Dutch equities out of favour among foreign investors
For the second quarter running, foreign investors sold (EUR 100 billion) more Dutch equities in the third quarter of 2002 than they bought (EUR 97 billion). That is unusual – having last occurred in two successive quarters in the second half of 1997 – and it reflects the exceptional plunge, in both national and international terms, in the AEX index in the period July-September 2002. One of the reasons for the 32.6% drop is that financial institution stocks, which performed extremely badly in this quarter, have a relatively large weighting in the index. This was the highest loss on the Dutch stock exchange in any given quarter since the Second World War. Investment funds with a lower risk profile, such as bond funds and mixed funds, were consequently more popular than equity funds in the period under review. Some EUR 1.3 billion was deposited in collective investment schemes in the third quarter (EUR 781 million following correction for one-off factors).
Funds deposited in banks for longer terms
For some months now, bank lending to the Dutch corporate sector has no longer shown any expansion, reflecting a decline in corporate investment. In contrast, growth in bank lending to other financial institutions has remained robust, partly due to the securitisation of residential mortgages (see below). Within the banking sector, a shift can be seen from sight deposits to less liquid forms such as fixed-term deposits, half of which have a maturity of more than two years. There seems to be a greater propensity to place funds in bank deposits with longer maturities.
Less vigorous growth in cross-border claims and liabilities in 2001
The development of Dutch net external assets in 2001 was strongly influenced by the global slowdown in growth, the fall in equity prices and the September 11 attacks in the United States. These effects were felt mainly in direct investment and cross-border securities transactions. All in all, the net external asset position became less negative (from EUR -61 billion to EUR -55 billion).
Growth in Dutch direct investment abroad amounted to 13%, half of the expansion in the peak year 2000. The increase stemmed mainly from intra-group loans and current account relationships between Dutch parent companies and foreign subsidiaries. Notably following the attacks of 11 September, a sharp rise could be observed in intra-group lending, probably to provide financial support to American subsidiaries. On the other hand, considerably less new purchases took place, while foreign participations in the telecom sector and others were written down. Foreign direct investment in the Netherlands also came under pressure from write-downs. In 2001, the United States remained the country with the largest holdings in the Netherlands, American holdings increasing by EUR 19 billion to EUR 77 billion. Conversely, the United States is by far the most important destination country for Dutch direct investment (EUR 99 billion).
Credit growth in danger of being underestimated owing to robust growth in securitisations
In 2001, Dutch financial institutions securitised a record amount of EUR 27.2 billion worth of loans. The 7.4% growth of bank lending to the Dutch private sector in 2001 was consequently distorted downwards by 1.7 percentage points. Residential mortgages constitute the largest category of securitised assets. Household mortgage debts may be seriously underestimated if derived solely from the balance sheets of banks and other traditionally important mortgage loan providers. The risks to financial stability may hence be underrated too.
Securitisation entails the sale of financial assets to a separate legal entity, usually denoted as a special purpose vehicle (SPV). To finance its purchase, the SPV issues marketable securities known as asset-backed securities or, where residential mortgages are transferred, mortgage-backed securities. The number of securitisations has soared in recent years. In the period 1996-2001, some EUR 33 billion worth of assets (including EUR 23 billion worth of residential mortgages) was transferred to spvs. Since spvs are not covered by the definition of credit institution, there is a danger that the picture of actual lending may become distorted.
Financial institutions may have several reasons to embark on securitisation of claims. Securitisation reduces the pressure on their balance sheet and enhances their solvency position. The capital released may also be used to finance other loans which might give higher returns. Other motives might be to lower financing costs or to widen their portfolio spread.
For further information please contact Eelco van den Berg, telephone: 020-524 2304