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De Nederlandsche Bank (DNB) warns of tougher testing of banks. Although the banking sector is doing well, high inflation, high interest rates, the war in Ukraine and the risk of a global recession mean caution should be exercised.
“Inflation is high and interest rates are going up, while economic growth is declining. This is a combination of factors we haven’t seen to this extent since the 1970s,” says DNB President Klaas Knot.
“We are in a better position than before and I am confident in the resilience of our financial sector, but this combination of negative developments clearly increases financial stability risks.”
Households that have accumulated high debt in recent years – for example to buy a house in an overheated housing market – may face problems if interest rates continue to rise and income growth is slower. The same goes for companies.
If these households or businesses are subsequently unable to repay their loans, this will also affect the banking sector. DNB warns that this can happen, for example, in companies that use a lot of energy.
The supervisor therefore urges the banks to maintain their protective margins as much as possible. This means, among other things, that the sector must exercise restraint in the distribution of dividends and the buy-back of its shares.
Since the beginning of this year, banks have been forced to keep more money in reserve because, according to the DNB, they have not sufficiently taken into account the shift in the housing market. This measure will be extended until at least December 1, 2024.
As mortgage rates rise and the outlook for the economy darkens, there is a greater chance of home prices falling. The last quarter Home prices are already down 5.8 percent from the previous quarter.
With home values declining, there is also a chance that more homes will be inundated again. An analysis by DNB shows that if home prices fall 20 percent for 8 percent of homeowners, their mortgage debt will be higher than the value of their homes.
This concerns a few hundred thousand families. Young homeowners in particular have relatively high mortgage debt. Excessive debt is not only a risk for homeowners, for banks it can lead to losses in the mortgage portfolio.
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