Habituation to low interest rates is a risk to households and businesses with high debts
Financial markets across the globe have become increasingly nervous in the past six months, which is partly attributable to disappointing global economic trends. Due in part to the ECB's accommodating monetary policy, interest rates are expected to remain low for some time to come, which negatively impacts the solvency of pension funds and insurance companies. In addition, households and businesses with high debt levels may become accustomed to low interest rates, which may cause them to run into trouble if interest rates return to more normal levels in the future. Dutch banks are in a relatively good position where profitability and capitalisation are concerned. Despite the low level of interest rates, their interest income has remained at acceptable levels to date. These developments are detailed in DNB's Overview of Financial Stability (OFS), which was published today.
The Dutch economy and the housing market are picking up, further measures on the housing market are warranted
The Dutch economy and the housing market are picking up. The housing market is expected to continue recovering. This will give the next government scope to boost the housing market's resilience by accelerating the curtailment of mortgage interest tax relief, and gradually lowering the loan-to-value ratio to 90% after 2018. As this will lead to increased demand for rented accommodation, ancillary policies targeted at increasing the supply of rented homes will be necessary. Despite the recovering housing market, credit growth is still below its long-term trend. This is an important reason for DNB to keep the countercyclical buffer unchanged at 0%.
Pension funds and insurers as well as households and businesses with high debt levels should be aware of the impact of prolonged low interest rates
The prolonged low level of interest rates is proving to be particularly challenging to pension funds and insurance companies. It is important that pension funds and insurance companies remain aware of the growing differential between the ultimate forward rate (UFR) and market interest rates. Households and businesses with high debt levels are in danger of becoming accustomed to low interest rates, which may cause them to run into trouble if interest rates return to more normal levels in the future. Households with high and largely interest-only mortgage loans, and fragile post-crisis SME sectors would do well to use the current low interest burden to boost their financial resilience.
DNB welcomes fintech, but is keeping an eye on the risks of a quick transition
This edition of the OFS also discusses the recent rise of fintech, a development that DNB in principle takes a positive stance to. Technological innovation in the financial sector offers a great deal of opportunities and may be beneficial to financial stability. At the same time, innovation harbours risks, specifically in case of a quick transition. DNB therefore wants to achieve a measured balance between offering scope for development of new initiatives and monitoring risks. It is important that the financial sector prepares itself to face the challenges that fintech brings.
The risk map below provides a schematic overview of the key risks to financial stability. The size of the circles reflects the magnitude of risk.
For more information, please contact Ben Feiertag on +31 20 524 2304, or +31 6 524 96 142.