de nederlandsche bank - center for financial stability

De Nederlandsche Bank

Overview of Financial Stabil ity in the Netherlands

November 2009, no. 10

09

De Nederlandsche Bank

November 2009, no. 10

09Overview of Financial Stabil ity in the Netherlands

© 2009 De Nederlandsche Bank NV

Edition: 550

This document uses information available up to November 16, 2009.

Publication and multiplication for educational and non-commercial purposes is allowed, with acknowledgement.

Westeinde 1, 1017 ZN Amsterdam – PO Box 98, 1000 AB Amsterdam, the NetherlandsTelephone (+31) 20 524 91 11 – Telefax (+31) 20 524 25 00Website: www. dnb. nl.

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Contents

Introduction 5

1 Developments in the international environment 6 Box 1 Distorting effects of support measures and exit strategies 11

2 Dutch firms and households 13 Box 2 Why is Dutch corporate credit declining? 13

3 Dutch financial firms 18 Box 3 Stress-testing for Dutch financial firms 20

4 Institutional developments and infrastructure 24

5 Conclusion 29

5

Overview of Financial Stability in the Netherlands

Introduction

After a period of extreme turbulence, the acute threat to global financial stability has abated since the spring of this year. Financial market sentiment has improved, witness the rise in equity prices, fall in risk premia and the improved access to market finance.

Despite the stabilisation, the situation is still fragile. The first half of 2009 saw a deepening of the recession in many countries, with markedly negative growth rates. And the financial sector has already had to eat into its buffers because of the crisis. Moreover, the improvement in the financial markets cannot be seen in isolation from the exceptional support measures, including the expansionary monetary and fiscal policies, capital injections and guarantee schemes. While these measures were essential to curb the crisis, they have unwanted side-effects in that they distort the level playing field, put pressure on public finances and may induce moral hazard.

The prospects for economic recovery differ across the globe, with the emerging economies in Asia and parts of Latin America accelerating fastest while the United States and Europe are taking longer to pick up speed. In view of the still sizeable global imbalances, this enhances the risk of a disorderly adjustment with sharp fluctuations in interest and exchange rate. New setbacks arising from the recession must be anticipated over the next few months. The recession is reflected – in the Netherlands as elsewhere – in corporate defaults, stagnant housing markets and ris-ing unemployment. Notably specific sectors – including the commercial real estate market – are under pressure.

In the Dutch financial system the financial position of pension funds is vulnerable, even though they are gaining from the revival in the markets. Banks and insurers are still under severe strain, and some large institutions must restructure their balance sheets as a result of the credit crisis and the ensuing support measures. The bank-ruptcy of DSB Bank in mid-October was a drastic event. The underlying problems at this institution were in part unrelated to the credit crisis, but amid the tense market climate, the situation rapidly deteriorated in the wake of negative publicity, resulting in a bank run.

All things considered, prospects appear mixed. The acute danger of systemic crisis has waned and the swift economic contraction has been arrested. But there is still a long way to go before we can speak of sustainable recovery. The authorities face the tricky task of unwinding the expansionary support measures. The crisis has severely deteriorated public finances. The recent period highlights how important it is for the government to have a robust financial position that allows it to intervene effec-tively. Moreover, sound public finances are essential in view of other developments over the coming years, such as demographic ageing. Finally, it is important to pursue ongoing initiatives to structurally reinforce the financial system, such as the gradual tightening of capital requirements and the improvement of supervision and crisis management.

Situation still fragile

Timely unwinding of support measures

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1 Developments in the international environment

A gradual improvement has been seen in the international environment since this spring, most obviously in the financial markets and in a number of emerging economies. Furthermore, the US housing market appears to be stabilising. However, it should be borne in mind that the recovery is taking off from particularly weak starting conditions and is heavily dependent on the exceptional support measures. For the moment, major downward risks must still be factored in.

Cautious recovery in financial markets

After some hectic months since the fall of the US investment bank Lehman Brothers last autumn, financial markets have improved. This is most obvious in the surge in equity prices, which reached a trough in March this year but have since increased by tens of percentages (Chart 1). The improved market sentiment is also reflected in the decline in equity price volatility and lower risk premia on corporate and govern-ment bonds. The tensions in the money market have eased too. The spread between the three-month interbank interest rate and the risk-free interest rate narrowed to under 50 basis points, a level that has not been so low since August 2007 (Chart 2). In addition, central banks have slashed their policy rates over the past year, steeply pushing up the yield curve and widening the interest margin for the banking sector.

The favourable market conditions can be partly attributed to the improved outlook and decline in risk aversion among market parties. Nonetheless, concluding that the end of the credit crisis is in sight would be premature – for two reasons. Firstly, the recovery is starting from the bad situation in the autumn of 2008 when the financial system was hit by an unprecedented systemic crisis. Though much has improved relative to that benchmark, there is still a long way to go: the capital buffers and profitability of financial firms are still under pressure, and this has begun to interact adversely with the real economy. Secondly, the improvement in market sentiment relies heavily on the authorities’ exceptional support measures (see Box 1). Central

Financial markets picking up …

… but crisis not over yet

Chart 1 Recovery in market sentimentEquities; world index, July 2006 = 100. Volatility; VIX index (rhs)

150

100

50

0

jul. 06

07 08 09

Source: Datastream.

200

150

100

50

0

Volatility

(rhs)

Financial sector

Real sector

7


Chart 2 Euro area money market less tense, yield curve steepensBasis points

300

250 Money market risk premium200

150

100 Yield curve

50

0

-50

-100

-150

Jun. 06

Feb. 07

Feb. 08

Feb. 09

The risk premium is the three-month interest rate minus the EONIA SWAP index, the yield curve is the ten minus the three-month interest rate-year Source: Datastream.

banks are supporting the markets, not only by setting low policy rates, but also by ample provision of liquidity and the purchase of specific debt instruments. Governments have issued guarantees, provided capital injections and considerably loosened fiscal policy. These measures were successful in curbing the crisis and creating the conditions for recovery but do not offer a sustainable solution.

Correction in the real economy

While the financial markets are picking up, the adjustments in the real economy are still in full swing. Developments differ across the globe (Table 1), however, with the emerging economies in Asia and parts of Latin America being the first to recover after a moderate slowdown in growth. The US economy is expected to improve next year, while GDP growth in the euro area will be slower to recover. In the short term, unemployment will continue to rise.

