Rapid rise in interest rates exposes financial vulnerabilities

Room for improvement in some areas of international regulation

DNB President Klaas Knot said: “The problems at regional banks in the United States and at Switzerland’s Credit Suisse underline the importance of good risk management and supervision and demonstrate the need to strengthen international bank regulation.”

Global standards must be applied more widely, because even problems at smaller banks can trigger a global chain reaction. These global standards have been incorporated in European regulation, but it is also important to ensure that the latest reforms (set out in the Final Basel III accord) are implemented fully and in a timely manner.

Banks must also be prepared for rapid changes in the interest rate environment. In this context, we wish to explore internationally whether interest rate risks should be included in the minimum requirements for banks. Liquidity requirements must also be reviewed, since it is now clear that, in a digital world with social media, savings and corporate deposits can be withdrawn from a troubled bank in a matter of seconds. Finally, it is important that resolution authorities prepare various options to wind up a failing bank.

Dutch institutions can withstand shocks

Financial institutions in the Netherlands are well capitalised and able to withstand shocks. The amount of capital and cash at Dutch banks is well above the minimum requirements, so they are in a strong position. A stress test has shown that the major Dutch banks are resilient even in an adverse scenario with a confidence shock and strong economic headwinds. Insurers and pension funds are also in a good position. The historically rapid turnaround in financing conditions and persistently high inflation nevertheless call for alertness. 

DNB set to adjust buffers for banks

Buffers are an important means of absorbing shocks. This is true particularly in times of uncertainty and growing risks to financial stability. The current risk picture provides reason to raise the countercyclical capital buffer (CCyB) from 1% to 2%. The increased requirement applies to banks that provide credit in the Netherlands, including foreign banks. The new requirement will come into force on 31 May 2024.

The purpose of the CCyB is to increase banks' resilience as cyclical risks build up, and 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 curb lending to businesses and households. This can soften the blow of a crisis on the real economy.

At the same time we are lowering the buffer requirement for domestic systemically important banks (Other Systemically Important Institutions, O-SIIs). The new buffer requirement better reflects the size of the Dutch banking sector relative to the economy, which has decreased since the introduction of this buffer. Progress has also been made on European regulation and integration, such as the development of the banking union, which allows problems in the banking sector to be addressed more effectively. This new buffer requirement will also come into force in 12 months’ time.

The raising of the CCyB and the lowering of the O-SII buffers will have different impacts on each bank, but will lead overall to a limited increase in the required level of capital of the Dutch banking sector as a whole.

DNB President Klaas Knot will elaborate on the FSR in a public discussion in the House of Representatives on 7 June.

Risk map (dutch only)

This risk map presents a schematic overview of the main risks to financial stability. Not all risks are addressed in every FSR, and the same is true of the current edition. The size of the circles reflects the magnitude of risk. The colour of the circles reflects whether, over the medium term, a risk sharply increases (red), moderately increases (yellow), decreases (green) or remains unchanged (grey) compared to the previous edition of the Financial Stability Report published six months ago.

For more information, please contact Bouke Bergsma by mail at bouke.bergsma@dnb.nl or by telephone at +31 (0)6 - 53 25 84 00.