Financial Stability Report May 2025

ANALYSIS REPORT MAY 2025 Financial Stability Report

In brief. As a result of the accumulated geopolitical tensions, economic uncertainty has increased. This has led to write-downs and increased volatility in capital markets, especially in April after the announcement of trade tariffs by the US. Additionally, cyberattacks may increase in the current geopolitical climate. This requires strong operational resilience from financial institutions and households. In light of these developments, better cooperation in Europe is crucial. In the asset management sector, liquidity risks have so far remained limited but are increasing amid heightened market stress. In the housing market, affordability has deteriorated, although it appears to be stabilizing. Finally, continued attention to climate risks is essential.

ANALYSIS REPORT

1. Introduction and Summary 3
2. General Trends and Risks 5 2.1 Geopolitical and Macroeconomic Developments 5 2.2 Digitalization 10 2.3 Sustainability 12
3. Risks and Trends in Capital Markets 14 3.1 General Trends and Developments 14 3.2 Functioning of Money Markets 18 3.3 Chain Risk 19 3.4 Use of AI in Trading Algorithms 19 3.5 Interconnectedness of Crypto-Assets 22
4. Risks and Trends in the Asset Management Sector 24 4.1 General Trends and Developments 24 4.2 Liquidity Risks 25
5. Risks for Customers of Financial Institutions 28 5.1 Retail Investments 28 5.2 Buy-now-pay-later 29 5.3 Housing Market 29 Contents

Financial Stability Report 3 ANALYSIS REPORT

1. Introduction and Summary Geopolitical tensions have increased significantly, leading to higher uncertainty and volatility in financial markets. The trade policy of the US government is causing considerable uncertainty and contributes to geo-economic fragmentation, which will have a negative impact on the global economy. Growth and inflation expectations have become very uncertain, and recession concerns have increased. Import tariffs have a disruptive effect on global supply chains. Furthermore, the high degree of uncertainty is causing investment decisions to be postponed or canceled, and consumers are saving more and spending less. A global recession directly impacts corporate profit expectations and the valuations of financial and physical assets.

In capital markets, the trade tariffs announced by the US have resulted in significant price declines and very high volatility. Equity valuations have been adjusted downward. In the Netherlands, price-earnings ratios are now around the level before the coronavirus pandemic, just below the long-term average. In the US, valuations remain above the long-term average despite significant declines, making further market correction not entirely unlikely. Furthermore, volatility in equity markets has been higher since the announcement of trade tariffs. This has not yet led to major liquidity problems for financial institutions. However, investors, including pension funds, have suffered significant losses. Gas prices have fallen due to trade tariffs, but they remain above the level before the gas crisis in 2022, due to the scaling back of Russian pipeline gas, leading Europe to rely more on liquefied natural gas (LNG), which is shipped by sea.

The geopolitical environment is also causing operational risks to increase. Due to the digitalization of processes in the financial sector, cybersecurity has become crucial. Especially in light of current geopolitical developments, which may lead to an increase in cyberattacks, it is important that institutions are digitally and operationally resilient. New regulation from Europe contributes to this, and the AFM supervises its implementation. Furthermore, developments in the field of AI are proceeding at a rapid pace, with potential risks for financial institutions and capital markets as a result. The use of AI can offer benefits that promote the efficiency of parties, but it simultaneously requires more attention to (model) risk management by institutions. Additionally, AI applications in capital markets may lead to higher volatility and homogeneous behavior. Here too, regulation and a deep understanding of the behavior of trading algorithms must contribute to controlling risks.

For asset managers, it is important that they implement adequate liquidity risk management, including in the areas of stress tests and the availability of liquidity management tools (LMTs). Due to the high volatility and uncertainty in financial markets, managers of investment institutions face increased liquidity risks from capital outflows and margin requirements. It is important that they manage these risks and take appropriate measures. In addition to the availability of LMTs, regularly conducting stress tests is an important part of risk management. The AFM has previously shared points of attention regarding liquidity stress tests. For example, it is useful to calculate hypothetical scenarios in addition to historical stress scenarios. In the current volatile environment, tail risks are increasing, and future market shocks may be larger than previously encountered. For pension funds, the risk of margin requirements on derivative positions is also relevant. Although they have been able to meet significant margin requirements during periods of market stress in recent years, the availability of liquidity in money markets is a prerequisite. This is also relevant because, due to the transition to the new pension system, many funds have increased their interest rate hedging.

