De Nederlandsche Bank publishes Overview of Financial Stability, Autumn 2011

Press release
Date 2 November 2011

The outlook for financial stability in the Netherlands is worrying and places high demands on institutions and policymakers. The European debt crisis and the weak global economic recovery are currently the biggest threats. In the Netherlands the structure of the housing market makes households and banks vulnerable to shocks. Systemically important banks will need to enhance their resilience.


  • Financial stability under pressure from European debt crisis and weak economic growth.
  • Dutch mortgage debt is too high, making households and banks vulnerable.
  • Systemically important banks need to prepare for specific requirements, including the build-up of an extra capital buffer and the development of recovery plans

These and other issues are covered in the Overview of Financial Stability published today by De Nederlandsche Bank (DNB). By releasing this Overview, DNB seeks to promote financial stability in the Netherlands by monitoring and identifying the key risks to the financial system. DNB also presents priorities for policymakers and the financial sector in an endeavour to mitigate these risks where possible.

The debt crisis has escalated: investors now openly doubt the debt positions of some large European countries and banks. Public finances in virtually all European countries are deteriorating and a dangerous interaction has arisen between the soundness of the financial sector, that of governments, and stagnating growth prospects. Crumbling confidence among investors and consumers is increasing the likelihood of a double dip scenario or a prolonged period of low growth, also in the Netherlands. Against this backdrop, it is imperative that the agreements made at the recent Euro Summit be rapidly and energetically translated into concrete action.

Conditions in the Dutch housing market are difficult. Falling house prices are magnifying the financial risks for households and banks. At 128 per cent of GDP, households have virtually the highest debt position in the world, with high loan-to-value ratios (the amount borrowed relative to the value of the collateral). They are hence vulnerable. Banks can only partly fund their large mortgage loan portfolios through savings deposits and are therefore dependent on market funding. The loss of confidence in the euro area is putting pressure on market funding.

The large mortgage debt in the Netherlands reflects the current fiscal regime, which encourages households to take out maximum loans and make minimum repayments. Welcome steps were taken earlier this year when lenders agreed in their code of conduct on a maximum mortgage of 106 per cent. As a logical next step, interest-only mortgages should be discouraged. Maximum mortgage interest  tax relief could be determined on the basis of a fictional repayment schedule. Interest payments during the life of the loan would then be gradually eligible for less tax relief, providing an incentive to actually make higher repayments.

A positive development is that Dutch banks have considerably improved their capital position since the outset of the crisis, under market pressure and because of higher supervisory requirements. It is a good sign that banks were largely able to do so by retaining profits. Moreover, this form of building up buffers complies with strict quality requirements under Basel III.

The Netherlands has a large financial sector that fits its open economy, but its size also carries risks. To further enhance financial system resilience, the Ministry of Finance and DNB demand that systemically important banks prepare for specific requirements, including the build-up of an extra capital buffer and the development of recovery plans. In addition, DNB wants to improve the resolvability of systemically important banks. For these institutions, resolution plans will be drawn up, aimed at salvaging vital functions should they run into unforeseen trouble. Such plans should also limit risks to the taxpayer and contagion effects. 

For further information please contact Herman Lutke Schipholt (+ 31 20 524 2712,+ 31 6524 96900), Flore Kraaijeveld (+ 31 20 524 3091, +31 6310 28660) or Kees Verhagen (+ 31 20 524 2272, +31 6211 23922).