)
    - -40 and -25 percent change in developed country equities (insurers)
    - -50 and -30 percent change in developing country equities and in private equity (insurers)
  - Credit:
    - 60 and 40 percent change in credit spreads for speculative grade credits (insurers/pension funds)
    - 50 and 30 percent change in credit spreads for investment grade credits (insurers/pension funds)
  - Volatility:
    - 25 percent increase in volatilities for exchange rates, interest rates, credit spreads, equities and commodities
  - Other risks:
    - -45 and -30 percent change in commodity prices
    - -20 and -10 percent change in real estate prices
    - 50 percent increase in worst technical insurance result in last 5 years deterioration in insurance
    - 50 percent increase in maximum cost in last 5 years.

### B. Scenarios (multi-variable, internally consistent)
- For banks:
  - Scenario 1. Domestic crisis of confidence
    - Triggers: a series of corporate scandals.
    - Immediate shocks:
      - Dutch stock prices slump instantaneously by 45 percent.
      - Credit spreads on Dutch corporations increase by 200 bps.
    - Real economy and asset impacts:
      - Unemployment suddenly rises and consumer confidence collapses.
      - Property prices in the Netherlands fall by 5 percent per quarter for two years to a level 40 percent lower.
      - Commercial property prices fall in the first year by 5 percent per quarter.
      - Domestic investment and consumption slowdown due to higher cost of capital, rising unemployment, and negative effects on confidence and wealth.
    - Assumptions:
      - No policy response by the ECB to these shocks.
      - No shocks from abroad.

  - Scenario 2. Dollar crisis
    - Immediate shocks:
      - U.S. dollar depreciates instantaneously by 30 percent vis-à-vis the Euro.
      - U.S. equity prices fall by 45 percent.
      - Euro appreciates by 30 percent vis-à-vis all other currencies (which follow the dollar).
    - Real economy and asset impacts:
      - Slowdown in the U.S. (and global economy).
      - 20 percent fall in U.S. residential prices over 1 year.
      - Given no changes in ECB policy, financial conditions in the euro area tighten.
      - Weaker global economic conditions result in lower exports for the Netherlands and lower GDP growth.

- For insurance companies and pension funds:
  - Single-factor shocks as above occur simultaneously, with correlation 0, 0.5 and 1.

### Key financial system indicators (selected figures extracted from appendices)
- Financial system coverage and assets (1998–2003)
  - Banks (number): 67 61 60 58 59 57 (for 1998–2003 respectively)
  - Assets (Banks, in billions of Euro): 1,183 1,343 1,573 1,720 1,734 1,850
  - LCFIs assets (in billions of Euro): 1,015 1,167 1,383 1,508 1,509 1,655
  - Insurance companies assets (in billions of Euro): 215 244 250 297 284 293
  - Pension funds assets (in billions of Euro): 366 436 445 466 435 489

- Domestic banking system asset composition (1998–2003)
  - Total assets (in billions of euros): 896.2 983.7 1,148.9 1,265.9 1,356.4 1,469.0
  - Total claims on EU residents (percent): 83.5 84.3 84.7 81.1 82.0 83.4
  - Claims on EU residents by instrument — Loans (percent): 66.5 67.7 68.9 65.8 65.7 66.8
  - Total private sector loans to EU residents (in billions): 415.2 473.3 543.3 587.6 629.3 676.8
  - Residential real estate loans to total loans (percent): 49.4 45.4 43.6 44.2 45.3 48.3
  - Foreign currency loans to total loans (percent): 17.2 16.5 16.6 20.3 17.0 15.4

- Off-balance sheet and derivatives (1998–2003)
  - Total notional value of derivative contracts (in billions of U.S. dollar): 3,572 4,651 4,692 5,274 6,614 8,701
  - Total notional value of exchange traded contracts (in billions of U.S. dollar): 2,897 4,591 5,167 6,374 6,445 716
  - Credit derivatives (memo): .........57.0 ......

- Major institutional investors’ assets (1998–2003)
  - Total assets (in billions of euros): 581.1 680.2 694.9 763.1 719.2 782.5
  - Insurance corporations (in billions of euros): 215.4 243.9 250.0 297.0 284.3 293.2
  - Pension funds (in billions of euros): 365.7 436.3 444.9 466.1 434.9 489.2
  - Distribution of pension fund assets — Shares (percent): 41.6 51.6 49.0 48.3 42.3 46.3

- Banks’ profitability and liquidity (1998–2003)
  - LCFIs return on assets (pre-tax, percent): 0.60 0.80 0.79 0.55 0.47 0.63
  - LCFIs return on equity (pre-tax, percent): 15.16 20.37 19.58 14.34 12.76 16.93
  - Spread between average lending and deposit rates — Average (percent): 3.40 0.72 1.90 1.90 1.19 0.51
  - Liquid assets to total assets — LCFIs (percent): 26.7 25.3 25.5 26.2 26.2 26.2

- Capital adequacy and asset quality (1998–2003)
  - Regulatory capital to risk-weighted assets — LCFIs (percent): 10.80 10.57 10.61 10.75 11.11 11.21
  - Tier-1 to risk-weighted assets — LCFIs (percent): 7.87 7.80 8.04 7.80 8.22 8.59
  - Nonperforming loans to total gross loans — 3 largest banks (percent): 2.5 2.4 2.2 2.3 2.0 ...
  - Nonperforming loans to Tier-1 capital — 3 largest banks (percent): 28.0 32.0 31.0 32.0 24.0 ...

- Life insurers and pensions (selected)
  - Life insurers return on assets (percent): 1.1 1.3 1.4 1.3 0.2 ...
  - Life insurers capital to assets (percent): 15.7 14.1 11.6 10.6 9.1 ...
  - Average cover ratio (pension funds, percent): 133 139 132 118 101 ...

- Other financial soundness indicators (1998–2003)
  - Corporate debt to GDP ratio (percent): 93.6 101.6 109.5 109.2 112.8 ...
  - Household debt to GDP (percent): 79.5 87.2 91.7 95.1 102.1 108.4
  - Household debt service (percent): 9.5 8.9 10.5 10.2 10.3 9.9
  - Unemployment rate (percent): 5.1 4.3 3.7 3.4 4.1 5.4
  - Residential real estate prices (median prices, EUR '000): 138.9 167.3 187.4 196.9 205.0 ...

*Source: IMF staff compilation of material in Appendix I–II and source tables (DNB, PVK, AFM, IFS) as presented in the content unit.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2004/_cr04312.pdf_