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The market stress in Europe has abated further since last autumn. This is evidenced by the muted market reaction to the Cypriot bailout package. However, a renewed escalation of the European debt crisis still forms a threat to financial stability in the Netherlands. Further progress in the implementation of an effective banking union remains necessary in order to control the debt crisis. It is essential that European supervision be supplemented by an effective European resolution regime, resolution fund and deposit guarantee scheme. Market players must have confidence that the banking union will be launched with no hidden losses. A thorough review of European bank balance sheets will bolster that confidence and thus reduce the risk of a renewed escalation of the European debt crisis.
It is important that banks form adequate provisions for problem loans, even when defaults are avoided through restructuring. This is all the more important at present because the historically low interest rates make it more likely that problem loans will be restructured through repayment deferral.
The use of secured funding by Dutch banks is still limited in volume terms, but is becoming more and more common. Banks need to be transparent about this. Secured funding increases the risks for other creditors, because in the unfortunate event of a bank failure there will be fewer assets available to meet their claims. Secured funding also increases the risks for the deposit guarantee scheme (DGS) and the interconnectedness between financial institutions.