These forecasts are surrounded by large margins of uncertainty, with any setbacks liable to be reinforced by a detrimental interplay between the real economy and

Real economy still weak

Table 1 GDP growthAnnual change in percentages

2007 2008 2009* 2010*

World 5.2 3.0 -1.1 3.1

US 2.1 0.4 -2.7 1.5

Japan 2.3 -0.7 -5.4 1.7

Euro area 2.7 0.7 -4.2 0.3

Emerging economiesAsia 10.6 7.6 6.2 7.3

Latin America 5.7 4.2 -2.5 2.9

Central and Eastern Europe 5.5 3.0 -5.0 1.8

* Estimate.Sources: IMF, World Economic Outlook October 2009.

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the financial sector. New losses could arise at banks, intensifying the pressure on lending and consequently curtailing spending and exacerbating the downturn. An important source of uncertainty is inflation and nominal interest rates. It is conceiv-able that the current expansive monetary policy will feed inflation, but the reverse scenario of persistently low inflation or even a measure of deflation cannot be ruled out either.

The differences in the pace of economic recovery and the prolonged financial ten-sions could translate into a disorderly correction of the global imbalances. These imbalances – particularly in the balances of payments and public finances of many countries – were part of the cause of the credit crisis.1 Though lower than it was, the US current account deficit is still substantial and the stability of the US dollar is subject to uncertainty. The loose monetary policy in the developed economies is driving up inflation in a number of emerging economies and may put more pressure on exchange rates. Widening budget deficits and the pressure on some currencies are enhancing the likelihood of an abrupt adjustment with sharp movements in interest and exchange rates.

A crucial question is the extent to which recovery in the US will actually continue. Initial data on the third quarter of 2009 once again show positive GDP growth, implying that the recession there has ended. And the freefall in house prices (Chart 3), which have lost around one-third of their value since 2007, came to a halt over the past few months. Experiences from the past and in other countries show that such a correction is normal in housing market crises.2 Nonetheless, the house prices could come under more pressure if, for instance, interest rates increased. The scale of defaults on loans has further expanded, with – besides mortgages – the rapid increase in arrears on credit card loans being particularly marked (Chart 4). These are approaching ten per cent of the loan volume, a level not previously seen. The European economic cycle follows the pattern in the US with some lag. House prices are under pressure in some countries here too, notably the UK, Spain and Ireland. The fall in house prices in the Netherlands has so far been limited to a few per cent (see Chapter 2).

The extensive support measures are essential for containing the financial crisis, but also undermine the government’s financial position. Government debt is expand-ing considerably in many countries and the differences in risk premia on govern-ment bonds are widening. Moreover, the budget deficits will continue to rise on the back of the recession, owing to a combination of falling tax revenues and increasing spending on social security. The government’s financing needs are partly met by

Correction of global imbalances?

Turnaround in the US?

Deteriorating public finances

Chart 3 Decline in housing market levelling off Annual change in percentages

30

Netherlands

15

US0

Spain

-15

UK-30

00 01 02 03 04 05 06 07 08 09

Source: Datastream.

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financial firms’ increased preference to invest in treasury paper. These investments are partly financed by the central banks’ temporary liquidity provisions. If the unconventional monetary policy measures were unwound, it could cause upward inflationary pressure and a crowding out of private investment (see Chapter 2), all the more so because a large number of countries have substantial recourse to the capital markets at the same time. It is hence vital that public finances are brought quickly under control and that the unwinding of the support measures is begun timely and gradually.

Implications for the financial sector

Chart 5 shows the global losses written down by financial institutions since the start of the crisis in 2007. These reached a peak at end-2008 but are still mounting and now amount to more than USD 1600 billion. To counter the erosion of their financial position, many institutions have raised new capital with the help of governments, which in the case of banks roughly compensates for the losses incurred (Chart 6). Furthermore, thanks to the improved stock market conditions, many banks and insurers can raise new capital themselves. They can use the new capital to reinforce their buffers, whereas banks that received state support can repay it in part.

More writedowns are in the pipeline, according to the IMF; at end-September 2009 total losses were estimated at approximately USD 3400, around half of which has thus already been written down. This estimation was lowered relative to six months previ-ously, while the composition of the losses has changed too. Writedowns related to weak market sentiment have been partly recovered and losses stemming from the recession have increased. Another expectation is that the steepening of the yield curve (Chart 2) will drive up banks’ net interest income. This pattern is already vis-ible in US banks’ profit figures over the third quarter. The earnings recovery among commercial banks rests in part on improved interest margins. It should be noted that this recovery falls short of the sharp rise in profits at US investment banks, which have primarily benefited from the pick-up in trading activities. Most European banks have as yet shown no more than a hesitant earnings recovery.

Changes in the financial landscape

The state of the financial system now largely reflects the crisis and measures taken by the authorities to contain it. However, these measures offer no basis for sustain-

Losses in financial sector continue to mount

Chart 4 Defaults on various types of loans Percentages of total outstanding loans

4,0 10,0

Recessions

3,0 7,5

Mortgages

2,0 5,0

Corporate loans1,0 2,5

0,0 0,0 Credit card loans (rhs) 85 90 95 00 05

Source: Federal Reserve Board.

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able recovery and have an unintended and distorting effect (see Box 1). They hence need to be phased out timely. Financial institutions must prepare themselves, for one because they will once again be dependent on regular financing at competitive conditions.

Institutions will also have to deal with important changes in supervision and regula-tion. The capital requirements for specific bank exposures will be raised, making, say, investments in complex products and propriety trading less attractive. Measures will also be taken to make supervision less procyclical. And international recom-mendations have been made to facilitate an orderly dismantling of a large, cross-border financial institution in difficulty, for example by simplifying an institution’s legal structure (see Chapter 4).

It is important to pursue initiatives aimed at strengthening supervision and regula-tion. At the same time, undesired side-effects must be taken into consideration when implementing these changes. An accumulation of new rules places heavy demands on the business operations of institutions and may reinforce the economic downturn in the short term, thus having a procyclical effect (see Chapter 4). In addition, new rules may structurally erode the profitability of particular business models. The latter is unavoidable, but could mean that financial services will shift to less regulated components of the system. It could also cause institutions to take

Return to normal conditions

New search for yield?

Chart 6 Global writedowns versus capital injections Writedowns and capital injections, banks and other financial firms in the US, Europe and Asia in the period

2007, third quarter until 2009, second quarter, USD billion

2000

Banks

1500

Non-banks

1000

500

0

Writedowns Capital injections

Source: Bloomberg.

Chart 5 Global writedowns per quarter Writedowns by banks and other financial firms, USD billion

300

US

200 Europe

Asia

100

0

III 07

I 08

III 08

I 09

Source: Bloomberg.

