DNB: Dutch banks are in good shape, but financial sector risks are increasing

Despite the current good position, the Dutch Central Bank (DNB) warns the banking sector against a sharp increase in risks. This was revealed on Monday from the Overview of Financial Stability (OFS), in which the risks to the financial sector are described every six months. DNB president Klaas Knot speaks of a “mix of factors that we have not seen to this extent since the 1970s”. High inflation, rising interest rates, the war in Ukraine and a possible global recession: DNB mentions several ‘unfavorable developments’ in the overview that will test the financial sector in the coming period. It is also possible that inflation will remain high for a longer period of time than the markets are now taking into account. To reduce the risks, the supervisor of the Dutch banks advises to maintain buffers. For example, restraint is recommended with regard to the payment of dividends, as well as with the repurchase of own shares. Companies and households that have built up high debts can run into problems due to rising interest rates and slower income growth. If companies cannot pay their loans, this will also have consequences for the banking world. DNB emphasizes in the overview that this can happen, for example, at companies that consume a lot of energy. This increase in risks is offset by a strong starting position for the sector. Extensive government support measures and the policy of the European Central Bank have ensured that the Dutch financial market is stable despite the corona crisis.