Contributing to sustainable prosperity
The structure of the banking sector largely determines the stability and efficiency of banking services. Within this context, stability is taken to mean the banking sector's ability to keep providing its services to consumers and businesses in times of crisis – without the need for government support. In addition, an efficient banking sector is able to offer products and services at reasonable, cost-effective rates. In this way, it provides the best possible support to consumers wishing to take out a loan and make savings and contributes to sustainable prosperity. The report describes the current structure of the Dutch banking sector and assesses its development with a view to the stability and efficiency of banking services. As such, it supplements the Cabinet's vision paper on the Dutch banking sector, the Wijffels Commission report and DNB's own Supervisory Strategy 2014-2018.
Relatively sizeable banking sector
A key feature of the Dutch banking sector is its large size. Although having shrunk since the crisis broke out, it remains large in relation to the economy as a whole, both in historical terms and from an international perspective. This can be explained in part by the high risk appetite prevailing in the pre-crisis years, which boosted bank lending. Significant aspects were tax factors and implied government guarantees for systemic banks. It is important that these distortions are further reduced, for example by further curbing mortgage interest tax relief, continued lowering of the maximum loan-to-value ratio for mortgage loans and ensuring the resolvability of systemic banks in times of crisis.
Concentrated banking sector
The Dutch banking sector is also one of the most concentrated in Europe. The failure of a bank with a large market share could pose a threat to the stability of banking services, while a high market concentration does little to promote competition either. Small banks and innovative new entrants face a competitive disadvantage compared with large banks, being limited in scale and lacking the implied government guarantees to which systemic banks can resort. DNB favours lower market concentration, which will benefit smaller market players and new entrants. To achieve this objective in a natural manner, competition must become wider, which may be achieved by promoting market entry by parties that are innovative, technically or otherwise, reducing government guarantees for large banks and introducing standard products, beside existing product ranges, which customers may more easily compare in terms of price.
Banking landscape shows little diversity
Until the wave of mergers set in during the nineties, the banking sector had been relatively diverse. There were clear distinctions between merchant banks, savings banks and mortgage banks. Mergers and acquisitions increasingly obscured these distinctions. The trend towards the universal bank model has led banks to undertake a wide range of activities across various sectors and countries. While this type of diversification helps individuals banks control risks in an effective way, larger diversity within banks reduces diversity in the sector as a whole. This increases the likelihood of multiple banks becoming unstable at the same time. The measures that should foster competition will also contribute to enhanced diversity, as they put more pressure on the banks to specialise in what they are good at. In addition, banks could be encouraged to take account of the drawbacks of diversification, for example by placing more emphasis on risk management based on prudent lending standards, adequate buffers and proactive debtor management.
Foreign banks operating in the Netherlands
Foreign banks do not play a very prominent role, which is a further notable feature of the Dutch banking market. In 2009, the Netherlands even ranked first in Europe in terms of dominance of domestic market players. Improved market entry by foreign banks may help achieve a sustainable increase in competition, especially if such entrants invest in local customer relationships and can fall back on financially sound parent companies if needed.
Dutch banks operating abroad
Foreign operations of Dutch banks have receded by roughly half from their 2007 peak. The introduction of the banking union may provide Dutch banks with an impetus to expand into other European countries in due course. Given the drawbacks of diversification for the stability of the financial system as a whole, however, it is important that such foreign operations contribute sufficiently to the efficiency of banking services. This will be the case, for example, if banks’ foreign operations generate operational economies of scale and scope with banks’ existing activities, which may be driven by integrating the foreign operations into the business as a whole.
A compass for assessing future developments
In due course, the European banking union may contribute to cross-border competition and more efficient and stable banking services. At the same time, however, integration of the European banking markets may spark a new wave of consolidation, thereby increasing the systemic importance of European banks. This underlines the need for reintroduction of a financial stability criterion into European legislation, to assess banking mergers and acquisitions. As a minimum, such a criterion should consider the size and resolvability of a newly merged bank.
DNB's report is not a blueprint for a new banking sector structure. Rather, it aims to provide a compass that may help assess whether future developments and policy intentions contribute to stable and efficient provision of banking services. One example of a development that has a potentially significant impact on the sector's structure is technological innovation, which is why DNB recently launched a thematic examination into this subject.
Although assessments of such developments in the sector are made within the context of the European banking union, the domestic perspective will continue to be of prime importance to Dutch customers. Examples of policies which have taken the right course are the curbing of mortgage interest tax relief, the lowering of maximum loan-to-value ratio for mortgage loans, the new European bank resolution policy and the proposed legislation for supervision of credit unions.