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more risks in order to continue realising adequate returns. That would bring us back to the search for yield phenomenon that contributed to the build-up of vulnerabili-ties in the run-up to the crisis.

Box 1 Distorting effects of support measures and exit strategies

Central banks and governments took special measures during the crisis in order to protect financial stability and counter the credit crunch facing the private sec-tor. Central banks gave liquidity support to the banking sector and supported specific financial markets with purchase programmes, while governments initi-ated more guarantee schemes and provided capital injections. The interventions prevented a collapse of the financial system and were effective in that respect. At the same time, the authorities were aware that their measures could have distorting influences on the markets, see Table 2.

The level playing field between supported and unsupported financial institu-tions or national or international markets may be distorted, as reflected in dif-ferences in funding costs and price developments. Government influence on institutions may also scare off private financers. Such effects could be partly seen in the market data of financial institutions and in the price formation in financial markets. For governments, the interventions lead to rising government debt and higher financing costs, which could damage confidence in their cred-itworthiness.

Distorting effects that could arise in the longer term relate mainly to undesir-able risky behaviour, for example by investors in general and by directors and holders of shares, bonds and deposits in financial institutions in particular. In designing the support measures, authorities sought to keep the possibly distort-ing influences to a minimum. To this end, the support was granted at market terms and under internationally harmonised conditions where possible. Ways of containing the uncertainty among market parties are providing clarity on the content of the measures, keeping a distance between the government and the business operations of the supported institutions, and ensuring that private stakeholders bear continuing responsibility.3

To reduce the distortions where possible, a smooth exit from the measures is desirable. Furthermore, careful timing is essential. The financial sector is going through a major adjustment process, while the risk of new unexpected shocks remains. The safety nets provided by central banks and governments are hence still required for the time being. As the G20 concluded at end-September, we must guard against an overly sudden withdrawal of the support measures. That could damage stability. Sooner or later, however, the financial sector will have to operate independently again. A complication is that support could get in the way of market recovery, as market parties have too few incentives to trade with each other. This can be prevented by making it clear in advance that the sup-port is provisional and is being granted under conditions that ensure it would be unattractive in the event of market recovery. An example is the premium for guaranteed bank debt, which makes the use of this instrument unappealing if funding costs in the market drop.

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When making an exit, the various support measures should be reviewed in con-nection to each other. The obvious approach is to phase out the support in the market segments where recovery is most advanced, for example in the money market. Exits from far-reaching measures entailing extensive restructuring in the financial sector – as in the case of nationalised financial institutions or toxic assets – will require more time. On the basis of such key assumptions, the IMF outlines a possible timeframe in which liquidity support is unwound first, fol-lowed by guarantee schemes and then government participations and schemes for toxic assets.4 This would make the transition more gradual, to the good of financial stability.

Besides a gradual exit, international coordination is important in preserving a level playing field across countries. Authorities are working internationally, in the G20 and other contexts, to realise a careful exit from the support measures, setting great store on correct and well-coordinated timing. Finally, effective and timely communication on the exit strategies could help prevent surprises and a possible overreaction from the markets.

Table 2 Instruments to contain distorting effects

Distorting effects Mitigating instruments

Shor

t ter

m

Market relationships Market-compatible and harmonised support conditions - unlevel playing field - adequate conditions for support (price, instrument,

governance)- distortion in international capital flows - harmonisation of national programmes- financial protectionism { - no territorial discrimination

- equal treatment of foreign subsidiary/branches- crowding out of unsupported markets - purchase of debt paper at market prices

External effects / confidence Authorities act clearly and complement market - uncertainty about effects of support - clarity on the content of the support measures - institutions’ market access restricted - clarity on the position of private financiers - uncertainty about government influence on

business- government at arm’s length from business operations

- creditworthiness of governments - budgetary consolidation, multilateral initiatives- independence of central banks - limit financial risks or ex-ante government guarantees

Lon

ger t

erm Moral hazard Disciplinary mechanisms

- stakeholders (management, private sector involvement equity, bond and deposit holders)

{ - involvement of private sector- temporary support, incentives for timely and smooth exit- prudential supervision

- search for yield - timely increase in policy rates

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2 Dutch firms and households

The free fall of economic growth in the Netherlands has been stemmed. According to preliminary figures, the economy edged up 0.4 percent after four consecutive quarters of contraction. International trade is reviving, and so is Dutch producer confidence. Yet, the recovery perceived is fragile and both households and firms will for the time being continue to feel the effects of the economic crisis. The crisis has also put pressure on public finances.

Firms

The economic crisis has hit Dutch firms on two sides. First, for a great many enter-prises it has become harder to finance operational activities. Growth of bank lend-ing has fallen off, partly as a result of stricter lending criteria (see Box 2). Other funding sources have also become less accessible. Owing to poor operating results, firms have less recourse to internal financing, while not all firms have access to bond or equity markets. Moreover, the high public sector demand on the capital market may in the longer term crowd out private finance opportunities. Besides finance-related problems, firms are faced with plummeted sales. Investment is often being shelved, exports are still at a low and also private consumption has dropped sharply on a 12-month basis. At a nearly 8 percent volume decrease in the third quarter on a 12-month basis, notably construction has been hit particularly hard. The surge in business bankruptcies reflects the difficult financial situation in which the Dutch business sector finds itself.

Funding difficult for firms

Box 2 Why is Dutch corporate credit growth declining?

Bank lending growth is sagging worldwide. In the Netherlands, the growth rate of lending to non-financial firms has fallen from more than 15 percent in the summer of 2008 to 4 percent now. Since its peak last year, the volume of short-term loans outstanding has dropped as much as nearly EUR 10 billion. And while the volume of loans with longer maturities is still rising, the decrease in this credit type’s growth rate has been no less significant. Short-term credit is gen-erally moving more in sync with the business cycle than longer-term credit. A growth rate decline could also be perceived in the period between 2001 and 2004.

The sharp drop in credit growth is related to both demand and supply factors. From the Bank Lending Survey – a qualitative quarterly survey of European banks’ lending policies – it appears that a majority of Dutch banks are perceiving a decline in demand. The reduced economic activity is among the chief causes. For one, the need for capital to make investment has diminished. Corporate investment in the second quarter of this year was down nearly 18 percent from the same period a year earlier. Demand for credit to finance mergers and acqui-sitions has also fallen. At the same time, corporate demand for credit for debt restructuring has risen, partly making up for the drop in demand.