Financial Stability Report 4 ANALYSIS REPORT House prices have continued to rise, and their affordability has deteriorated, although it appears to be stabilizing. High demand for housing and lagging supply remain decisive. For households, excessive mortgage debt is a risk because they may no longer be able to afford the burdens. This is partially mitigated by fixed mortgage rates. Although total mortgage debt in the Netherlands has increased in recent years, as a percentage of GDP, it is actually decreasing. The behavior of lenders, advisors, and appraisers must prevent the housing market from becoming overheated. To gain more insight into the quality of appraisals, it would be good to conduct further research on this. It could also help to make the bidding process more transparent, for example, through a bidding log. Finally, climate risks play a role in the housing market, such as the risk of foundation damage, which may be insufficiently priced in. It is therefore important that households are well informed. However, the current dynamics in the housing market mean that there is more overbidding and no reservations are made regarding financing or a structural inspection.

Financial Stability Report 5 ANALYSIS REPORT 2. General Trends and Risks 1 The cutoff date for including relevant information is May 7, 2025. All graphs in the report were last updated on May 1, 2025. 2.1 Geopolitical and Macroeconomic Developments Geopolitical risks have increased in recent years due to conflicts and international political developments, resulting in increased risks for financial stability. On April 2, US President Trump announced significant trade tariffs against almost every country worldwide. Trump declared this day "Liberation Day." A tariff of 20% has been set for the EU, which is relatively low compared to other countries. For example, a tariff of 34% was initially announced for China, on top of the existing 20%. This led to a further escalation of the trade war between China and the US, with both countries further increasing trade tariffs. Ultimately, trade tariffs were largely postponed by 90 days (a minimum tariff of 10% remained in place), except for China. The trade policy of the US government is causing considerable uncertainty in the areas of trade and economic policy (Figure 1 and 2)1 and contributes to geo-economic fragmentation. Additionally, there is much unrest in the world regarding conflicts due to the ongoing war in Ukraine, the situation in the Middle East, and the South China Sea. The use of trade-restrictive measures by the US, the further escalation of this through counter-reactions by other countries, and ongoing conflicts are straining relations and will have a negative impact on the real economy. The risks for financial stability have thereby increased.

Figure 1: Doubts about tariff policy remain at an unsustainable level, as measured by the Bloomberg Trade Uncertainty Index. Source: Bloomberg.

Figure 2: As a result of geopolitical risks, uncertainty about economic policy in Europe is also increasing. Source: Bloomberg.

Financial Stability Report 6 ANALYSIS REPORT Geopolitical developments can result in risks for financial stability because they affect economic growth and inflation (expectations) and lead to uncertainty and volatility in financial markets. A distinction can be made between three risk channels: (i) the real economic channel, (ii) the financial markets channel, and (iii) the digital/operational environment (Figure 3). In the real economic channel, trade restrictions, financial restrictions, and physical damage from conflicts impact economic growth and inflation (expectations) by disrupting supply chains and capital flows. Via the financial markets channel, geopolitical risks create uncertainty that impacts investor confidence, risk aversion, and volatility. Both channels subsequently impact prices of financial and physical assets, which in turn can have a reinforcing effect on the economy. Ultimately, this can result in risks for financial stability because it leads, among other things, to increased market volatility, pressure on the solvency and liquidity of financial institutions, lingering shocks through interconnected financial systems, and risks not being adequately managed in risk models. Via the digital/operational channel, geopolitical risks can result in material and operational damage and disruption through cyberattacks and disinformation. This can subsequently impact investor confidence, risk aversion, and volatility (see also 2.2).

Financial Stability Report 7 ANALYSIS REPORT Figure 3: Conceptual framework of geopolitical risks.

Financial Stability Report 8 ANALYSIS REPORT Geopolitical developments will take a toll on the global economy. Last year, global GDP growth was still 3.2%. In the Netherlands, GDP growth was 1%, approximately equal to the average in the eurozone. Due to geopolitical tensions, forecasts for 2025 and 2026 have been revised downward and have become very uncertain.2 There are major concerns about a global recession. Trade restrictions cause disruptions in capital and trade flows, which has a negative impact on growth and inflation. According to a study by the CPB, Dutch GDP growth will be 0.4 percentage points lower in 2025 due to import tariffs and 0.6 percentage points lower in 2026.3 The high degree of uncertainty also causes investment decisions to be postponed or canceled, risk premiums to rise (making it more expensive for companies to raise capital), and consumers to save more and spend less. Changes in growth and inflation expectations also work through into expectations regarding corporate profitability. This will result in adjustments in the valuations of assets, currencies, and credit.

