The economic recovery continues, but political and economic uncertainties that affect the global economy have increased in recent months, due in part to the imminent Brexit. In addition, concerns about the profitability of the European banking sector have deepened further. Bank profits are weighed down by persistently low interest rates and the high levels of non-performing loans in bank balance sheets of mainly southern and eastern European banks. These banks have been insufficiently capable of resolving non-performing loans, due in part to flaws in insolvency legislation. Insolvency laws in Europe must be modernised. Dutch banks, which thus far have hardly suffered any adverse impact of the low interest rates, are also expected to be confronted with declining interest income in the period ahead. These developments are detailed in the Financial Stability Report (FSR) of De Nederlandsche Bank (DNB).
Besides insurers and pension funds, banks are also sensitive to prolonged low interest rates. Declining bank lending rates and an effective lower limit to saving rates are putting a downward pressure on the interest rate margins of Dutch banks. If the interest margin is squeezed, this may slow down lending and thus obstruct monetary transmission. The ECB will need to evaluate this side-effect of accommodative monetary policy against its effectiveness in terms of achieving price stability.
European banks burdened with high levels of non-performing loans urgently need to resolve these loans, given that they undermine the banking system's resilience and hamper economic growth. Against this backdrop, faster and less costly legal procedures and further harmonisation of European insolvency laws are desirable. But improved solvency laws will only help resolving non-performing loans if other structural problems are addressed. It is important that the market for trading of non-performing loans is further developed.
Initial survey figures show a moderately adverse impact on the UK economy, but the uncertainties about the exact ramifications of the Brexit are great. The ultimate consequences will largely depend on the trade deals which the UK and the EU will conclude. Any substantial growth deceleration resulting from the Brexit may adversely affect financial stability, given that it may frustrate European economic recovery, the resolution of non-performing loans in the financial sector and the return to a normalisation of monetary policy. For the purpose of stability, the period of uncertainty must be kept as short as possible.
The Dutch economy is recovering, which, together with low interest rates and little new construction activity, fuels the resurgence of the housing market. House prices are increasing across almost all regions, but there are large differences. The recovery in the housing market should serve to further increase its resilience. Accelerating the curtailment of mortgage interest tax relief, further lowering of the maximum loan-to-value ratio after 2018, and increasing the supply of non-subsidised rented accommodation is needed.
The risk map below provides a schematic overview of the key risks to financial stability. The size of the circles reflects the magnitude of the risk. The colour of the circles reflects whether viewed over the medium term, a risk increases (red), decreases (green) or remains unchanged (grey).
For further information, please contact Ben Feiertag (Tel. +31 20 524 2304/+31 6 524 961 42).
Financial Stability Report - autumn 2016
Financial Stability Report figures - autumn 2016
As at 30 June 2024, Dutch households held some €15 billion in bank deposits in other euro area countries, the latest figures from DNB and the European Central Bank (ECB) show. This means foreign savings keep growing.
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Higher mortgage rates over the past two years caused house prices to fall temporarily, but now they are rising. How can that be explained?
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The proportion of bonds carrying negative yields fell sharply in the first half of 2021 on the back of rising market rates. As of 30 June 2021, the combined nominal value of Dutch bonds with negative yields totalled €624 billion, down €142 billion on 31 December 2020.
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Dutch banks' interest margin decreased last year. Interest rates are expected to remain low, sustaining pressure on the interest margin. Banks are therefore applying negative interest rates to a growing proportion of savings.
Read more Low interest rates put pressure on banks’ interest margin