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The economic downturn has depressed demand for office space and other com-mercial property. This has impacted the value of real estate (Chart 8). In the third quarter, the market index was 8 percent below that in September 2008. This fall in value feeds through into the financial system in various ways. Financial insitutions sustain losses on investments in commercial property. Besides, property is often used as collateral for regular coporate loans. A depreciation of commercial property translates into a higher credit risk, which, incidentally, will not manifest itself unless the debtor is no longer able to meet his payment obligations and the bank is com-pelled to resort to realising the collateral. Nonetheless, the depreciation of property contributes to the reduced accessiblity of firms to bank loans.

Households

For most households the effects of the economic crisis have so far remained limited. For example, since the summer of 2008 unemployment has risen by as yet no more than approximately 1.5 percentage point. The increase in unemployment has been temporarily stemmed by the introduction of part-time unemployment and the ‘discouraged worker’ effect. The latter refers to the phenomenon of job seekers

Commercial property market under pressure

Unemployment steadily rising

Besides reduced demand, banks’ lending policies also account for the lower credit growth. As early as autumn 2007 the majority of Dutch banks reported they were tightening their credit standards. An ample majority explained they were doing so in response to the increasing risks involved by collateral, the mac-ro-economic developments, individual firms and industrial sectors (see Chart 7). Reasons related to banks’ balance sheet positions also play an important role. Indeed, banks are dealing with higher costs of capital and liquidity, for one, be-cause the crisis has rendered it more difficult to raise funds on financial markets. From ECB analyses it appears that cost of funds and balance sheet restraints generally have an adverse effect on banks’ willingness to extend new loans to firms.

Given these developments, a further decline of credit growth should not be ruled out. From a historical perspective, it is not unusual that an improvement in corporate credit follows an economic recovery with some lag. Given the pres-sure on their balance sheets, the risk exists that banks are less than usually able to facilitate rising demand for credit.

Chart 7 Determinants of lending criteriaNet percentage, unweighted average of underlying answers

100

75 Risk perception50

25

0 Cost of capital and balance restrictions

-25

-50

03 04 05 06 07 08 09

Source: DNB, Bank Lending SurveyThe chart is based on estimates by Dutch banks. A positive sign implies a tightening of criteria.

Criteria tightening C

riteria relaxation

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withdrawing from the labour force as they are discouraged by the notion that the crisis has lessened their chances of finding a job. A case in point are graduates who, instead of looking for a job, take up another university course. In addition, as the labour market was very tight before the start of the crisis, the current unemployment figure (5 percent of the labour force) is still low. Even so, these effects have stemmed rather than counteracted unemployment, which will therefore continue to rise over the next few years.

Although total unemployment is rising steadily, starters on the labour market are hit relatively hard (Chart 9). From the previous OFS it appears that this group is vulnerable for lack of adequate financial buffers.6 Notably young homeowners are vulnerable if they become unemployed.

The crisis also has repercussions on the housing market. Over the past twelve months house prices in the Netherlands have fallen approximately five percent on

Chart 8 Increase in value of commercial propertyAnnual change in percentages

15

Retail

10

Offices

5

Houses

0

Plants

-5

Total

-10

-15

Dec. 01

Dec. 02

Dec. 03

Dec. 04

Dec. 05

Dec. 06

Mar. 07

Jun. 07

Sep. 07

Dec. 07

Mar. 08

Jun. 08

Sep. 08

Dec. 08

Mar . 09

Jun. 09

Sep. 09

Source: ROZ.

Chart 9 Unemployed labour force by age categoryPercent

12

15 - 25 yr

10

25 - 35 yr

8

35 - 45 yr

6

45 - 55 yr

4

55 - 65 yr

2

0

07 08 09

Source: CBS.

16


average. While so far the decline has remained modest, the number of transactions has dwindled much more sharply. The number of houses sold in the third quarter of 2009 was nearly a quarter below the number of housing transactions in the same period the year before (Chart 10). Households’ restraint on the housing market is partly induced by the uncertain income situation and the stricter mortgage stand-ards. Uncertainty about the price development in the housing market is another important factor. This uncertainty is fed by lack of clarity about whether or not the mortgage tax relief will be maintained.

The development of interest rates presents a significant risk for homeowners. If, upon expiry of the fixed interest period, the new rate is higher than the original rate, mortgage service costs may soar. In recent quarters, homeowners have increasingly opted for a mortgage with a short fixed-rate period, indicating growing household vulnerability. About half of all mortgages has a remaining fixed interest period of 4 years or less, while one-fifth has a remaining fixed interest period of less than one year even (Chart 11). Should mortgage rates surge, these households in particular will be confronted with higher mortgage service cost.

Public finances

The recession has a strong impact on public finances. Tax revenues are lower, while expenditures are mounting due to the support measures and the increase in unem-ployment benefits. As a result, the 2008 budget surplus of 0.7 percent of GDP has turned into a deficit of more than 4 percent of GDP in 2009. For 2010, a further deterioration by approximately 2 percentage points is being anticipated. Dutch government debt is also developing unfavourably. Owing to budget deficits, the recession and the support provided to the financial sector, the debt ratio of more than 65 percent of GDP estimated for 2010 is no less than 20 percentage points higher than in 2007. In the coming period, the government will have to make radical choices to keep public finances under control. These choices will inevitably affect the position of firms and households.

Uncertainty on the housing market

Chart 10 Housing saleNumber of homes sold; 12-month moving average, x 1000; period for sale, in days

20

18

16

14

12

10

00 01 02 03 04 05 06 07 08 09

Source: CBS/Cadastre & NVM.

140

125

110

95

80

65

Period for sale (rhs)

Number of homes sold

17


Chart 11 Cumulative distribution of interest rate period and years until rate adjustmentPercent of total number of mortgages

100

Fixed-interest period chosen

80

60

Fixed-interest period remaining

40

20

0

0 5 10 15 20 25

Source: DNB Household Survey, 2008.

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3 Dutch financial firms

Despite the improvement of financial markets, Dutch financial firms continue to be under heavy pressure, while the recession causes the burden of risks to shift gradually to the real economy. These risks translate into tighter credit standards, which in turn may accelerate the economic downturn. Furthermore, banks, pension funds and insurers continue to be vulnerable should the sentiment on the financial markets start to deteriorate again.

