Prepared by Francisco Nadal De Simone.
The Kingdom of the Netherlands—Netherlands: Financial System Stability Assessment, including Reports on the Observance of Standards and Codes on the following topics: Banking Supervision, Securities Regulation, Insurance Regulation, Corporate Governance, and Payments Systems, Securities Settlement Systems, and Anti-Money Laundering/Combating the Financing of Terrorism, IMF Country Report N. 04/312, September 2004.
LTV ratios are not regulated in the Netherlands. Regulations apply to the ability to pay rather than to the ability to reclaim value (i.e., income-to-value ratio as opposed to LTV). Moreover, the tax deductibility of mortgage interest payments has been factored into loan demand. Finally, it is also possible that the increased share of mortgages in banks’ portfolios observed in several countries reflects markets’ anticipation that Basel II will reduce capital requirement on mortgage lending.
A concern related to the mortgage market is the growing take-up in interest-only mortgages and the difficulty in tracking and assessing the risk related to the investment of associated funds to cover the future payment of principal.
The life sector is still recovering from the reduction in returns after the removal of tax deductibility of life insurance premia in 2001.
As discussed below, the solvency ratio starting in 2006 will be determined on the basis of market interest rates instead of a fixed discount rate as used now. Market rates would imply a decline in the solvency ratio from 129 percent in 2003 to 123 percent in 2004.
As Solvency I is not considered sufficiently risk based by the authorities, they are working to influence and accelerate the development and introduction of Solvency II within the context of the Insurance Committee of the European Commission.
At the same time, the authorities are striving to reduce the administrative burden on firms, an objective that also is taken into account in designing financial policy. Against this background, the authorities did not include in the Act, as suggested by the FSSA, audit committees for individual banks.
Coverage requirements—expressed in terms of the coverage ratio, which is defined as the ratio of the present value of assets over liabilities—depend on the risk profile of the individual pension fund’s investment portfolio and the degree of guaranteed indexation of benefits.
Under the new arrangements, pension funds will be required to achieve a coverage ratio (i.e., the ratio of the present value of assets over liabilities) implied by a 97½ percent probability of meeting their obligations. In cases where indexation is not guaranteed, the latter implies a coverage ratio, on average, of 130 percent. Under the increased transparency associated with the new framework, the authorities consider that the pension funds that intend to provide full indexation will have to clearly state that the funds available for that purpose are those that exceed the 130 percent required to provide only partial indexation.
See, for example, Houben, Kakes, and Schinasi, 2004, “Towards a Framework for Financial Stability,” DNB Occasional Study, Vol. 2, No. 1; Houben, Kakes, and Schinasi, 2005, “A Policy Perspective to Financial Stability,” Financial Regulator March 2005; and Van den End and Tabbae, 2005, “Measuring Financial Stability: Applying the MfRisk Model to the Netherlands,” DNB Working Paper No. 30).
For example, since 2001, interest on mortgage loans used for consumption or the purchase of a second home have not been deductible. In addition, the period for the deductibility of mortgage interest has been capped at 30 years.