February 12, 2019

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.

 

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Keywords: Europe, Netherlands, Banking, Insurance, Macro-Prudential Policy, NPLs, Recovery and Resolution Framework, Article IV, IMF

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