Banks

Following a very poor performance in the fourth quarter of 2008, the Dutch banking sector suffered a limited loss in the first half of this year (Chart 12). This was largely due to an increasing addition to the provisions of EUR 3 to 4 billion per quarter. This reflects (expected) credit losses related to the recession. Chart 13 shows how the addition to provisions is related to the number of bankruptcies and GDP growth. Net interest income continued to be remarkably stable in recent quarters, but may rise in the coming period. Banks were confronted last year with mounting funding costs as a result of the poorly functioning money market. This year, banks profit from the sharply steepened yield curve (see Chapter 1), while interest expenses have been falling owing to the improved money market conditions and the recent reductions in interest rates on savings deposits. In addition, Dutch banks have recently raised capital on the market, partly to repay government support. When considering the development of banking performance, it should be noted that the accounting rules revised in 2005 have changed the pattern of profits and losses appreciably. For example, under the new rules banks are not allowed to transfer losses to their profit and loss accounts until these losses actually manifest themselves. Neither may they make provisions - as they used to do - for anticipated losses not sustained yet. At

Limited loss of banks

Chart 12 Results of Dutch banksChief items, in EUR billion; operating result (rhs), in EUR billion

30

15

0

-15

-30

-45

07 Q3

08 Q1

08 Q3

09 Q1

Source: DNB.

20

10

0

-10

-20

-30

Financial transactions

Provisions

Operating costs

Net interest income

Commis sion income

Miscella-neous

Operating result (rhs)

19


the international level, work is underway to amend accounting rules in order to create options to factor in expected losses in advance. This should reduce the pro-cyclicality of provisioning.

In the short term it will become clear how much the recession has impacted banks, which, incidentally, are themselves an important link in this process. Indeed, if risks rise in the real economy, banks will obviously tighten their credit standards (see Chapter 2). To investigate the effect of a very negative scenario, DNB last summer performed a stress test at the largest banks and insurers of the Netherlands (see Box 3). One important conclusion resulting from these tests is that the sector, while being hit hard, should be deemed capable of absorbing the losses.

In October, DSB Bank, which owing to weaknesses in its business model had been in trouble for some time already, ran into acute problems. These problems had been triggered by negative media reports as well as a public call to depositors to withdraw their balances from this bank, resulting in a bank run. A possible bail-out action by private parties was compounded by uncertainty about the size of the announced claims for damages by customers and doubts over the viability of the business model. Eventually, this resulted in the bank’s collapse, despite preventive attempts in which DNB acted as mediator. This event demonstrates that the threat of mass claims can translate into a prudential risk and that under extreme circumstances the liquidity risk of retail savings is high. It also illustrates the need to improve the official crisis management toolkit and the working of the deposit guarantee scheme (see Chapter 4).

Besides these recent developments, the Dutch banking system is passing through a restructuring process. This notably applies to the largest banks. For example, the break-up process of ABN Amro is not completed yet and a number of entities are set to be merged with Fortis Bank Nederland. Furthermore, ING has announced a stra-tegic reorientation, which provides for the split-up between the banking and insur-ance business, among other things. Such measures largely arise from the conditions which the European Commission has set for merging ABN entities with Fortis Bank Nederland and for public bail-out operations, after previously granting its condi-tional approval to these steps. Among other things, the European Commission has stipulated the divestment of entities. While necessary to avoid distortion of compe-tition, this precondition at the same time carries complications if banks must follow up on it under time pressure and in an unfavourable market situation. The restruc-

Stress test

Collapse of DSB Bank

Restructuring of Dutch banking system

Chart 13 Addition to provisions and real economyProvisions, in promille of loans granted; bankruptcy rate; GDP growth (reversed scale), percent

5 1.2 5

4 1.0 4

3 0.8 3

2 0.6 2

1 0.4 1

87 90 93 96 99 02 05 08 87 90 93 96 99 02 05 08

Bankruptcy rate is number of bankruptcies divided by number of firms.Source: DNB.

-6

-4

-2

0

2

4

6

Provisions

Bankrupties

GDP growth

20


Box 3 Stress testing for Dutch financial firms

DNB has for many years used stress tests as a tool to assess the impact resist-ance of financial institutions.7 Last summer DNB performed a macro stress test at fifteen of the largest Dutch banking and insurance groups. The results show that after undergoing a combination of shocks specified by DNB, the sector re-mains well above the minimum solvency requirements.

The stress scenario (Table 3) assumes historically high losses on exposures to firms and households. In respect of the year 2008, Dutch GDP shrinks more than in the 1930s, with employment rising to nearly ten percent. Share and house prices undergo sharp corrections as a result. At 4 percent, the corporate credit loss ratio is much higher than during previous recessions.

Table 3 Stress scenarioCumulative percentage changes on 2008, over a two-year horizon (unless stated otherwise)

GDP volume -6.3

Unemployment (level, percentage) 9.7

Housing prices (year-end) -30

Commercial property prices(year-end) -40

Stock market index (year-end) -50

Source: DNB

Owing also to capital reinforcements, the sector has built up sufficient buffers to be able to absorb the effects of the scenario. At banks, the average tier 1 ratio falls from 11 to 7 percent, well above the international minimum standard for Tier 1 capital of 4 percent (Chart 14). Life insurers are particularly sensitive to the assumed decrease in long-term interest rates to 2 percent. Their solvency ratio drops from 200 to 160 percent, remaining above the minimum requirement of 100 percent. Having a shorter horizon, non-life insurers are less sensitive to interest rate movements. Their solvency ratio falls from 320 to 290 percent. Pen-sion funds, which were not covered by this stress test, would likewise be hit hard by the combination of falling interest rates and losses on corporate invest-ments.8

Chart 14 Impact of scenarios on tier-1 ratio of banksBlock is 25-75 quartile intervals; dot is weighted average

14

12

10

8

6

4

2

Year-end 2008 2 yr stress

Source: DNB.

21


turing process is still well under way, but some of the contours of the new situation are already becoming visible. For example, in the new situation the largest Dutch banks will be smaller in size than they were before the crisis, the number of large foreign players will increase, and the bancassurance model will definitely lose in importance.

Insurers

The insurance sector, too, is depressed by the credit crisis and the recession. Notably life insurers face investment risks and an increase in the present value of their obliga-tions due to the low interest rates, combined with a substantial fall in production. This is caused by several factors. In the wake of the sharply cooled-down market, demand for the related life insurance products has fallen too. In addition, since the previous year, life insurers have faced competition from bank saving: the favourable tax treatment of savings products previously reserved for insurers now also applies for banks providing insurance services.9 A third factor in the fall in life insurance production are the so-called ‘woekerpolissen’, referring to the high costs of unit-linked insurance policies. Most insurers have meanwhile effected a composition with representatives of aggrieved parties. The credit crisis, falling production and costs of settlements combine to depress life insurers’ earnings, which in 2008 made for a net loss for the sector. Furthermore, in the coming years, the sector will have to reckon with a structurally lower profitability.

