Dutch banks’ securities portfolio: decline in SPV paper, increase in government bonds

Statistical News Release
Date 13 July 2011

Dutch banks, excluding their foreign offices, hold EUR 350 billion in debt instruments. This amounts to approximately fifteen per cent of their balance sheet total. The portfolio mainly consists of debt paper issued by special purpose vehicles (SPVs) and government bonds, two categories in the portfolio that are extremely volatile under the economic conditions and new regulations.

Decline of SPV paper on the balance sheet

The debt paper issued by SPVs and held by banks at the end of April 2011 amounted to EUR 190 billion and has declined by EUR 50 billion since the end of last year. Dutch banks primarily use SPVs to sell on and make tradable the mortgages and other loans they have issued. This is called securitisation. The SPV buys mortgages and other loans from the bank and finances this by issuing debt paper. In recent years, banks bought a lot of debt paper from their “own” SPVs. On the one hand because of the decline in demand from institutional investors for debt paper from SPVs and on the other hand because of the possible use of these securities as collateral for loans from the Eurosystem. A small part of the recent decline in debt paper from SPVs on banks’ balance sheets is caused by the renewed introduction in the market of debt paper from SPVs.

In addition, part of the debt paper from SPVs can no longer be used as collateral for loans from the Eurosystem due to more stringent requirements. As a result, several securitisation programmes have been ended, the debt paper is redeemed and the originally transferred mortgages and other loans are re-entered on the bank’s balance sheet. In addition, securitisation programmes have been reversed so that the underlying mortgages and other loans can be used as collateral for the issuance of covered bonds. These securities are covered by loans; both the loans and the securities issued remain on the bank’s balance sheet. In addition, in the reversal or restructuring of securitisation programmes other more micro-economic reasons, such as efficiency considerations, may play a role.

Increased interest in government paper

Government bonds held by Dutch banks at the end of April 2011 amounted to approximately EUR 100 billion. The increased interest in government bonds started mid-2009. Between June 2009 and April 2011, government bonds on banks’ balance sheets increased by EUR 30 billion. In the past six months, the value of government bonds held by banks decreased somewhat. A large majority of this paper held by Dutch banks has been issued by governments in the euro area, in particular the Dutch (EUR 30 billion), German (EUR 25 billion) and French (EUR 20 billion) governments. Government bonds issued by Greece, Ireland and Portugal in the possession of banks amount to approximately EUR 2 billion in total. Dutch banks are not alone in their increased interest in government bonds. Banks in other euro countries also purchased significant amounts of debt paper from EMU governments (an increase of EUR 140 billion) in the past few years.

Chart Debt paper

A number of factors play a role in the increased interest for government bonds. For one, an increased interest in relatively safe debt paper may have stimulated the purchase of government bonds. In addition, banks are confronted with amendments to liquidity regulations in the run-up to the new supervisory framework (Basel III), which encourage holding highly liquid government bonds.

The recent decline in the value of government bonds on banks’ balance sheets can largely be explained by price falls following the rise in interest rates on government bonds. Mainly as a result of this, holdings of government paper in the past six months declined by EUR 10 billion.