IMF published its staff report and selected issues report under the 2019 Article IV consultation with the Kingdom of the Netherlands. Directors recommended further tightening of macro-prudential policies, including loan-to value and debt-service-to-income ratios. They noted that banking sector soundness and profitability have improved, although banks remain highly leveraged, concentrated, and vulnerable to shocks; thus, they encouraged the authorities to continue to build buffers and further strengthen supervision.
The staff report highlights that bank credit to non-financial corporations contracted by about 1% y-o-y in November 2018. Non-banks, mainly insurance companies and pension funds, increased their mortgage lending recently, but from relatively low levels. Banks capitalization improved and non-performing loans (NPLs) are among the lowest in the euro area. Banks are increasingly focusing their lending activity on the domestic market, with mortgage loans representing about 90% of long-term lending. In addition, banks are still highly dependent on wholesale funding, with an aggregate loan-to-deposit ratio above 120%, compared to below 100 for the euro area. Short-term market funding represents about 28% of total. This makes banks vulnerable to changes in global financial conditions.
The report highlights that continued building of capital and liquidity buffers to comply with tightening requirements and reinforce resilience to shocks is warranted. The 2018 EBA stress test indicates that large banks are well-capitalized but one bank falls below the 3% leverage ratio (capital-to-assets) limit in the adverse scenario. In addition, the leverage ratio is below the euro area average for significant institutions and should be strengthened. Furthermore, the report reveals that, as macro-prudential policies were tightened recently, household debt has stabilized at about 250% of the net disposable income, but it still remains high. Over-borrowing on mortgages has contributed to the accumulation of household debt. When housing prices declined sharply after the global financial crisis, many mortgages were under water and private consumption contracted sharply, as households attempted to rebuild their net worth.
The report also notes that insurance sector solvency has improved but insurers remain vulnerable in the current low interest rate environment. Low interest rates are associated with higher liabilities for insurers, especially for life insurance where 67% of liabilities consist of guaranteed return policies. The new national recovery and resolution framework for insurance companies is a welcome development. Such a framework, which is intended to protect policy holders and safeguard financial stability, will facilitate orderly resolution of insurance companies in the event of a disruptive shock.
Keywords: Europe, Netherlands, Banking, Insurance, Macro-Prudential Policy, NPLs, Recovery and Resolution Framework, Article IV, IMF
Previous ArticleIMF Publishes Reports on 2018 Article IV Consultation with Croatia
BCBS is consulting on the principles for operational resilience and the revisions to the principles for sound management of operational risk for banks.
The Financial Stability Institute (FSI) of BIS published a brief note that examines the supervisory challenges associated with certain temporary regulatory relief measures introduced by BCBS and prudential authorities in response to the COVID-19 pandemic.
HKMA, together with the Banking Sector Small and Medium-Size Enterprise (SME) Lending Coordination Mechanism, announced a ninety-day repayment deferment for trade facilities under the Pre-approved Principal Payment Holiday Scheme.
The Advisory Scientific Committee of ESRB published a response, in the form of an Insights Paper, to the EBA proposals for reforms to the stress testing framework in EU.
MAS announced several initiatives to support adoption of the Singapore Overnight Rate Average (SORA), which is administered by MAS.
BoE updated the reporting template for Form ER as well as the Form ER definitions, which contain guidance on the methodology to be used in calculating annualized interest rates.
PRA published the policy statement PS19/20 on the final policy for extending coverage under the Financial Services Compensation Scheme (FSCS) for Temporary High Balance.
EBA published the final draft implementing technical standards for disclosures and reporting on the minimum requirements for own funds and eligible liabilities (MREL) and the total loss-absorbing capacity (TLAC) requirements in EU.
EBA published an erratum for the phase 2 of technical package on the reporting framework 2.10.
EC published the Implementing Regulation 2020/1145, which lays down technical information for calculation of technical provisions and basic own funds.