Dutch financial institutions are able to withstand larger economic shocks. That is the conclusion of De Nederlandsche Bank based on a stress test. However, cyberattacks are an increasing danger, especially now that uncertainty in the global economy has increased sharply.
“The uncertainty has not led to vulnerability of Dutch financial institutions,” explains DNB President Klaas Knot. “Yet we see that the risks to financial stability have increased.”
DNB investigated the risks for the report Overview Financial Stability. In it, the central bank names the three main risks. The global economy, in which countries are brandishing import duties, is the first. The small, open Dutch economy is particularly sensitive to this type of uncertainty.
That leads to volatility, the second most important risk. The expected volatility, or the possible unrest in financial markets, rose in April to the highest level since the beginning of the corona crisis. Investors are worried about the import duties. That is reinforced by general concerns about American policy.
Continuing political tension can lead to larger economic shocks. To test whether banks can absorb those shocks, DNB has mapped out the possible consequences with a stress test. In it, the central bank simulates scenarios in which the situation deteriorates, for example due to an increase in import duties.
The banks passed that test. In addition, insurers and pension funds, which were not included in the test, “amply meet the minimum requirements,” says DNB. “Pension funds and insurers have solid buffers, but are sensitive to volatility in financial markets,” the central bank emphasizes.
Attacks from the usual suspects
The third risk is cyber threat. The financial sector is increasingly indirectly affected by attacks on critical service providers, such as network providers and cybersecurity companies, or attacks on vital infrastructure such as the energy and telecom sector.
“Most of these types of attacks come from China and Russia, the usual suspects,” says Knot. “In the run-up to the NATO summit in The Hague in July, the Netherlands is suddenly more interesting as a target.”
The recent power outage in Spain and Portugal has shown how much impact a disruption can have on payment traffic. For example, digital payments were difficult. However, a cyberattack was ruled out here.
Due to geopolitical tensions, there are also concerns about the digital dependence on non-European service providers. If trade tensions escalate, digital service providers could become part of the battle. And if essential services are not accessible, this can lead to “operational system risks for the financial system,” writes DNB.
Three Quarters of Climate Damage Not Insurable
Postponing climate measures, such as the United States withdrawing from the Paris climate agreement, also increases risks. Climate damage has been increasing in recent years and if damage is not properly insurable, climate disasters can cause financial instability. In the European Union, approximately 75 percent of climate damage is currently not insurable, writes DNB.
Furthermore, higher defense spending, which can increase national debt, is a risk. The same applies to possible overvaluation in the real estate market, which can change suddenly, and a concentration in the stock market. In the latter, an increased concentration, for example in American shares, creates vulnerability.
Regarding the turbulent global economy, “there is some recovery again,” says Knot. He mentions the recently adjusted American import duties for the European Union. US President Donald Trump has also temporarily lowered tariffs for China. Knot: “This episode has shown that Trump is not entirely insensitive to the financial markets. But it remains fragile.”
‘Limited’ Exposure to American Financial Markets
“Geopolitical tensions increase the risks for the Dutch economy and financial stability,” concludes the Central Planning Bureau (CPB) in its own report with similar conclusions. Buffers are present, but there is less international coordination. “European cooperation must be strengthened.”
The direct exposure of the Netherlands to American financial markets is “reasonably limited,” the CPB further concludes. “A financial crisis in the US could affect the Dutch financial sector through indirect effects, such as higher global uncertainty and a decline in economic activity.”