Global economic uncertainty leads to higher financial stability risks

DNB President Klaas Knot: ‘We see legitimate concerns worldwide about the potential of the import tariffs as announced affecting financial stability. Against this background, European and international cooperation remains essential. Fortunately, we see that Dutch financial institutions have solid buffers to cope with an uncertain future.’

Buffers prove their worth in escalating trade war

DNB used a stress test to assess the potential impact of an escalating trade war on Dutch large banks. The most important outcome is that banks are well positioned to withstand the impact of an escalating trade war. In a scenario involving US tariffs as announced on 2 April, the average decline in the capital ratios of Dutch large banks remains limited. Under this scenario, the core capital ratio falls by about 1.5 percentage points compared to a scenario without trade tensions, reaching to 16.1% by the end of 2027. In a severe scenario with even higher import tariffs, the capital position of Dutch banks deteriorates further, to 14.5%. Even in this scenario, however, it remains above the average minimum requirements.

The stress test does not include insurers and pension funds, but they too are vulnerable to heightened trade tensions. The increased concentration in equity portfolios also increases vulnerability to further corrections in financial markets, especially in the case of pension funds. Nevertheless, these sectors also have a good starting position and, for the time being, can easily meet the minimum capital requirements.

Financial and digital resilience must be prioritised

The current uncertainty underlines the importance of capital buffers to cushion the effects of unexpected shocks. In addition, it is important for financial institutions to thoroughly embed geopolitical risks in their financial and operational risk management, for example by conducting scenario analyses and stress tests.

Geopolitical tensions are also a source of heightened cyber threats to the financial sector. Financial institutions can be directly targeted by cyber attacks, but are currently more often hit indirectly. We are seeing an increase in the proportion of attacks on digital service providers and critical infrastructure on which the financial sector relies, such as cyber security firms and telecom providers. In addition, uncertainty about digital dependence on non-European service providers has increased.

This underlines how imperative it is to prioritise digital resilience and the need for financial institutions to thoroughly understand and manage digital dependencies in their processes. To strengthen this resilience, the Digital Operational Resilience Act (DORA) sets stricter requirements for managing ICT and cyber risks in outsourcing chains and introduces an oversight framework for key ICT service providers.

International and European cooperation more important than ever

Trade tensions and geopolitical conflicts are eroding the effectiveness of international organisations that play a vital role in safeguarding global financial stability, especially now. Indeed, strained international cooperation can fuel a regulatory race to the bottom and impede rapid policy response to global shocks of the type we saw during the COVID-19 pandemic. Moreover, for the Netherlands, as a small country with an open economy, cooperation within Europe is more important than ever. Some 70% of Dutch trade is with single market partners in the European Union. Deepening the single market and European capital markets is necessary to strengthen the EU’s financing capacity and competitiveness, and there is considerable room for improvement in this regard. Targeted regulatory simplification can play a role here, as long as financial sector resilience is maintained.

Media representatives can contact Bouke Bergsma by email at bouke.bergsma@dnb.nl or by telephone at +31 653 258 400.