De Nederlandsche Bank: Low interest rates constitute an important challenge to the entire financial sector in the Netherlands

State of Supervision
Our Executive Directors of Supervision Jan Sijbrand and Frank Elderson stated this today during a press conference marking DNB’s new annual publication “State of Supervision”. In it, we outline the status of the Dutch financial sector as we see it and look back, rendering account for our efforts in supervising the Dutch financial sector and the results of those efforts. Together with “Supervision Outlook 2016”, published in November 2015, this report constitutes the new annual accountability cycle we use in our capacity of prudential supervisory authority for the Dutch financial sector.    

Banks’ interest margins are tightening
For banks, the lower interest rates will in the longer run be a major factor depressing interest margins, which are their principal source of revenues. In a bid to prevent that margin from tightening, banks may attempt to lower their cost of funding, but it would as yet appear unlikely for banks to take such measures as charging their savings customers negative interest rates. Any degree of success in keeping up interest margins will also depend on uncertain factors such as competitive conditions, demand for new loans and the choice between market share retention versus profitability. The banks will need to take these factors into account in assessing their business models. 

DNB committed to adoption of more realistic UFR for insurers
Insurers have been feeling the pressure of low interest rates for a longer time for several reasons. One of these is that commitments previously entered into, in the life insurance sector in particular, push up the value of future liabilities in a low-interest rate environment, causing sustained pressure on solvency ratios. With the Solvency II supervisory framework launched at the start of 2016, financial market developments are now better reflected in the insurers’ figures, but the prolonged low interest rates in the financial markets cause the interest rate used to discount future liabilities under Solvency II to be increasingly unrealistic. The main reason for this is that the Ultimate Forward Rate (UFR) insufficiently accounts for market conditions such as persistently low interest rates.

This is why, in the European arena, we have called for an adjustment to the way the UFR is determined, using a method that better reflects economic realities. Specifically, we are of the opinion that the UFR method as used by pension funds is the most suitable. In 2013, the Dutch UFR Committee recommended this method, given that it was the most realistic way of determining the actuarial rate of interest, and the method was embraced by the Cabinet for use by pension funds. 

Monitoring integrity risks
We called financial institutions to account over their responsibilities in the area of integrity in 2015. Our follow-up examinations have shown that most of them now have adequately designed risk analyses in place. However, this does not mean that all institutions are now capable of mapping out or controlling their risks to a sufficient extent. We consider imposing supervisory measures on institutions that score poorly and have launched follow-up examinations to find out whether the right risks are being identified and whether risks found are actually addressed by implementing adequate measures and procedures. 

It is our view that the media reports on the Panama papers once more demonstrate the need for financial institutions to systematically monitor integrity risks. It is becoming increasingly clear that integrity is not merely about strictly following the letter of the law, but also about whether specific behaviour may be deemed socially acceptable. We keep a close tab on media reports about the Panama papers and have again requested trust offices and selected banks, insurers and pension funds to report any involvement in affairs such as those referred to in these media reports. 

End of press release

For more information, please contact Tobias Oudejans by telephone at +31 20 524 3100 or +31 6 524 96 961.