Besides a reduction in life insurance turnover, the composition of the demand for these products is changing (Chart 15). Customers have an increasing preference for products with a high degree of certainty, at the expense of the proportion of ‘unit-linked’ products, where the policyholder bears the investments risks.

The investment risk run by non-life insurers is traditionally lower than for life insurers, as payments of claims are largely funded from premiums received in the running year. Nonetheless, they suffer seriously as a result of the recession, as such periods are usually attended by a decline in insurance production and increase in damage claims.

Life insurers under pressure

Chart 15 Production of life insurersBy premiums earned in EUR mln during Jan.-Sep.

7,000

6,000 Cash-based

5,000

4,000 Unit-linked

3,000

2,000

1,000

0

03 04 05 06 07 08 09

Note: The risk inherent in cash-based (unit-linked) policies is borne by the insurer (policyholder). Source: Dutch Association of Insurers (Verbond van Verzekeraars).

22


Pension funds

The pension sector benefits directly from the improved market sentiment. Whereas early this year most funds were in a state of heavy underfunding, the funding ratios of many have meanwhile risen again (Chart 16). However, this does not mean the sector has recovered. In order to become sufficiently resilient and to honour – usu-ally conditional – index-linking commitments, funds typically need a funding ratio equal to some 130% of nominal liabilities. Moreover, the mood on many markets is still delicate and requires funds to take precautions against strong downward risks. Chart 17 shows how, mainly as a result of stock market developments, the composi-tion of funds’ investment portfolios has changed. To ensure the sustainable rein-forcement of pension funds’ financial positions, DNB closely monitors their recovery and keeps a keen watch over their investment policies. In addition, the pension system as a whole is being appraised by several experts, including two Government-appointed committees which are to make recommendations on, respectively, the sustainability of the current system and pension funds’ investment policies and risk management.

Depending on how rapidly the sector recovers, the real economy will also feel the pain of the losses sustained by pension funds. Many funds, for instance, are cur-rently unable to fully index their members’ pension rights, while in several cases contributions must be raised or sponsors must be asked for a margin payment. The eventual impact on the economy is extremely uncertain still, but to get some idea of the order of magnitude, DNB has modelled a few scenarios. The picture that

Pension funds still far from recovery

Chart 16 Projected funding ratio of the Dutch pension sectorPer cent of nominal liabilities, up to 2009, second quarter

160

140

120

100

80

07 08 09

Source: DNB.

1011

4341

53

32

55

Chart 17 Breakdown of pension funds’ investmentsPer cent

2007, third quarter 2009, second quarter

Real estate investments

Other investments

Equities

Fixed-rate instruments

Source: DNB.

23


emerges suggests that over the 2009–2013 period the Netherlands faces an aggregate GDP volume contraction of some ¾ per cent.10

Structural changes

In line with international trends, Dutch financial institutions will have to adapt to changes in the financial landscape. These are driven by adjustments – in many cases tightening – of regulatory regimes. Also, demand for financial services may be expected to change, with a strong preference for simple products emerging. In order to gain a better view of the main trends facing the Dutch financial sector, DNB has carried out a study.11 This study concludes, among other things, that the so-called universal bank, offering several product categories under a single roof, continues to be an attractive business model. Large Dutch companies are expected to increasingly use the services of foreign banks. Another important conclusion is that financial institutions continue to realise sufficient profit growth, which may translate into a renewed search for scale. The pension sector may realise scale economies through consolidation. A final conclusion is that life insurers world-wide have come under pressure, with Dutch institutions facing the added burden of a mature market, competition from new players (tax-sponsored bank savings plans) and reputation damage in connection with the recent commotion over unit-linked insurance policies.

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4 Institutional developments and infrastructure

In response to the crisis, international bodies are restructuring themselves while measures have been taken to reinforce the financial system. Here, major steps are being taken, as in the field of macroprudential supervision and the set-up of European supervision and crisis management. This chapter also discusses three developments in the financial infrastructure that are relevant to financial stability: the increasing complexity of payment and securities settlement systems, the crea-tion of central counterparties for the trade in credit derivatives and the fight against cybercrime.

Institutional developments

Global developments

Inspired by lessons drawn from the crisis, international bodies such as the Financial Stability Board (FSB), the Basel Committee of Banking Supervisors (BCBS) and the International Monetary Fund (IMF) have implemented reforms. Their substantive focus has improved, as through the creation of separate sub-groups addressing the most urgent issues, such as the improvement of crisis management and the rein-forcement of liquidity and capital requirements for banks. At the same time, repre-sentation within these bodies has become more proportional, so that countries such as Brazil, Russia, India and China now occupy positions that are commensurate with their share in the global economy. In Europe, moreover, the institutional set-up of financial supervision and macroprudential supervision is being reformed and reinforced. The central aim of all these changes is to create more vigorous policy-making and supervisory processes and more effective cooperation, both among compatriot authorities and across national borders. One key element is the effort towards better alignment of financial supervisors and standard setters, on the one hand, and the authorities responsible for macroprudential policy on the other. Such alignment is needed so that risks in the financial system may be identified in time and adequately mitigated.

As regards banking supervision, measures are being taken to increase banks’ resil-ience against shocks, including stricter capital requirements in respect of high-risk exposures.12 Moreover, intentions are to redesign the supervisory framework in such a manner that capital requirements will, more than in the past, work to dampen the financial cycle rather than reinforcing it. To reduce this so-called procyclicality of banks, the BCBS is currently working on a set of measures. One such prospective measure aims to enforce adjustments to banks’ provisioning poli-cies in such a way that during an economic upswing, they may reserve additional provisions against expected later losses; under the current regime, they are not allowed to do so until such losses are actually sustained. Another example is the introduction of a target level for banks’ capital ratios above the minimum; while the target is not achieved, restrictions would apply to the percentage of profits which banks may pay out in the form of dividends, bonuses etc. Thus larger buffers are accumulated in good times, while banks will have an additional buffer available to tide them over in bad times. Also, the possibility is being investigated of creating

International financial architecture evolves

Macroprudential focus on procyclicality

25


a mechanism by which the minimum capital requirement varies directly with cer-tain macroeconomic variables.

