Introductory line for the Standing Parliamentary Committee for Finance

I would like to thank the Chair and the members of the House of Representatives for their invitation. In this setting – together with my colleagues from CPB and the AFM – it has become good practice to discuss with you the main risks to the financial system. I will do so on the basis of the Financial Stability Report, which has been sent to you.

I usually begin with a review of the past year, but this time I would like to start by focusing on the recent turmoil at a number of foreign banks. Several regional banks in the United States have collapsed, including Silicon Valley Bank and First Republic. Closer to home, the major Swiss systemically important bank Credit Suisse also met its Waterloo. My fellow Executive Board members Steven Maijoor and Olaf Sleijpen recently visited you to consider the overall risk picture and the state of the Dutch banking sector. In my introduction I will therefore focus more specifically on the lessons we can draw from the recent failures of those banks in the United States and Switzerland.

Let me first emphasise that these problems were to a large extent isolated. SVB, for example, mismanaged interest rate risk and depended heavily on large, unsecured deposits, resulting in a classic bank run.

Credit Suisse had been in severe difficulty for some time, partly due to a series of scandals. Although these kinds of problems are not affecting Dutch banks, they do have a message for us. They show that we cannot be complacent when it comes to supervision and regulation. The reforms implemented in recent years have contributed to the resilience of the financial sector. Partly as a result of this, financial institutions have stood up well to recent challenges such as the CODIV-19 crisis. But there is room for improvement, particularly in 1) the application of regulations in general; 2) interest rate risk; 3) liquidity risk; and 4) the orderly resolution of troubled banks.

The recent turmoil in the banking sector shows first of all that global agreements need to be applied more widely. The regional banks in the United States fell outside the scope of a great deal of regulation, while problems at smaller banks can also trigger a global chain reaction. The US supervisory authority has therefore concluded that the application of rules and supervision should be improved. In Europe, by contrast, these standards apply to all banks. But here too, closer to home, it is important that we complete the reforms to the capital framework for banks.

I therefore reiterate our call for full and comprehensive implementation of the reforms already agreed as part of the Final Basel III Accord in the EU.

Secondly, financial institutions must also be prepared for changes in interest rates. We must ensure that they make realistic assumptions about the consequences of an interest rate change for both their income and their liabilities. Although interest rate rises generally improve the interest margin and hence the banks’ financial position, the crucial factor is the speed of the rate changes. They can happen quickly, as we have seen over the past year. With all the attendant risks. The question of how supervisory authorities should view this interest rate risk was assessed at international level some years ago. Given the recent banking accidents, we now call for an international examination of the need to adjust or develop the agreements currently in place.

Recent events have shown a need to review bank liquidity requirements. We developed liquidity requirements after the last crisis, and they have proved useful. But the world moves on. Digitalisation and social media are major factors these days, and a post on Twitter can trigger or accelerate a bank run.

In the case of SVB, for example, customers withdrew savings and large deposits much faster than expected. This means we must carefully review the relevant assumptions in our liquidity requirements and adjust them where necessary.

The fourth and final lesson I want to mention concerns resolution. As a resolution authority, we must ensure that a collapsed bank can be wound up in an orderly manner. That must be done at the lowest cost and with the least impact on the economy and society. It is never clear in advance under what circumstances a bank will have to be resolved. It is therefore important to devise several options in advance, so that the safety net can actually be used in times of emergency.

As I mentioned earlier, Dutch banks have so far remained in good shape, and that is borne out by a stress test that we conducted. Banks can certainly withstand stress. But we cannot sit back and assume that the worst is over. The ECB’s policy rate has been raised by 3.75 percentage points, at a record pace. This has immediately translated into higher market rates, but this impact has yet to feed through to the real economy. That takes time, however. Financial institutions are also still in the middle of the adjustment process. Furthermore, I am not yet convinced that the current degree of tightening is sufficient.

Inflation may well remain too high for a long time, requiring further rate hikes. Financial markets are optimistic: they are assuming that inflation will fall quickly and are already pricing in rate cuts for next year. If monetary policy has to be tightened further – or for longer – than is currently expected to curb inflation, there will be a greater risk of new market stress. Also, history has shown that after a rapid cycle of monetary tightening, problems in the financial sector often only emerge with a time lag. After the 2005/2006 tightening cycle, for example, it took well over a year for the first signs of the credit crisis to manifest themselves in the United States.

I would like to conclude with a word about buffers for banks. The current risk picture underlines the importance of buffers in order to be prepared for future shocks. It indicates that we, as DNB, need to raise the countercyclical buffer from 1% to 2%. The purpose of the CCyB is to increase banks' resilience as cyclical risks build up, and to be able to release the buffer as soon as these risks materialise. This gives banks additional headroom to absorb losses in bad times, so they do not have to cut lending to individuals and businesses. This can soften the blow of a crisis on the real economy.

At the same time we are adjusting the buffers for domestic systemically important banks. Progress has been made over the past decade with regard to European financial integration, for example with the establishment of the banking union. Also, banks in the Netherlands have become smaller relative to the size of the Dutch economy. The adjustment of the (O-SII) buffers takes account of these developments.

Taken together, the raising of the CCyB and the lowering of the O-SII will cause a limited increase in the net capital requirements for the Dutch banking sector. The combination of these two changes will nevertheless have different impacts on individual banks. This is because the buffers are calculated in different ways and the adjustments do not simply cancel each other out.

Vulnerabilities have also built up in the non-banking part of the financial system in a low interest-rate environment. We have seen various liquidity issues in recent years, driven by a combination of the use of leverage, maturity transformation and illiquid assets.

When such assets fall sharply in value – as we are now seeing, for example, in commercial real estate – shocks in the system may follow. Authorities around the world are working hard to tighten up the supervisory framework for non-banks. I fully support those efforts and I believe Ms Van Geest may also share her views on these other financial institutions with you in a moment. This concludes my introduction.

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