Inflation remains high in the Netherlands compared to the eurozone, and due to the established trade barriers, expectations have become more uncertain. Since the peak of more than 10% at the end of 2022, HICP inflation in the eurozone has gradually declined to 2.2% in April 2025. The Dutch HICP inflation, according to a quick estimate, was still significantly higher in April at 4.1%.4 A trade war with broad import tariffs increases prices of imported products, thereby fueling inflation. The impact of this will be most felt in the US. In the eurozone, a stronger euro relative to the dollar, weaker economic growth, and lower global energy prices due to higher recession risks can have a dampening effect on inflation. This, combined with deteriorating growth expectations, was reason for the ECB to lower the interest rate by 0.25 percentage points in April.

In light of geopolitical risks, the high public debts of some EU member states may pose a risk to financial stability. The necessity of higher defense expenditures could lead to further rising debts. Many eurozone countries already have debt well above 60% of GDP and/or a budget deficit above 3% (Figure 4). High debt positions with rising interest rates can cause countries to no longer be able to bear their financing costs. Additionally, high public debt may have a negative impact on the macroeconomic environment in Europe, which can spill over to financial markets. For example, financial institutions, especially banks, often hold significant amounts of government bonds on their balance sheets. When interest rates on government bonds rise, their value declines, which can affect the balance sheets of institutions.

The significant investment plans of Germany and the European Commission can give a positive impulse to economic growth but may also result in more upside risks. The budget plans of the new incoming German government amount to EUR 500 billion, intended for infrastructure and climate measures. The Bundestag has also agreed to a relaxation of German budget rules, allowing more borrowing to invest in defense. The European Commission also wants to make EUR 800 billion available to rearm Europe. This sharp change in course, and the associated possible debt issuance, has caused German government bond yields to shoot up suddenly in March. Government bond yields of other member states subsequently also rose because they are often priced relative to the German yield curve. Spreads, the differences in government bond yields between member states, were not directly affected. This was the case after the political crisis in France at the end of last year. The French-German spread rose to above 0.8 percentage points (Figure 5). After Trump announced trade tariffs, the German government bond yield fell back to the level before the budget announcement. American economic policy has resulted in concerns about US public debt, and thus the status of 'safe haven' of US government bonds is under discussion, with German government bonds being seen as safer (see also paragraph 3.1).

Financial Stability Report 9 ANALYSIS REPORT Geopolitical risks can destabilize financial markets through increased uncertainty, potential capital restrictions, and sanctions. The sudden announcement of significant trade tariffs by the US and their unpredictability caused significant volatility in financial markets, an increase in risk aversion, and flight-to-safety behavior by investors (see 3.1). Although uncertainty is not new for financial markets and can be priced in, the current situation causes this to lead to more shock-like price movements. Thus, financial stability is also at stake. Additionally, an increase in risk-averse behavior can lead to reduced access to credit, which subsequently works through into economic growth via lower investments. By mid-April, calm had somewhat returned to markets, partly due to the temporary postponement of a large part of the trade tariffs. However, uncertainty is not gone, so volatility remains at a higher level than before the announcement of trade tariffs.

5 DNB (2025). The Netherlands invests approximately €3500 billion.

Dutch financial institutions and households are exposed to the risks of uncertainty through their exposure to US assets. For example, pension funds invest a total of nearly EUR 500 billion in the US (of the EUR 1,568 billion total in long-term investments). For Dutch investment institutions, approximately EUR 126 billion (26% of net assets) is invested in North America. Specifically for equity funds, this is higher, with 40% of their net assets invested in North America. Investments in listed shares of Dutch companies, institutions, and households are invested almost three-quarters in companies outside the euro area, primarily in US institutions, such as large tech companies like NVIDIA, Apple, and Microsoft.5

The current geopolitical developments and dependence on American (financial) infrastructure underscore the importance of European cooperation and further development of European capital markets. The announcement of US trade tariffs is seen by many economists as poor economic policy.

