Report of the Financial Stability Committee of 24 March 2025

1
| DNB RESTRICTED |
Report of the Financial Stability Committee of 24 March 2025 In the Financial Stability Committee (FSC), representatives from the Authority for the Financial Markets (AFM), De Nederlandsche Bank (DNB), and the Ministry of Finance discuss developments regarding financial stability in the Netherlands. The Central Planning Bureau (CPB) participates in the meetings as an external expert. The President of DNB chairs the FSC.
During the meeting on 24 March 2025, the FSC discussed current developments and risks to financial stability, particularly those related to geopolitical developments. Additionally, the FSC discussed the Minister of Finance's vision for the financial sector. The FSC also delved deeper into the risks of high government debt and current European budgetary discussions.
Current Developments and Risks to Financial Stability The FSC discusses the current economic situation of the Dutch economy based on the Central Economic Plan 2025. The Dutch economy is performing relatively well, with growth (expectations) standing out positively compared to the euro area, unemployment remaining low, and inflation gradually decreasing further. The economic situation is structurally challenging, given the limits of the supply side of the economy. This can also be a factor counteracting the decline in inflation, such as a tight labor market. FSC members simultaneously note that economic expectations are surrounded by considerable uncertainty due to the current geopolitical situation. (Announced) US import levies are taking a toll on the world economy, and counter-reactions from other countries are strengthening the negative consequences for world trade. Companies are anticipating potential tariffs by building up larger inventories, which increases demand in the short term. However, larger inventories result in less future growth. This also increases the volatility of trade figures and makes them harder to interpret. Furthermore, the likelihood of disruptions in production chains increases, leading to shortages and price shocks. Finally, confidence effects among consumers and investors can have a significant impact on economic dynamics. Since the Dutch economy is heavily dependent on world trade, the negative effects of tariffs and fragmentation are indeed felt in the Netherlands.1 These negative effects may be exacerbated because the Netherlands is dependent on the US in financial and technological terms.2 After a prolonged period of rising stock prices, volatility on financial markets has recently increased. This is partly due to increasing geopolitical tensions and, especially in the US, worsening growth prospects. At the same time, long-term interest rates on European government bonds have increased substantially following the announced increase in (European) defense spending. In the event of further geopolitical escalation, sentiment could shift towards more shock-like adjustments with periods of high volatility and low liquidity. Such a shock would also have consequences for Dutch financial institutions. The FSC concludes that the financial system has so far been able to absorb these shocks well, emphasizing the importance of well-functioning money markets for financial institutions under these circumstances. The FSC views the increasing undermining of international cooperation and multilateral forums as a major risk to financial stability. This is concerning because many important challenges have a cross-border nature, including climate change, the regulation of Non-Bank Financial Institutions (NBFIs), and crypto-assets. Financial markets and financial institutions are also highly interconnected internationally. As a result, shocks originating in one country can spread quickly worldwide. To limit the side effects of this
interconnectedness, consistent international regulation and cooperation are crucial. A good example of this was the provision of US dollar swap lines by the US central bank during the Covid-19 crisis. This helped limit further negative effects at the time. Finally, cyber and hybrid threats are also increasing, which can affect payment systems and other core financial infrastructure. A successful cyberattack has the potential to cause significant damage. With the introduction of the European DORA regulation, there is now a tool available to strengthen the digital resilience of the financial sector, including the chain of ICT service providers. Vision for the Financial Sector In January, the Minister of Finance shared his vision for the financial sector with the First and Second Chambers of the States General. This vision centers on three themes: well-functioning markets, lower regulatory burden and good supervision, and accessible payment systems and consumer protection. FSC members share the main principles of this vision. Additionally, the FSC examined in more detail measures in the vision that could strengthen financial stability, also in light of resilience against geopolitical tensions. Completing the European internal market via the European Savings and Investments Union3 is an important priority to promote the broad availability of capital and financial stability. The AFM and DNB recently underscored the importance of this in their response to the recent European Commission consultation regarding the Savings and Investments Union. FSC members cite increasing the availability of venture capital, for example through venture capital funds, as an important factor. The FSC will also consider at a future opportunity whether European risk-free debt instruments (“safe assets”) are important for a deep European capital market. 3 The European Savings and Investments Union approaches the Capital Markets Union and Banking Union more cohesively.

4
| DNB RESTRICTED |
The simplification of financial regulation, for example via the Omnibus package of the European Commission4, can promote European competitiveness, but must not come at the expense of resilience, for example as a result of a reduction in capital requirements or inadequate risk management.
Therefore, it is necessary to find a good balance between reducing regulatory burden and maintaining solid supervision of financial institutions. In this regard, FSC members cite the implementation of Final Basel 3 as an important step to achieve this. Additionally, the AFM and DNB note that issues regarding the business climate and competition often transcend the role of the financial supervisor.
Furthermore, specific attention is needed for the adequacy of macroprudential policy for NBFIs. The follow-up to the European Commission's consultation on this should remain high on the policy agenda.5 For example, the resilience of money market funds during periods of stress in financial markets must be strong enough to guarantee their liquidity function. Finally, macroprudential instruments for banks, such as systemic buffers, should be further harmonized in the EU to achieve better and comparable shock absorption capacity for large banks, less complexity, and a level playing field. Risks of High Government Debt The FSC reflects on recent developments regarding budgetary policy in Europe. The European Commission has presented plans that could significantly increase defense spending in Europe. Additionally, the German Bundestag has agreed to lift the so-called debt brake, with exceptions made for defense spending and other areas. 4 See Commission wants less administrative hassle and a simpler business environment - European Commission 5 National response to the Consultation of the European Commission on macroprudential policy for NBFIs | De Nederlandsche Bank

5
| DNB RESTRICTED |
FSC members highlight the importance of sustainable government debt for financial stability. For example, European budgetary rules are important for confidence in public finances and the room to absorb future shocks. Additionally, countries with high debt are more sensitive to shifts in financial markets, for example due to rising geopolitical tensions.6 The FSC also points to the so-called sovereign-financial sector nexus, where the stability of financial players and markets is strongly linked to the dynamics and sustainability of government debt. Due to this interconnectedness, shocks on government bonds can quickly ripple through the financial system via value and liquidity effects. At the same time, the FSC recognizes that a temporary exception to budgetary rules may be necessary for additional defense spending. This exception should be temporary, limited, and ideally phasing out. It is important that member states integrate additional defense spending into their budgets for the longer term. This task further underscores the importance of structural reforms to address problems on the constrained supply side of the economy. Furthermore, the European Commission proposes to take on €150 billion in joint loans to finance defense projects, guaranteed from the ongoing EU budget. Member states would then repay these loans. Any higher debt at the EU level would require a reduction in national debts. Although joint European debt issuance may have (financing) advantages, this is a political choice. Finally, the FSC reflects on the market effects following the lifting of the debt brake in Germany. This has resulted in a sharp rise in bond yields across the entire euro area, but has so far been well absorbed by the financial system. Differences between the interest rates on government bonds of member states have even decreased. The effects of such market movements were previously discussed by the FSC based on the DNB-AFM analysis of risks in derivative positions at pension funds. These events show how the execution of stress tests can contribute to solid liquidity management, ensuring that financial institutions are well prepared for rapid and unexpected market movements. Partly because money markets remained well-functioning, the impact of the significant interest rate increase remained limited. Next Meeting The next meeting will take place on Wednesday, 9 July 2025. The agenda will be set a few weeks before the meeting.