European developments

An important lesson to be drawn from the crisis is that macroprudential supervision needs to be reinforced and to be aligned more closely with microprudential supervi-sion. In Europe, this latter awareness is reflected in, among other things, various national-level initiatives to place the supervision of financial institutions close to or within the central bank, as is already the case in the Netherlands (examples are Germany, France, Belgium and Portugal). At the EU level, the Council this Autumn embraced the proposal by the De Larosière Working Group to create an European Systemic Risk Board (ESRB). The ESRB will operate as an overarching watchdog by analysing macroprudential risks and, based on its findings, will issue risk warnings and policy recommendations. These recommendations will not be binding, but addressees must justify non-adherence. The recommendations may be targeted at one or more Member States, at the prospective European supervisory authorities (see below) or at national supervisors. DNB supports a swift establishment of the ESRB, scheduled to take place in June 2010. The President and one supervisory executive director will represent DNB on the ESRB.

The last Overview of Financial Stability concluded that the prudential supervision of financial institutions in Europe needed to be reinforced. After all, the current supervisory structure, in terms of cooperation, coordination and information shar-ing, is running up against its limits, as was made clear during the crisis. Therefore the European Council has decided to revamp the existing European supervisory committees for banks, insurers, pension funds and securities firms, into three sepa-rate European Supervisory Authorities (ESAs), having farther-reaching powers. Thus ESAs will have power, in specific situations, to address its decisions on the interpreta-tion of EU legislation directly to individual institutions. ESAs will also have power to mediate in conflicts between national supervisors. DNB supports the creation of the ESAs, which will also take place in the course of 2010. It would be undesirable, however, if the European Commission, which sits on all three ESAs, were to be given a say on individual supervisory files, because this might affect supervisory independ-ence. It is for this specific reason that supervision in the Netherlands has been placed at a suitable distance from politics.

Crisis management

In view of experiences gained in the financial crisis, reinforcement of crisis man-agement has been placed high on the agenda of international as well as Dutch policymakers. Important initiatives have been launched towards the reinforcement of (i) crisis prevention and management and (ii) the effectiveness of the deposit guarantee scheme.

Initiatives geared towards more effective crisis prevention and management

In September 2009, the Basel Cross-border Bank Resolution Group recommended its so-called ‘living will’ concept: cross-border financial institutions should record in a living will how, should their survival be jeopardised, they may restructure or, ulti-mately, liquidate themselves in a manner that has the least possible destabilising effect on the financial system as a whole. The idea is that structural simplification of, especially, large and complex financial institutions may reduce the interdepend-ency and integration within the firm and across national borders. Such simplifica-tion, which some institutions have, in fact, already initiated in view of the lessons

ESRB new, broad-spectrum watchdog

DNB: qualified support for ESAs

‘Living will’ as new crisis instrument?

26


learnt from the crisis, will facilitate restructuring or a coordinated approach by authorities. DNB supports the living will concept, yet acknowledges that implement-ing it will not be that easy. Simplification of the organisational structure along national lines may, for instance, undermine an institution’s efficiency. Also, restruc-turing a large and complex organisation within a foreseeable period is an extremely difficult task, as is apparent from e.g. the split-up of ABN Amro. Finally, a living will must not be judged only by its individual merits, but must be viewed also in its interaction with similar wills of other banks. For if several banks state they intend to combat acute problems caused by a systemic crisis by terminating or hiving off the some or similar activities, simultaneous execution of such wills may deepen the crisis.

On 20 October 2009 the European Commission issued a Consultative Communication exploring the possibilities of an EU framework for crisis management at cross-border financial institutions. Leading ideas are: more instruments for timely and effective action at troubled financial institutions, and international harmonisation to encour-age the cross-border use of them. The current crisis has demonstrated that the legal powers and instruments of authorities are determined at the national level and may differ considerably from one country to another. So while a harmonised set of crisis mitigation instruments for the EU is to be preferred, the road there is encumbered by heavy obstacles. One of these is how the several Member States are to share the burden of support extended to a pan-European financial institution. The EU-level discussion further concentrates on the desirability of adding certain powers to the crisis instruments of some countries. A major source of inspiration here is the recent British bank resolution regime, which demonstrated its added value during the latest crisis.13 This has enabled authorities to pass all or part of an ailing financial institution into public hands or to another private bank. Another possibility is transfer to a bridge bank. Finally, a modified insolvency regime is to be introduced creating, among other things, the possibility to transfer savings balances covered by the deposit guarantee scheme to another institution.

European and Dutch proposals for the improvement of the Deposit Guarantee Scheme (DGS)

The financial crisis has made it clear that the design of the deposit guarantee schemes of several European countries is less than optimal. This gave rise to evaluations, both in a European context and in the Netherlands. In late 2010, a new EU Directive will come into force. An important change under this Directive is that the disburse-ment period once a DGS is invoked is limited to twenty business days, with one possible extension by 10 business days. This poses a major challenge not only to the managers of such schemes, but to the banks as well. Swift disbursement of bank balances covered by the schemes requires standardised administrative records and regular reports of the highest quality. Other proposals by the European Commission to improve the design of the DGS are expected during the final quarter of 2009.

In the Netherlands, the settlement in the bankruptcy of Icelandic savings bank Icesave prompted DNB, the Ministry of Finance and the Dutch Bankers’ Association to reconsider the design of the Dutch DGS. In early June, Finance Minister Wouter Bos presented the resulting report to the Parliament,14 announcing at the same time his intention to move towards a DGS funded on an ex ante basis by risk-weighted pre-miums. The collapse of DSB Bank demonstrated once again that the DGS is an essen-tial part of the public safety net. Although the scheme protects individual deposit holders’ balances up to EUR 100,000, this did not prevent the massive redemption of savings balances by DSB customers in early October. This illustrated the importance of speeding up the operation of the scheme, to mitigate the potential adverse effects of a collapse for consumers and thus to enhance its preventive effect.

Dutch national crisis instruments reviewed

DGS design reviewed

27


Financial infrastructure

Authorities have been paying serious attention to the increased interdependency of financial institutions and systems worldwide. This is the result of progressive globalisation and technological innovation, plus the ongoing consolidation of sys-tems and institutions which now offer their services to several markets and market participants simultaneously. The effect this is having on the stability of payment and securities settlement systems is not immediately clear, however: the risk of contagion and the potential impact of a systemic failure have increased, but the potential to absorb individual shocks has grown as well. In its 2008 report The interdependencies of payment and settlement systems, the Committee on Payment and Settlement Systems therefore recommended that all parties concerned (system operators, financial institution and service providers) should take account of these interdependencies in their risk management. More in particular, each party’s risk management should take a broad perspective (i.e. look beyond the firm’s own direct operations and exposures: a more central role within the global payment and settle-ment system should be reflected in more stringent risk management requirements). Correspondent banks – i.e. banks performing payment services for other banks – usually play a central role within systems. DNB has therefore charted the specific risks inherent in correspondent banking and has incorporated these in its regular moni-toring activities. Another topical debate is that surrounding the risk management of so-called central counterparties or CCPs in respect of the mutual links established by these firms. The European Commission is in favour of such links between CCPs, because they enhance their mutual competition, which may benefit the efficiency of the market as a whole. DNB Oversight, together with the AFM, monitors the design and operation of risk management policies concerning such links.

