A. Remarks on the Relation between Solvency and Liquidity Stress Test Results ________________ 38 HOUSEHOLD SECTOR ANALYSIS ______________________________________________________________ 38 A. Recent Developments in Household Indebtedness and Vulnerabilities _______________________ 39 B. Simulation Analysis of Risks of Mortgage Loans ______________________________________________ 43 C. Conclusion and Policy Implications ____________________________________________________________ 48 CORPORATE

more »

... CTOR ANALYSIS _______________________________________________________________ 49 A. Stylized Facts on Overall Balance Sheet Developments _______________________________________ 50 B. Insights on Dutch Firms' Financial Vulnerabilities using Micro-Level Data ____________________ 52 C. Sensitivity Analysis of the Dutch NFC Sector __________________________________________________ 50 portfolios (35 percent). Thus, in different tests, the RWAs for mortgage portfolios increase to 21, 28, and 31.5 percent, respectively. The results show that, based on capital ratios corresponding to end-2015, the introduction of the floors would cause declines in CET1 ratios equivalent to 0.7, 1.4, and 1.8 percentage points, respectively. Liquidity stress tests reveal that banks could handle significant withdrawals of funding. Cash flow-based liquidity stress tests assessed resilience to strong shocks characterized by run-off rates on funding sources calibrated by liability type, with haircuts on assets. The structure of contractual maturities and run-off rates resulted in withdrawals of funding equivalent to 15-20 percent of the initial stock within the first two to three months (with variation across banks). The results of these tests, based on maturity ladder analysis, revealed that, with the exception of a small institution, all banks could confront persistent and sizable withdrawals of funding without emergency liquidity assistance (ELA) from the European Central Bank (ECB) for periods longer than six months. The system exhibits heavy reliance on wholesale funding; however, liquidity risks appear contained because the term structure of this type of funding has sufficient average length. Our analysis indicates that households with high LTV and LTI ratios are relatively more vulnerable to adverse shocks. Staff analyzed household sector vulnerabilities based on (i) microlevel data of incomes and indebtedness of borrowers (the analysis was done in conjunction with the De Nederlandsche Bank, DNB); and (ii) a macroeconomic general equilibrium model with a housing sector. The micro-level data analysis confirms that young low income households with high LTV and LTI ratios are the most vulnerable to adverse shocks. The general equilibrium model demonstrates that higher tax-deductibility encourages households to increase indebtedness (e.g., to seek a higher LTV ratio). Furthermore, households are more vulnerable to changes in the housing outlook the higher the LTV ratios are. Specifically, model simulations show that an increase in the variance of housing returns (i.e., higher risk associated to housing) leads to declining output, employment, and consumption; the decline, however, is small if the LTV ratio is below 80 percent. Also, the higher the LTV ratio, the earlier a household defaults. This analysis supports the financial stability role of the LTV and debt-service-to-income (DSTI) limits. The authorities are therefore encouraged to tighten these measures further to build the resilience of borrowers against future macrofinancial shocks. While overall nonfinancial corporates have restored their profitability and strengthened their equity-to-debt ratios, there are pockets of vulnerabilities in certain segments. Corporate vulnerability analysis carried out by staff points to non-trivial heterogeneity across firm categories, which suggests that data gaps should be addressed quickly to allow a more a granular investigation of corporate balance sheets. KINGDOM OF THE NETHERLANDS-NETHERLANDS