Figure 4: Average public debts in the eurozone well above 60%. Source: Eurostat.

Figure 5: Convergence of French and Italian spreads. Source: Bloomberg.

Financial Stability Report 10 ANALYSIS REPORT From the perspective of economic statecraft - where economic means are used to achieve goals in the area of foreign policy or national security - they are better explained.6 From this perspective, dependence on American financial institutions and infrastructure is a vulnerability.7 The Dutch financial sector is strongly intertwined with the US. Dutch pension funds and households invest heavily in US equities, American financial institutions are important service providers in Europe, and the Netherlands is largely dependent on American technology. Global capital markets also rely heavily on the dollar as a reserve currency, and US government bonds are seen as very liquid and safe-haven investments. This can change due to the US course change, which may be accompanied by stability risks. The market unrest of March 2020, for example, showed that the availability of dollar swap lines with the Fed is crucial for European institutions. If the independence of the Fed is no longer a given, and such instruments are possibly used as leverage, this can have major consequences for financial stability in Europe.

Better European cooperation and further deepening of the European capital market, as described in the Draghi report8, is necessary to reduce dependence on the US. A joint supervisory approach with US authorities is no longer self-evident. The AFM is therefore a strong advocate for promoting the Savings and Investments Union (SIU) as the cornerstone for stimulating economic growth and financial stability in the EU. A well-functioning SIU will (i) attract market financing and promote a more competitive financial ecosystem, (ii) create equal competitive conditions through consistent supervision and harmonized regulation, (iii) increase the financial stability of the EU by diversifying funding sources, and (iv) strengthen Europe's strategic autonomy in global markets.

6 Forging a positive vision of economic statecraft - Atlantic Council. See also Macrostrategy versus “Grand Macro Strategy” - Rabobank for an in-depth explanation of economic statecraft and the instruments that can be used. 7 Hellendoorn, E. (2025). Finance, Strategy and European Autonomy. Survival, 67(1), 99–122. https://doi.org/10.1080/00396338.2025.2459014. 8 The European Commission (2024). The Draghi report on EU competitiveness. 9 CBS (2024). Cybersecurity Monitor 2023. 10 ENISA (2025). ENISA Threat Landscape: Finance Sector. January 2023 to June 2024. 2.2 Digitalization Due to increasing digitalization, cybersecurity has become crucial, also in light of rising geopolitical risks. Due to greater dependence on IT systems, cyber incidents can have major consequences for the financial sector. Figures from the CBS cybersecurity monitor show that large companies (>250 employees) and companies in financial services are the most frequent victims of cyberattacks. It also appears that costs are often higher at financial institutions. Although the total costs of external cyberattacks decreased in 2022, a larger share of affected financial institutions dealt with relatively high costs between 5% and 10% of turnover.9 Large-scale cyber risks can threaten financial stability, for example, by bringing essential parts of the financial system, such as the payment system or trading infrastructure (e.g., trading platforms or clearing and settlement), to a standstill. In the financial sector, banks are the most frequent targets of cyberattacks.10 Additionally, government agencies and individuals are often affected (Figure 6).

Furthermore, there are significant dependencies in areas such as cloud services, where a limited number of third parties provide services to a large number of financial institutions. Cyber incidents at such parties can therefore have broad impact on the financial sector. This can have major financial and economic consequences, affecting both consumers and financial institutions. Additionally, Europe has a significant dependence on American cloud service providers regarding data storage. Much data of European citizens, companies, and governments is stored on servers in the US. In the current geopolitical climate, particularly the change in US foreign policy, this can be a risk that limits Europe's strategic autonomy.

Financial Stability Report 11 ANALYSIS REPORT It also plays a role that Europe is in danger of losing an important partner in combating digital attacks from Russia now that the US has suspended offensive cyber operations against Russia.11

Figure 6: Banks are primarily the target of cyberattacks. Government agencies and individuals are also in the top 3. Source: European Union Agency for Cybersecurity (ENISA).

The rapid technological developments surrounding artificial intelligence (AI) may also contribute to increased stability risks. The increasing use of AI solutions can have benefits, for example in the area of operational efficiency, cost reduction, and risk management. At the same time, this greater dependence on digital processes also creates...