Within the European financial sector, CCPs have been created for the trade in credit derivatives. Such CCPs are important for financial stability because they reduce the operational and counterparty risk inherent in credit derivatives. In addition, the CCPs serve to increase the transparency of the derivatives market, which has devel-oped into a main pivot within the financial system. However, this is not sufficient. Precisely given their pivotal role it is of great importance that CCPs should be suffi-ciently resilient against shocks. A discussion is currently going on about the extent to which the requirements imposed on CCPs’ risk management should be revised in light of the lessons from the crisis. Compounding this is the fact that the most complex and risky credit derivatives are not traded through CCPs. It is in this con-nection that the European Commission on 20 October 2009 announced additional measures to ensure that more derivatives are traded centrally and, by consequence, more transparently, and proposed legislation on, among other things, the govern-ance and risk management of CCPs.

Cybercrime poses a potential threat to the integrity of the financial sector (see also the previous OFS). Examples of cybercrime relevant to the Dutch financial sector are Internet banking fraud, debit card fraud and ‘malware’ (malicious software). From the point of view of continuity and public confidence in the electronic payment services offered by banks, the banks’ own defences against cybercrime are a major issue. In this context, the fight against so-called ‘distributed denial of service’ attacks, that is, attempts to disrupt e.g. the website of a bank, has DNB’s fullest attention. DNB is currently finalising an investigation into the safety of internet banking. Banks’ security measures were assessed and where necessary, recommendations for improve-ment were made. In addition, the Financial Expertise Centre15 has launched a project aiming to reinforce processes which strengthen the defences of the sector and authorities against cybercrime. Also, in the spring, a market-wide crisis exercise was organised at the initiative of DNB, with cybercrime as its central theme. The exercise tested the current crisis management measures of the participating institutions as

CCPs useful, yet need further regulation

DNB and sector target cybercrime

28


regards decision-making, procedures and information exchange. The exercise also concerned communications with the press and with stakeholder organisations.

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5 Conclusion

After a highly turbulent period there are tentative signs of stabilisation. To a major extent, this is attributable to the far-reaching support operations undertaken by the authorities and to the improvement of market sentiments, and especially financial institutions’ improved access to capital. The threat of a systemic crisis has been further mitigated by the fact that the rapid decline of economic growth in Europe has stopped, and economic recovery has taken root, in the USA and, especially, Asia.

At the same time, the credit crisis and its implications for the financial sector and the real economy are not over. The situation remains fragile, in the first place because the balance sheets and profitability of financial institutions are still under pressure from recession-related losses, in particular. The coming months will show, for instance, whether the adjustment of the real estate and housing markets will lead to additional losses on financial institutions’ credit and investment portfolios. Added to this, the problems in the financial sector and the recession may reinforce each other. For one thing, the reinforcement of bank balance sheets puts additional pressure on lending, and this may in turn aggravate economic recession, leading to additional credit losses.

Since the recent large-scale support measures cannot bring improvement for the longer term, they should be phased out in good time. This requires careful timing, with redemption of liquidity support probably requiring less time and effort than the termination of state guarantees and equity participations. Financial institutions will do well to act accordingly, since in a while they will again be dependent on regular financing against market conditions.

Apart from addressing the current crisis, policy makers have also launched initia-tives to make the global financial system more resilient into the future. Noteworthy are the international and national recommendations for improvement of crisis pre-vention and mitigation. These have led to a structural review of European financial supervision taking effect in 2010 and designed to lead to more effective cooperation between supervisors and central banks. In the meantime, European and Dutch authorities are working to reinforce the available crisis instruments and enhancing the effectiveness of the DGS. The challenge they face is to come up with effective policy proposals that may be implemented at relatively short notice.

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Notes

1 See the article ‘Global imbalances and the financial crisis’ in the DNB Quarterly Bulletin September 2009.2 See for example IMF, World Economic Outlook, October 2009. Box 1.4.3 For more information see Van den End, Verkaart and Van Dijkhuizen (2009), ‘Distorting effects of the crisis measures, DNB Occasional Study (forth-coming).4 See the IMF document ‘Crisis-Related Measures in the Financial System and Sovereign Balance Sheet Risks’, available at http://www.imf.org/external/np/pp/eng/2009/073109.pdf.5 See also ‘Recent developments in bank credit standards’, DNB Statistical Bulletin, September 2009.6 See Box 2, ‘Households sensitive to financial set backs’ in ‘Overview of Financial Stability in the Netherlands’ of May 2009, downloadable via www.dnb.nl.7 For more details, see press release ‘Outcome of DNB macro stress test summer 2009’, dated 28 September, on DNB’s website. Also see article entitled ‘Macro stress testing as a tool for super-vision and stability’, DNB Quarterly Bulletin, June 2009.8 Box 3 of ‘Overview of Financial Stability in the Netherlands’ of May 2009 illustrates pension funds’ sensitivity to fluctuations in interest rates and share prices.9 However, the tax advantages applying to annuity products were restricted several years ago. 10 See the DNB 3 August, 2009 press release, ‘The effect of pension funds’ recovery plans on Dutch economic growth’ on www.dnb.nl.11 See the report of 10 July 2009 entitled ‘The Dutch Financial System; An Investigation of Current and Future Trends’ on www.dnb.nl, under News and publications / Other documents.12 For a more detailed discussion, see the article ‘Adjustments to the Basel banking super-vision framework’ in DNB’s December 2009 Quarterly Bulletin (forthcoming).13 See Banking Act 2009, Special Resolution Regime (SRR), which was passed by Parliament in February 2009.14 See the report entitled ‘Het Nederlandse depositogarantiestelsel – een garantie voor de toekomst’ (The Dutch DGS – safeguard for the future) on the DNB website, www.dnb.nl.15 The FEC is a multidisciplinary cooperative body representing nine partners, DNB among them. The FEC aims to reinforce the integrity of the financial sector by encouraging, coordinating and enhancing the cooperation between its partners.

de nederlandsche bank - center for financial stability

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