Unrest shows importance of banking sector supervision, says Dutch central bank president

Banks in the Netherlands are still financially sound, but the turmoil in the banking sector in recent weeks has shown that the supervision of banks must remain persistent. Klaas Knot, the president of Dutch central bank De Nederlandsche Bank (DNB) insisted on the importance of continued supervision during the presentation of the DNB’s annual report.

He said it is sometimes as if people have already forgotten about the financial crisis of 2008. “Memory is so very short. That’s why every year that I’m standing here, the word, ‘Buffers, buffers, buffers’ will keep coming up.”

Knot emphasized that the problems at financial institutions, like Credit Suisse and the Silicon Valley Bank in the United States “are largely isolated.” But he does want to learn lessons from what happened there due to “poor risk management.”

Knot said, “The fact that shocks have now been well absorbed is no guarantee for the future. The past few weeks have taught us once again that maintaining buffer requirements is of great value for both large and small banks.”

The DNB president also noted that the problems at Silicon Valley Bank might have been avoided if the United States had not raised an important supervisory limit a few years ago after lobbying from the business community. If that had not happened, the collapsed bank would have been classified as bank that is “too big to fail,” which would have led to stricter checks. That is why Knot has urged European politicians to introduce Basil IV, a global tightening of banking rules, completely and totally in the European Union. This should be done “Right now,” Knot said.

Due to the unrest, DNB has also noticed that the banking sector has become more risk-averse. For example, risk premiums have risen significantly. As a result, taking out loans has become less attractive. In this way, according to Knot, the unrest can also have consequences for the interest rate policy of the European Central Bank (ECB).

Knot would not yet dare to say how high interest rates should rise at the next ECB interest rate meeting in May. The ECB raised interest rates by half a percentage point last week to combat high inflation. According to Knot, inflation is still far too high, making it clear in his eyes that the ECB is not yet finished. “But nobody knows how long this risk aversion will last. The answer to that question will certainly have consequences for decisions to be made.”

Knot explained that the idea behind the interest rate hikes is that borrowing will then become more expensive. In this way, the ECB hopes to curb demand in the economy and to ensure that prices do not rise so fast. Such financial tightening can be arranged through interest rate hikes by the ECB, but if the market itself avoids risks more and makes borrowing less attractive, that naturally also works. In that case, such a sharp interest rate hike from the ECB would no longer be necessary.